Decision making (Business Management)

An important implication of prospect theory is that the way people subjectively frame an outcome affects their decision. Narrow framing is when people evaluate new gambles in isolation, ignoring other relevant risks. This is an example of

bounded rationality

Barriers to Individual Decision Making

+ Information-Related Barriers + Circumstance and Time-Related Barriers + Cognitive Biases ++ Confirmation Bias ++ Framing Bias ++ Hindsight Bias ++ Anchoring ++ Halo Effect ++ Overconfidence Bias ++ Status-Quo Bias ++ Pro-Innovation Bias

Styles of Decision Making

+ Optimizing vs. Satisficing + Intuitive vs. Rational + Combinatorial vs. Positional

Dean lives in Silver Spring, MD. His 15-year-old car has broken down, and he thinks he needs a new car. He remembers that the first step of the rational decision-making process is "define the problem." What should he consider?

Dean should consider all his transportation options, such as the Metrorail, Uber, or taxis, not just getting a new car.

nominal group technique

Group members are all present but members operate independently and use the following four-step process in idea generating: 1) Members independently write down ideas on a given problem. 2) Each member presents one idea to the group. Each member takes a turn, presenting a single idea, until all ideas have been shared. 3) The group engages in discussion on the ideas for clarity and evaluation. 4) Each member independently rank-orders the ideas. The idea with the highest aggregate ranking determines the final decision.

________ refers to how people make decisions in a lottery or with uncertainty. People do not generally make expected value decisions. They tend to overweight unlikely outcomes and underweight more likely events.

Prospect theory

Delphi technique (named after the Oracle at Delphi)

Questions narrow in on a specific topic as the rounds progress

Data, Logic, and Facts

Rational decision making is defined not only by adherence to a careful process, but also by a logical, data-driven manner of following the steps of that process. The process can be time-consuming and costly. It is generally not worthwhile on everyday decisions. It is more useful for big decisions with many criteria that affect many people.

In a decision tree with costs or net income and probabilities, each path of decisions and outcomes can be summarized in

an expected value

Brainstorming

an idea-generating process that specifically encourages all alternatives while withholding any criticism of those alternatives

facilitator or referee

can be used to separate participant and leadership roles or groups with opposing ideas

Halo Effect

concerns the preferential attitude that we have toward certain individuals or organizations

A baseball team is deciding where to celebrate their tournament victory. They decide between two restaurants by voting, and the one with the most votes wins. This is an example of:

consensus

Bright Learning Co. has a problem. Some people want to move the headquarters to a place with nicer weather and others do not. There are many factors to consider, and different people will weigh the factors differently. To reach a common decision, they should

define the problem, identify criteria, weight the criteria, generate alternatives, evaluate each alternative against the criteria, and make a decision

According to an article in Forbes, John Gourville, a Harvard Business School professor, said, "Historically, first-degree price discrimination has been very difficult to implement, mostly for logistical reasons. With advances in technology and collecting of big data, then it may...become easier to do." Now Freshplum, an online seller, experiments with price discrimination based on geography, repeat sales, and how a customer reaches the website. Freshplum uses ________ to increase sales.

evidence-based decision making

A combinatorial player

has a final outcome in mind, making a series of moves that try to link the initial position with the final outcome in a firm, narrow, and more certain way. The name comes from the rapid increase in the number of moves he must consider for each step he looks ahead

Looking to the past and incorrectly believing you can predict the future based on past knowledge or understanding is the definition of:

hindsight bias

One disadvantage of group decision making is that many members involved in group decisions find the meetings to be

inefficient and wasteful

Heuristics

simplifies a complex situation and allows the decision maker to focus only on the most important pieces of information

Even when a group's decision process is well-organized, there is no way around the process being

slower and more expensive than individual decision making

Pro-Innovation Bias

the opposite of the status-quo bias. Rather than prefer things to stay the same, the innovation bias gives preference to any new and innovative idea simply because it represents something new

A shoe manufacturer has created a decision tree with costs of different marketing strategies and the two possible outcomes from each strategy. What other data does the company need to include in the decision tree to calculate the expected values for each choice?

the probability of each outcome

Ideas that Complement and Contrast with Rational Decision Making

the rational method might entirely discount factors that are of known and obvious value, such as emotions and feelings, experience, or even ethical principles. This danger, along with other limitations of the rational method, has led to the development of the following concepts to provide a more balanced and holistic approach to decision making

In a group, the sum of the knowledge, skills, creativity, and expertise will always be greater than that of any individual member. If this greater resource base can be properly accessed and harnessed,

the result should be a greater number of more diverse and higher-quality solution ideas

groupthink

the tendency of group members to conform to and support a proposed group position.

Framing Bias

the tendency to be influenced by the way that a situation or problem is presented. Framing a message with a positive outcome has been shown to be more influential than framing a message with a negative outcome

If group members have a legitimate opportunity to participate in the decision-making process,

they will be far more likely to support the decision

Affective conflict

when the dialogue becomes "personal" and people become more aggressive or start to disengage

devil's advocacy

where an individual or a group is selected to become the critic in the proposed decision. The biggest strength to using the devil's advocate technique is the ability to prevent groupthink

Cognitive conflict

where people focus on the tasks or issues and debate and thrash these out and come to a creative solution

e-brainstorming

where people respond to issues via their computers in real time

College basketball players make many quick decisions in the course of a game. They do not stop to analyze the alternatives, weigh criteria, or calculate optimal solutions. They have trained to develop ________ .

an intuitive decision style

Prospect Theory

a description of how people made actual decisions in experiments. It doesn't say whether this is right or wrong. It is in the hands of decision makers to determine whether these tendencies are justifiable or if they should be overridden by a rational approach.

You are looking for a used car, and you're focused on finding one that has under 100k miles and is no older than 2006. In your search, you take little notice of the state of the engine or transmission. A month after buying the 2007 Busaru Scoutbeck with 98k miles, your transmission freezes on the way home from work. Which bias trap did you get yourself into that created this scenario?

anchoring bias

Doctors and specialists disagree about whether to treat patients who show low but not dangerously low thyroid hormone levels. That is, the standard of care for subclinical hypothyroidism is poorly defined. The opportunity here is to improve the profession's understanding with experiments and

evidence-based decision making

Uber has an algorithm for setting prices. It increases prices during periods of high demand in part to attract more drivers to participate. Recently, the company is experimenting with route-based pricing. Some routes will pay more. Uber is using

evidence-based decision making

E-commerce creates a great deal of data on how consumers interact with a website. L.L.Bean keeps records that show how quickly consumers make decisions, how many alternatives they explore, and whether they stop without completing a purchase. When a manager sees an issue and proposes a solution, the company can easily test the solution. This is an example of

evidence-based decision-making

Optimizing

involves collecting as much data as possible and trying to find the optimal choice. Generally, decision makers don't pick one or the other—you can think of satisficing to optimizing as a spectrum, and each decision starts with an assessment of how critical it is

The *positional* decision-making approach

is "looser," setting up strong positions on the board and preparing to react to the opponent. A player using this strategy increases flexibility, creating options as opposed to forcing a single sequence

Advantages of Group Decision Making

the sum of the knowledge, skills, creativity, and expertise in a group setting will always be greater than that of any individual member. If this greater resource base can be properly accessed and harnessed, the result should be a greater number of more diverse and higher-quality solution ideas. Also, the ability to evaluate those ideas should be improved by group collaboration.

Hindsight Bias

the tendency to believe falsely that we would have accurately predicted the outcome of an event after that outcome is actually known. When something happens and we have accurate feedback on the outcome, we appear to be very good at concluding that this outcome was relatively obvious

Confirmation Bias

the tendency to seek out or prefer information and opinions that we believe will confirm our own judgment. We want to be confirmed, so we pay more attention to information that we think supports us, and we ignore or diminish the significance of information to the contrary

Evidence-Based Decision Making

1) Proof of Success 2) Data Collection, Sharing, and Analytics 3) Descriptive Analytics 4) Predictive Analytics

How to Construct a Decision Tree

A decision tree is a branched flowchart showing multiple pathways for potential decisions and outcomes. The tree starts with what is called a decision node, which signifies that a decision must be made.

Circumstance and Time-Related Barriers

A variety of difficulties can also arise from the circumstances in the midst of which a decision maker must work.

Disadvantages of Group Decision Making

All the group members must invest their time in the process, and the group discussion and interaction is more time-consuming than individual decision-making processes. The number of man-hours involved can be relatively high, and the larger the group, the higher that number. Further, many group members involved in business meetings report that they find the meetings to be inefficient and wasteful of time.

Cognitive Biases

Even when circumstances are conducive to good decisions and a sufficient supply of accurate information is available, there are still a number of ways in which decision makers might be at fault in their manner of judgment

Robust Decisions

One final adaptation of the rational process that is becoming more prominent, especially in areas such as energy production and natural resource preservation, is the practice of making "robust" decisions.

Kahneman and Tversky used experiments to examine how people actually make decisions about risk. The researchers found a multi-step process with editing and evaluating phases. People showed a strong preference to avoid losses, much more than probability or expected value would suggest. Their name for this process is

Prospect Theory

Status-Quo Bias

Some decision makers prefer to avoid change and maintain the status quo. This desire, perhaps unrecognized, often leads them to favor ideas that do not lead to significant changes. Evidence and ideas that support change are neglected as a result.

The Rational Decision-Making Process

Step 1: Identify the Problem Step 2: Establish Decision Criteria Step 3: Weigh Decision Criteria Step 4: Generate Alternatives Step 5: Evaluate Alternatives Step 6: Select the Best Alternative

+ Intuitive vs. Rational

The subconscious mind is automatic and intuitive, rapidly consolidating data and producing a decision almost immediately. The subconscious mind works best with repeated experiences. The conscious, rational mind requires more effort, using logic and reason to make a choice

Bounded Rationality

This concept revolves on a recognition that human knowledge and capabilities are limited and imperfect

Satisficing—

a combination of the words "satisfy" and "suffice"—means settling for a less-than-perfect solution when working with limited information

When you can break a decision down into stages or decision nodes with branches representing possible outcomes, which tool can you use to help you visualize your options?

a decision tree

Anchoring

a tendency to fixate on initial information and then fail to adjust for subsequent information

Information-Related Barriers

based at least in part on information that the decision maker trusts. The reliability and use of that information can potentially lead to multiple problems

If you are trying to avoid a framing bias and you are looking for a way to diagram a yes/no decision-making process, you should choose what tool to make your decisions?

decision tree

Analytics that try to understand and describe what has taken place are ________. The analyst attempts to explain what the data reveals about the events that have occurred, the relationships between different events and market forces, and why the numbers are what they are.

descriptive

Kahneman found that the way a problem was stated could change preferences. When the choices were presented in positive terms, the participants preferred the more certain choice. When the choices were presented in negative terms, participants preferred a gamble, the chance of avoiding the loss. Participants were guilty of

framing bias

When a decision is made as a group, all the members will

have a far greater understanding of the issues and the reasons behind the decision

Bob is very analytical in his approach to decisions. He looks at the available data and weighs each factor. His approach takes more time but often finds cost savings or improves quality. His approach is called

rational decision making

For most of our decisions, we do not try to optimize the decision but simply make a good decision and move on. This is called

satisficing

Descriptive analytics are

the first step in making sense of the reams of data

democratic method

when all group members are given equal authority in a formal voting system

What are distinct advantages of group decision making?

Decisions can be drawn from a larger number of individual perspectives and experiences.

Jack Welch was a famed CEO of General Electric. He ran GE as a conglomerate, a company of companies. One of his criteria was that his companies should be in the top 3 of their industry. Companies with a large market share have much more negotiating power with suppliers and customers. His decision strategy was

positional

If current trends are projected to continue in the future, decision makers will have access to rich insight. This work of projecting future trends is known as

predictive analytics

One of the advantages of ________ is that it breaks down the decision into multiple steps and multiple criteria, so that people can discover where their differences lie, not just disagree. The weights and evaluations do not need to be objectively measurable in order to foster a productive discussion.

rational decision making

Natalie, a location scout, has been very busy with work and noticed her cell phone is breaking down. She likes her old Pamsung phone but needs to get one that has faster network abilities, is not more than two hundred dollars, has international roaming capabilities, and is water-resistant if possible. She thinks maybe the latest Phonei would work, but then she realizes the most important criteria are water resistance and international roaming. After visiting five stores and spending countless hours online researching the various phones, she evaluates her options and decides to go with the Yons Aperix Z3v. She buys the phone and sets out to find her latest movie location. What decision model did Natalie use to pick her new phone?

rational decision-making model

What action can help a group avoid groupthink?

Assign a rotating devil's advocate role at every meeting.

Overconfidence Bias

It basically amounts to the idea that an individual decision maker trusts his own judgment (usually his intuition) and allows that judgment to override evidence to the contrary. His opinion counts more strongly to him than that of experts who are more knowledgeable and often more than factual data that contradicts his views