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Submitted By hylcool1989
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The science of Decision-making

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Speed ventures
Instructions Get into groups Reach a group decision to race or not race Assumptions Speed Ventures gets to keep the oil contract except if the engine blows Goodstone has given $40,000 for the Pocono Race, But your racing teams gets 1 Million if you finish in top 5 Rules You have 30 minutes to reach a decision Person with most gadgets on their watch is timekeeper As a group you must decide whether to race or not race!

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Four possibilities
Finish Top 5 $1,500,000

Finish but NOT in the top 5 $500,000

$500,000

Race and blow engine

$0

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Sec 62: Speed Ventures Groups
Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Group 8 Group 9 Group 10 Group 11 Group 12 Group 13 Francisco Larrain Echeverria Nicolo Parravicini Cameron Murphy Eric Haddenhorst Paksikorn Tubtimthong Jose Lopez Lecube Jutatit Pumarin Alexander Bourdeau Javier Bernuy Giraudi Fuentes Mo Wang Kangseok Ji Piotr Bielaczyc Anja Zhao Ramakrishna Sayoji Rao Goli Nicolas Izquierdo Chadwick Lauren Zsigray Nicholas McGann Varun Mathur Ty Findley Michal Krowinski Daryl Brown Johann Narvekar Nathan Bell Laura Luedke Adam Tollefson David Nichols Taylor Hougland Jaskaran Bakshi Thanabhum Aramwatananont Ira Shiner Yajur Kapoor Tzung-tza Jeng Gaurav Bhandari Junhua Xu

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Macarena Garcia James Stepanek Simon Jieun Lee Adam DeWolf Natrucha Poomgate Yilei Huang Madhavi Misra Danielle Bagge Mehak Agarwal Sarah Saxby Carlos Castillo Calle

Gonzalo Romero Meng-Ju Chang Rodriguez Francisco Ochagavia Joshua Borin Balbontin J.Michael Zollo Mary Gray Bhanu Priya Vaddiparthi Benjamin Skrodzki Kyle Coots Adam Hirschkatz Marissa McGann Daniel Gibson Sasikarn Feinggumloon Wojciech Korpal

Suresh Kumar FNU Seung Lee

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Analysis vs. process
Decision analysis: analyzing data to determine the option that maximizes expected utility expected value calculations financial models Decision Process: the rules and norms that guide how people manage the decision process how were ideas discussed what decision rules were used was dissent tolerated

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Process matters
Analysis of 1,048 business decisions over 5 years Measured three variables Objective outcomes (profits, growth, etc.)

Quality of the decision analysis
Quality of the decision process They determined process mattered more than analysis

The science of decision-making

decision-­maker. And to be a good decision maker requires careful analysis. You need to identify the problem, consider all the outcomes, and, based on your best analysis, choose the outcome that will take your
Jeroen van der Veer

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A Rational analysis model
Define the problem or opportunity Establish the criteria Identify the alternatives

Evaluate each alternative across a standardized metric Select the alternative with the highest value

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Choosing the Right Business School

Culture Kellogg Chicago (B.S.) Stanford

Salary

Weather

Faculty

Total

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Choosing the Right Business School

Decision Weights

.3 Culture

.2 Salary

.1 Weather

.4 Faculty Total

Kellogg Chicago (B.S.) Stanford

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Choosing the Right Business School

Decision Weights

.3 Culture

.2 Salary 8 8

.1 Weather 2 2

.4 Faculty 10 6 Total

Kellogg Chicago (B.S.) Stanford

9 2

6

9

8

6

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Choosing the Right Business School

Decision Weights

.3 Culture

.2 Salary 8 8

.1 Weather 2 2

.4 Faculty 10 6 Total 8.5 4.8

Kellogg Chicago (B.S.) Stanford

9 2

6

9

8

6

6.8

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Choosing the Right Business School

Decision Weights

.3 Culture

.2 Salary 8 8

.4 Weather 2 2

.1 Faculty 10 6 Total 6.1 3.6

Kellogg Chicago (B.S.) Stanford

9 2

6

9

8

6

7.4

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Limits of the rational analysis model
Bound by uncertainty and ambiguity Rational analysis model requires a lot of that much information

Bound by the imperfections of the mind Limited by the systematic biases that taint the way we gather, process, and evaluate information

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goals
Learn to spot and neutralize the systematic errors that corrupt our decisions

Develop a step-­by-­step framework for making decisions

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expectations
Occasional home-­run insights Small but consistent improvements

More efficient decisions Transform into a decision guru

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the life of a decision
You encounter a choice or problem Gather information

Analyze your options
Make a decision Live with your decision

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Stage 1: encountering the decision*

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This or that decisions A pros vs. cons analysis of two options Whether or not to go to graduate school Whether or not to fire your assistant Whether or not to ask for a raise Whether or not to develop a new product Whether or not to start your own company 12

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Ask.com
Claireabelle: Breakup or not?

hang out with his family, I feel mood-­swingy towards me. His older brother hates me. His mom is rude to me. What do I do? I like *

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Ask.com
Shalie333: As long as he is not treating you this

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Ask.com
Eimis74523: he should stand up for you. If my family would do this to my gf, I would tell them to go {bleep} themselves.

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Ask.com
Yolo1212: Do whatever feels right.

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Ask.com
14sweetie: treats you good.

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Ask.com
Kuckleburg: creepy.

What is ideal outcome?

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The problem with narrow framing
Miss hidden alternatives Creates a focus on trade offs, not creative solutions they can maximize the decision

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Solutions to narrow framing
Expand your options Vanishing options test: If you could not choose any of the current options, what else could you do? Multi-­track: pursue multiple options at once

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Iphone flask
On a trip to the mall you stumble upon a fun new gadget -­ a flask that looks like an Iphone. The flask costs $17.99 What do you do? Buy the flask Not buy the flask

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Iphone flask
On a trip to the mall you stumble upon a fun new gadget -­ a flask that looks like an Iphone. The

flask costs $17.99. What do you do? Buy the flask Use the $17.99 to buy something else

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Opportunity costs
Opportunity costs what we give up when we make a decision People rarely take opportunity costs into account The cost of one modern heavy bomber is this: a modern school in 30 cities;; two electric power plants, each serving 60,000 people;; two fully equipped hospitals. -­ President Eisenhower

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Stage 2: gather information

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Confirmation bias
We seek out information that confirms our beliefs Occurs when we have preconceived ideas about the best course of action. And we usually do!

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Confirmation bias
We seek out information that confirms our beliefs Occurs when we have preconceived ideas about the best course of action. And we usually do! Subtle or robust? Results suggest that we are twice as likely to favor confirming information

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Confirmation bias
Problem Leads managers to ignore vital information Creates the illusion of knowing

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advocate roles and rituals Randomly role Challenge them to generate strong arguments Assign a team to prepare a case against a high stakes proposal

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Actively request disconfirming information Bad: What do you think of the proposal? the biggest obstacle to this plan? Good: If I failed, why do you think it would be? Thought experiment: What would have to be true for each option to be the right answer?

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Group discussion

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Conformity pressure
People conform to decisions supported by the majority or authority We like agreement and punish dissent Desire to be part of the majority Obedience to authority

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Conformity pressure

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Obedience to authority

What % of normal people would administer a painful electric shock of 135 volts to another person who misspells a word if told to do so by a leader? What about a potentially lethal electric shock of 450 volts?

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Private data collection Gather individual opinions before group discussion

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anchoring
We tend to make insufficient adjustments away from initial estimates (or reference points) Even when initial estimate is irrelevant

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anchoring Initial ideas bias all other subsequent ideas Creates groupthink and stifles creativity Private data collection

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Diagnosing success and failure
What causes (or is associated with) success and failure?

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Sampling errors
Occurs when you look at only one half of the outcomes E.g., Management books that look at the strategies of successful companies Tells us very little about the relationship between any two variables

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Races with gasket problems
Relationship between Temperature and Gasket Failure
Breaks in Head Gasket during Each Race

4 3 2 1 0 45 50 55 60 65 70 75 80 85 Am bient Air Tem perature

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Additional information
Temperature for Races without Gasket Problems
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Num ber of Races

3 2 1 0 65 70 75 80 85 Am bient Air Tem perature

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Combined data
Races with and without Gasket Failures
4

3

Number of Gasket Failures

2

1

0 45 50 55 60 65 70 75 80 85 Calculated Joint Tem perature

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Probability of failure using Combined data

Temp. < 65 65-70 71-80 > 80

Gasket Failures 4 2 1 0

Races 4 10 9 1

Prob. 100% 20% 11% 0%

The challenger

O-ring failure caused a breach in the solid rocket booster joint, allowing pressurized gas from the rocket motor to reach the external fuel tank

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Challenger o-ring data

Challenger o-ring data

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Necessity of all four cells
Lung Cancer Smoker 56 No Lung Cancer 99,936
.056% of Smokers Get Lung Cancer

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Necessity of all four cells
Lung Cancer Smoker 56 No Lung Cancer 99,936
.056% of Smokers Get Lung Cancer

Non Smoker

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99,992

87% of Lung Cancer Patients are Smokers

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Stage 3: analyze your options

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Loss aversion
Losses are more painful than gains are pleasurable People are hyper-­sensitive to losses Losing $20 dollars means more than winning $20 Loss aversion and golf Par is equal to the expected number of shots Birdie is a one shot gain Bogey is a one shot loss But each shot is equal to any other shot for your final score

Tiger woods
Any time you make big more important to make those than birdie putts. drop a shot. The psychological difference between dropping a shot and making a birdie, I just

a par putt.

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Analyzed over 1.6 million putts on the professional tour. Found that more likely to make a par putt (to avoid a loss) than make a birdie putt (to get a gain)

On average, this tendency costs professional golfers over $1.2 million in tournament winnings per year

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Loss aversion Distorts the evaluation of pros and cons Creates resistance to change;; we focus too much attention on potential losses Flip the frame:

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For day 3
Go to Usecandor.com and sign up for an account Download the Candor app if you have an Iphone

I recommend you read the Webster case

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The science of Decision-making

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$20 bill auction

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$20 bill auction
Bidding begins at $1 and increases in $1 increments No jump bidding Cannot top own bid Collusion among bidders is strictly prohibited. No communication is allowed Highest bidder receives the $20 bill (minus the amount of the bid) Second-­highest bidder must pay price of his/her bid This is for REAL money!!!

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Stage 4: making the decision

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Overconfidence bias
People are overconfident in their abilities and estimates Doctors were asked to diagnose an illness based on detailed case files diagnosis, they were actually wrong 40% of the time 82,361 expert predictions in various professional domains Which political party will win the upcoming election? Experts rarely (and never significantly) outperformed chance It is impossible to find any domain in which humans clearly outperformed crude extrapolation algorithms

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Presidents of your own Fan Club
Decision Making 67.31% Bargaining Ability 69.37% Your Intelligence 62.87% Your Driving Ability 59.64% Your Health 71.35% Physical Attractiveness 64.12% Number of friends 57.34 Contributions to Charity 49.58%

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Overconfidence bias

10 9 8 7 6 5 4 3 2 1 0

Confidence

Preferred Actual

Expertise/familiarity

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Overconfidence bias problem Unprepared for failure Overexposure to risk Inadequate preparation

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Overconfidence bias
Solution 1 Look for base rates success rate of other people in similar circumstances Danny Kahneman bet it would take 2 years to complete his high-­school textbook -­10 year completion time It took 8 years to complete

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Overconfidence bias
Solution 2 Prototype run small experiments rather than rely on forecasts and internal confidence indicators Why predict when you can test?

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Prototyping at hopelab
Hiring dilemma Often our best interviewees turn out to be our

worst performers Steve Cole Give potential employees a three-­week consulting contract Based on evidence, not impressions

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Overconfidence bias
Solution 3 the decision things outside of our control

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Stage 5: living with the decision

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Decisions to reinvest

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Escalation of commitment
Investing more resources in the hope of overturning initial bad outcomes;; Throwing good money after bad

With each new investment, commitment to a good outcome grows

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Examples of commitment
NBA draft Car repairs Large government projects Casinos Protracted wars Romantic relationships 45 lbs. pet tortoises

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Drivers of Escalation of Commitment
Sunk cost fallacy

Outcomes should match level of investment President Bush on staying in Iraq: "We owe them something (the 2,000 American casualties). We will Loss aversion People are hyper-­sensitive to losses Confirmation bias Seek out supportive evidence Overconfidence Overconfidence about how the future will unfold

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Escalation traps
We are particularly prone to EC when: Initial investment was voluntary Publicly identified with the project

Big investments
Organizational commitment (e.g., created a specific role)

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Protection against escalation traps
Pre-­established decision criteria Establish concrete criteria for failure and success Set public limits! Outside perspectives Decisions on further investments should be made by those who did not make the original investment Have an exit strategy Is the company well-­positioned to survive if this project fails?

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Strategic escalation
Highlight resources already spent Cut and run in Iraq Escalate commitment in you Invest resources in you Emphasize their responsibility for initial investment Publicly identify others with initial investment

The challenger

O-ring failure caused a breach in the solid rocket booster joint, allowing pressurized gas from the rocket motor to reach the external fuel tank

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The challenger

O-ring failure caused a breach in the solid rocket booster joint, allowing pressurized gas from the rocket motor to reach the external fuel tank

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Brainstorming exercise
20 minutes to come up with creative solutions Two groups: Come up with ideas individually for 10 using Candor then discuss in your group Come up with ideas in a group. Nominate someone to record your ideas. Goal is to generate good ideas;; Not a competition

Class 3 Exercise Group Assignments

MORS 430 (Section 62) Professor Nordgren

Group A
Alex Bourdeau Noon Poomgate Kyle Coots Boom Aramwatananont Laura Luedke David Nichols Marissa McGann Michal Krowinski Varun Mathur J Michael Zollo

Group B
Mark Wang Javier Bernuy Giraudi Fuentes Johann Narvekar Taylor Hougland Yilei Huang Wojtek Korpal Mandy Chang Sayoji Goli Carlos Castillo Calle Paksikorn Tubtimthong

Group C
Sasikarn Feinggumloon Ira Shiner Caroline Gray Ben Skrodzki Lauren Zsigray Joshua Borin Francisco Ochagavia Balbontin Sarah Saxby Nick McGann Leo Xu

Cond 1

Cond 2

Mehak Agarwal Macarena Garcia Simon Adam Tollefson Cam Murphy Gonzalo Romero Rodriguez Nicolo Parravicini Jieun Lee Ty Findley William Brown Madhavi Misra

Gaurav Bhandari Bhanu Priya Vaddaparthi Nicolas Izquierdo Chadwick Anja Zhao Eric Haddenhorst Shane Lee Francisco Larrain Echeverria Marcus Jeng Jose Lopez Lecube Dan Gibson

Keith Ju Jutatit Pumarin Nate Bell Yajur Kapoor Jamie Stepanek Adam DeWolf Jaskaran Bakshi Adam Hirschkatz Danielle Bagge

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Group A: New CIM event

CIM week is designed to get incoming students excited about the Kellogg experience, introduce them to the culture, and develop social bonds. Come up with exercises or events that would improve the current CIM week.* *Not critiquing your CIM experience but rather coming up with new ideas

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Private data collection
Limits conformity pressure Brings out disconfirming information Reduces overconfidence Neutralizes anchoring Generates more ideas Produces more diverse ideas Increases preparation Saves time

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What about intuition?

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Central claims
H1: Two modes of thought Conscious thought: Thinking about something while consciously attending to it Unconscious thought: Thinking about something while conscious attention is directed elsewhere H2: In most cases, decisions developed through unconscious thought will lead to better outcomes

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The capacity principle
Conscious thought has a low information processing capacity Unconscious thought does not have this constraint because the unconscious has a much higher processing capacity For complex problems, conscious thought only takes into account a subset of the information it should take into account

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Unconscious thought effect
Relationship between complexity of decision and quality of decision Quality

UT

CT
Complexity

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Analyzing our reasons
Analyzing our preferences disturbs the natural weighting of information by putting

disproportionate weight on attributes that are accessible, plausible, and easy to verbalize and therefore puts too little weight on other attributes.

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A

b

A

b

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Rooms for rent
You receive information about 4 apartments Each apartment had 12 attributes: Size, location, expense, etc.

Three apartments have 5 positive and 7 negative aspects One is better: 8 positive and 4 negative

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Rooms for rent
Participants choose an apartment Immediately

After thinking about it for awhile minutes (CT)
After being distracted for awhile minutes (UT)

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Who chose the best apartment?
70 60 50 40 30 20 10 0 Immediate Conscious Unconscious

Who chose the best apartment?
70 60 50 40 30

20
10 0 Immediate Conscious Unconscious

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Unconscious thought
Complex choices Creativity (innovation) Consumer satisfaction Personnel selection

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Unconscious thought 2.0
Unconscious thought is goal dependent -­then rules Unconscious thought benefits from sleep

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How would you take advantage of unconscious thought?

Recommended reading

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