EMGT 5110 FLW Managerial Decision Making Dr. David Spurlock Fall 2017 (JUL-AUG)

Signal Detection Concepts (Miss)

False negative, type 2 error

Signal Detection Concepts (False Alarm)

False positive, type 1 error

Framing and Preference Reversals (Basic ideas of framing and classic examples like the student retention problem)

"Alternative wordings of the same information that significantly alter decisions despite no objective difference in the actual information". Key idea with framing and preference reversals is the "reference point". Choices are typically evaluated with respect to a neutral reference point so manipulating which reference point the decision maker uses will affect the choice. Groups of decisions considered together ("seeing the big picture") may reflect different preference patterns than the preferences indicated when considering decisions sequentially and individually. Isolated, sequential decision processes in organizations tend to promote inconsistent preference patterns, especially when compared to decisions made in combination. The key driver in establishing behavioral economics and finance as fields. Traditional economists had resisted psychological explanations of economic behavior (they favored "rational actor" explanations) but they had to admit that framing systematically affected preferences. Framing indicates that the underlying mental processes are actually somewhat more complicated than simple expected value (rational) processes because the decision maker also seems to take into account a reference point and relative departures from it.

Bounded Awareness

"Bounded awareness" is the process that prevents us from noticing useful, readily observable data that would be relevant to our decisions. It exists because our brains must somehow cope with "information overload" and restricting our attention is one way we do this.

Signal Detection Concepts (Hit)

"Good" Accurate Result

Signal Detection Concepts (Correct Rejection)

"Good" Accurate negative result

Decisions Under Uncertainty (Wald's Maximum Return)

"Maximize the minimum return": pessimistic view (better safe than sorry) or "maximax": Optimisitic view (nothing ventured-nothing gained) *Know that these 4 rules aren't accepted as completely rational by every expert*

Framing and Preference Reversals (Rebate vs bonus framing & example)

"Rebates" will cause you to save more. "Bonuses" will cause you to spend more. Not entirely clear what the underlying mechanisms are but clearly the "bonus" frame leads one to consider the money as "unexpected reward" while the "rebate" is apparently viewed as returning money to you that you rightfully "already had" and thus reduces a preexisting deficit.

Bounded Awareness (Notions of reference group neglect)

"Reference group neglect" is a related error stemming from bounded awareness. Here people (say entrepreneurs but also athletes and other professionals) systematically overestimate their chances of success because they focus on their own skills and experience and neglect the skills of competitors.

Bounded Awareness (Notion of winner's curse)

"Winner's Curse" associated with (potential) regret of "winner" in negotiation or auction because of tendency to overpay. This tendency to overpay stems from "bounded awareness" because buyer in two-party transaction or high bidder in auction failed to accurately consider perspectives of other parties.

Prospect Theory Basics

"decision weights" are functions of probabilities not probabilities which allows for more accurate descriptions of human behavior such as overweighting of low probs or underweighting of high probs. The value function is steeper for losses than gains (people tend to hate losing $100 more than they love winning $100).

Poor Negotiation Practices

(1) lose-lose (leaving money on the table) (2) winner's curse (settling for too little because aspiration was set too low - regret occurs when realized that more was available) (3) walking away with no agreement when you have NO other options (often done out of spite) (4) agreement bias (settling for terms worse than alternative just to get an agreement)

Representative Heuristic

(Randomness): ignore the base rates, small sample bias, perceiving randomness, regression to the mean, conjunction fallacy, managerial implications: judgements of risk/reward, feedback and training, judgement of competence, marketing, and consumer behaviors.

Concepts and examples of "overprecision"

*Remember the guessing game we did in class about statistics with intervals* Tendency to be too sure in our judgments and uninterested in testing our assumptions or considering contrary evidence. This leads to overly narrow confidence intervals and too much certainty that we know the truth. Dissonance reduction Confidence influences others so leaders have incentive to be express too much confidence but if overconfidence is exposed then reputation is destroyed By-product of other cognitive processes - mainly "confirmation bias" - the tendency to seek confirming evidence and ignore disconfirming evidence How can it be reduced? Require generation of more than one estimate and average. Consider alternative outcomes and the likelihoods of them. Consider why you might be wrong. Take perspective of outsiders (others with different views).

Why is it hard to be evidence based?

1: There is too much evidence 2: There' not enough good evidence 3: The evidence doesn't quite apply 4: People are trying to mislead you 5: You are trying to mislead you 6: The side effects outweigh the cure 7: Stories are more persuasive anyway

Seven Implementation Symbols (method to help an organization become EBDM)

1: Treat your Organization as an unfinished prototype 2: No brag, just facts 3: See yourself and your organization as others do 4: Evidence based management is not just for senior executives 5: Like everything else, you still need to sell it 6: If all else fails, slow the spread of bad practice 7. The best diagnostic questions: What happens when people fail?

Holistic Hunch

A judgment that is based on a subconscious integration of information stored in memory.

Group Decision Making Concepts (Brainstorming)

A process to generate a quantity of ideas.

Expected Utility Theory

A rational choice will always maximize expected utility. (Assign values to one's preferences and make decisions based on the highest value preference available)

Heuristic

A rule of thumb or shortcut people use to reduce information processing demands.

Hindsight and the Curse of Knowledge (From Confirmation Heuristic)

After finding out whether an event occurred or not, people tend to overestimate the degree to which they would have predicted the correct outcome. Furthermore, individuals fail to ignore information they possess that others do not when predicting other's behavior

Decision Table and Terminology Format 1

Alternatives on one axis and attributes on the other axis with the utility values in the intersecting boxes

The Misconceptions About Negotiation

Are good negotiators born? NO - negotiation is a learned skill Experience is the best teacher? NO - it depends on right kind of experience Good negotiators are "risk takers"? NO - "take it or leave" initial offer is very risky and typically doesn't produce optimal and lasting agreements Good negotiators are "intuitive"? Sometimes - but intuition isn't enough and preparation is MUCH more important in most negotiations

Automated Experiences

Choice based on a familiar situation and a partially subconscious application of previously learned information related to that situation.

Four Deterministic Rule (Lexicographic Rule)

Choose the most important attribute and select the alternative with the highest value on that attribute; go to the next most important attribute to break ties.

Mathematics of Rationality (Normative Approach)

Based upon mathematical axiomatic models tells us how to ideally decide.

What is meant by BATNA? Why does it matters in a negotiation?

Best Alternative to Negotiated Agreement. (Take lower paying job or staying in your parents basement). You can't get the best outcome for yourself without knowing what the alternatives to an agreement are going to be for yourself (and ideally for the other party but that's harder to know). Walking away is your greatest leverage but you've got to be able to judge if walking away is a good idea.

The biggest obstacles to creating value

Biggest obstacles to recognizing win-win potential are False (illusory) conflict (ignorance of compatible goals/preferences). Fixed-pie perception (zero-sum game: whatever I win, you lose)

Framing and Preference Reversals (Notion of "certainty effect")

Changing a probability to zero or to one ( thus providing certainty) has a greater influence on our decision than making the same numerical change in probability with other values (not zero or one).

Four Deterministic Rule (Conjuctive Rule)

Check each attribute for a single alternative and if below threshold on any attribute reject that alternative.

The notion of contingent contracts

Can also create value through "bets" - contingent contracts that are very useful in the following ways: (1)create joint value; (2)allow parties to bet on their biases; (3)counter bluffs and doubtful claims; (4) provide incentives to perform.

3 Types of Decision Making (#2 Decisions under Risk)

Can't predict outcomes with certainty but can specify the probabilities precisely.

Decision Table and Terminology Format 2

Columns are the "states of nature" while rows are the possible "actions". Utility values are in the middle.

The basic ideas of distributive negotiation (slicing the pie, claiming value)

Claiming value: Distributive negotiation focuses only on this. 4 quantities determine the possible outcomes: (1) Buyer's aspiration (target) point & (2) resistance (reservation) point. (3) Seller's aspiration (target) point & (4) resistance (reservation) point. The aspiration (target) point doesn't necessarily have to be the same as the initial offer but presumably the initial offer won't be less favorable to its source than the value of the aspiration point The bargaining ranges represented by those endpoints either overlap (let's negotiate) or they don't (let's not waste our time bargaining). Even if they do overlap, each party in a fixed pie negotiation wants the settlement to be as close to the other party's reservation point as possible. Bargaining Zone Remember the two bars representing acceptable salary between employer and potential employee between 93,000 and 97,000. This is the overlap where an agreement can occur.

Four Deterministic Rule (Additive Difference Rule)

Compute the difference between two alternatives on each attribute & sum; use binary elimination if more than two alternatives.

Why splitting the difference isn't always the best outcome

Concessions on multiple issues by both parties yield a better outcome for each than just splitting the difference in a "50-50" compromise.

Bayes Rule

Conditional probability using hypothesis and evidence formula

Confirmation Heuristic

Confirmation trap (more critical with an opposing view), anchoring (and adjustment), brain reaches out for any information, conjunction and disjunction event, hindsight bias (Monday morning quarterback).

3 Types of Decision Making (#1 Decisions Under Certainty)

Consequences of choices can be known with certainty - no probabilities.

The basic ideas of integrative negotiation (expanding the pie, creating value)

Creating value: Win-win (integrative) negotiations require attention to creating value through thoughtful construction of multi-issue solutions. (Example: bonus if job is finished on time, call bluff) Goal of integrative (win-win) agreements: create solutions that don't leave money on the table. Not: simple compromise; even split; satisfaction; harmony. Single biggest problem creating such win-win agreements is recognizing the potential for them. Need more than one issue - "expand the pie". Preferences must vary across issues among the parties so that trade-off solution packages can be created. Impossible to create value in a single issue negotiation but in multiple issue negotiations one can trade on different issues to create value. This is not "altruistic" or "nice" - it expands the pie that you will soon be slicing. "Dealcrafting" is an art and sometimes you need to create new issues to make it work - especially if you start off with a single issue.

Garbage Can Model

Decision making is sloppy and haphazard, decisions result from the complex interaction of four independent streams of events: problems, solutions, particpants, and choice opportunities. (PSPC)

Mathematics of Rationality (Descriptive Approach)

Describes how real people actually make decisions.

3 Types of Decision Making (# Decisions under uncertainty)

Don't even know the probabilities

Tactics / approaches that DON'T necessarily lead to integrative (win-win) solutions

Don't put too much faith in - Good intentions (simply wanting to reach a win-win solution) - Compromise (compromises aren't equivalent to a win-win deal) - The relationship (stable, enduring harmony is nice but not necessarily win-win) - Overemphasis on cooperation (cooperation is important but too much may be just as useless as too much competition) - Taking more time (investing more time in negotiations won't ensure win-win outcomes)

Ease of Recall Bias (From Availability Heuristic)

Events that are more easily recalled or vivid appear to occur more often (even though they might be the same frequency) than instances that are less easily recalled.

Concepts and examples of "overestimation" (Optimistic Biases)

Expect future to be "rosier" than it really is.

Why is EU theory important?

Expected Utility Theory is important because, assuming you have accurate and complete information, EU would always guarantee an optimal decision. When people are involved, people do have systematic behavioral violations of the principles. There is also SEU which is Subjective EU... probabilities are based on personal estimates (more room for error).

St. Petersburg Paradox Game

Flip a coin and receive 2 dollars, continue, 1 dollar to potential infinite gain.

Bounded Awareness (Notion and examples of focalism & the focusing illusion)

Focalism: common tendency to focus too much on a particular event and tool little on other events that are likely to occur concurrently. (happiness on sports team, happier if richer). Focusing Illusion: The tendency to focus on a subset of relevant decision information that leads to the exaggerated importance of the "focal set" and the neglect of other available information. Decision makers who base a decision on inappropriate information may suffer the consequences. (Challenger example, o-ring temp)

Tactics / approaches that lead to integrative (win-win) solutions

Focus efforts on - Building trust and exchanging info - Asking appropriate questions to learn about the other parties preferences - Giving other parties info about your preferences (be careful: you don't want to reveal everything) - Creating multi-issue negotiations by unbundling existing issues, adding issues, and inventing issues - Making package offers or multiple offers (of overall equal value to yourself) simultaneously BUT: win-win negotiators must still be sure to claim as much value as the agreement can support; otherwise they may achieve a demonstrably inferior solution not only for themselves but even for the other party. (example: take lower paying job that has room for promotion instead of higher paying job with no promotion)

Decisions Under Uncertainty (Laplace's Principle of Insufficient Reason (Mean Return))

If probabilities are truly unknown, simply treat each state of nature as equally probable *Know that these 4 rules aren't accepted as completely rational by every expert*

General notions of overconfidence and why it is so important

Inappropriate confidence (often overconfidence but sometimes underconfidence) results from our tendency to more easily recognize or imagine evidence that supports (confirms) our prior ideas or prejudices Overconfidence plays a role in many forms of judgmental errors and major real-world decisions and facilitates many of the other biases

Bounded Awareness (Notion and examples of inattentional blindness & change blindness)

Inattentional Blindness: Key notion is that, despite our assumptions to the contrary, we often fail to observe even really obvious and quite striking events if we aren't paying attention. "You won't see it if you aren't looking for it". Inattentional blindness can lead managers making decisions to overlook readily available information. (Monkey) Change Blindness: people fail to notice obvious visual changes in their physical environment. (Receptionist change)

Retrievability (From Availability Heuristic)

Individuals are biased in their assessments of the frequency of events based on how their memory structures affect the search process.

Conjunctive and Disjunctive Events Bias (From Confirmation Heuristic)

Individuals exhibit a bias toward overestimating the probability of conjunctive events and underestimating the probability of disjunctive events.

Misconceptions of Chance (From Representativeness Heuristic)

Individuals expect that a sequence of data generated by a random process will look "random" even when the sequence is too short for those expectations to be statistically valid.

The Conjunction Fallacy (From Representativeness Heuristic)

Individuals falsely judge that conjunctions (two events co-occurring) are more probable than a more global set of occurrences of which the conjunction is a subset.

Anchoring (From Confirmation Heuristic)

Individuals make estimates for values based upon an initial value (derived from past events, random assignment, or whatever information is available) and typically make insufficient adjustments from that anchor when establishing a final value.

Overconfidence (From Confirmation Heuristic)

Individuals tend to be overconfident of the correctness of their judgments, especially when answering difficult questions.

Regression to the Mean (From Representativeness Heuristic)

Individuals tend to ignore the fact that extreme events tend to regress to the mean on subsequent trials.

The Confirmation Trap (From Confirmation Heuristic)

Individuals tend to seek answers that confirm their beliefs rather than search for disconfirmatory information.

Decisions Under Risk: Expected Value

Sum of expected values times probability.

Decisions Under Uncertainty (Savage's Minimax Regret)

Minimize the maximize regret one would experience if they chose the wrong choice *Know that these 4 rules aren't accepted as completely rational by every expert*

Four Deterministic Rule (MAUT)

Multiattribute utility rule: Compute the overall utility of each alternative by assigning a utility to each attribute of each alternative and an importance weight to each attribute and summing the products of the attribute utilities and weights for each alternative

Rational Negotiation (Why negotiation is good example of decision process)

Negotiation is an excellent example of joint decision making (contrasted with our previous focus on individual decision making). Negotiation has a well-developed rational foundation drawing from game theory and other disciplines. Negotiation is a common experience and is of tremendous practical importance for managers. Negotiation is a skill that can be learned.

Concepts and examples of "overestimation" (Illusion of Control )

Overestimate amount of control we have when we have little; underestimate the control we have when we have a lot.

Concepts and examples of "overestimation" (The planning Fallacy)

Overestimate the speed at which we will complete projects & tasks; underestimate how complexity leads to problems & obstacles.

Framing and Preference Reversals (Role of loss and gain frames in influencing choices)

Pairwise comparisons of options involving risk are subject to preference reversals as a result of the use of a loss frame vs a gain frame (wording is key). Explanation relates to the idea of "diminishing marginal utility".

Preparation -identify the basic questions to ask as you prepare for a negotiation and explain the value of preparation in the negotiation process

Preparation is THE MOST IMPORTANT aspect of negotiation. If you don't believe me, check out web sites to help consumers buy cars. Almost every guide to negotiations in a specific context will suggest questions for you to try to answer PRIOR to negotiating. You may not be able to answer all these questions well prior to every negotiation, particularly the ones about the other party and the situation, but the more thoroughly you prepare, the better your results are likely to be. Before you do anything else, you must have good answers to TWO QUESTIONS about yourself: What do I want? (aspiration point). What is my Best Alternative To Negotiated Agreement (BATNA)? It is critically important to try to answer self-assessment questions because those are the ones that you have the best chance of answering more or less accurately in many negotiation situations. In addition to the self-assessment, you should try to answer questions about the other party, particularly the other party's BATNA if possible (but try not to reveal your own BATNA unless you think it is advantageous to do so). You should also try to answer questions about the negotiation situation which could include consideration of your relationship with the other party.

Group Decision Making Concepts (Delphi Technique)

Process to autonomously generate ideas from physically dispersed experts. Computer aided decision making.

Group Decision Making Concepts (Nominal Group Technique)

Process to generate ideas and evaluate solutions.

Notion of Expected Utility (St. Petersburg Paradox)

Psychological utility and diminishing marginal utility. i.e. money is not mathematically the same as the actual objective "value" of money... as you get more money, $1 might not be worth as much to you.

Group Decision Making Concepts (Consensus)

Reached when all members can say they either agree with the decision or have had their 'day in court' and were unable to convince others of their viewpoin. Everyone agrees to support the outcome.

Decision Styles (Value Orientation)

Reflects the extent to which an individual focuses on either task and technical concerns or people and social concerns when making decisions.

Evidence Based Decision Making

Represents a process of conscientiously using the best available data and evidence when making managerial decisions.

Intuition

Represents judgments, insights, or decisions that "come to mind on their own, without explicit awareness of the evoking cues and of course without explicit evaluation of the validity of these cues".

Availability Heuristic

Samples from memory, recall biases, asthma kills more than a tornado, deer kill more than sharks.

Rational Decision Making Processes

Stage 1: Identify the problem or opportunity Stage 2: Generate alternative solutions Stage 3: Evaluate alternatives and select a solution Stage 4: Implement and evaluate the solution chosen

Evidence Based Decision Making (EBDM) 5 Steps

Step 1: Identify the problem or opportunity Step 2: Gather internal evidence or data about the problem, and evaluate its relevance and validity Step 3: Gather external evidence or data about the problem from published research Step 4: Gather views from stakeholders affected by the decision and consider ethical implication Step 5: Integrate and critically appraise all data and then make a decision

Concepts and examples of "overestimation" - including knowing about the manifestations like "self-enhancement", "illusion of control", "planning fallacy", and "optimistic biases"

Tendency to think we're better, smarter, more attractive, more capable than we actually are. This leads to thinking we can accomplish things faster than we can or have more control than we actually do

Decision Styles (Tolerance for Ambiguity)

The extent to which a person has a high need for structure or control in his life.

Group Decision Making Concepts (Minority Dissent)

The extent to which group members feel comfortable disagreeing with other group members, and a group's level of participation in decision making.

Framing and Preference Reversals (Transactional Utility)

The perceived quality of the deal relative to what you think the item should cost. When we consider transactional utility in our decision, it usually leads us to make irrational choices, most easily seen when the decisions involve discounts and coupons.

Why experience may not always be the best teacher

The pitfalls of learning from experience: "Experience keeps a dear school yet fools will learn in no other" Ben Franklin. Franklin's statement is often wrongly rendered as "Experience is the best teacher". Experience can certainly help if it is the right kind of experience and if there is appropriate feedback. Don't prepare to "fight the last war".

Framing and Preference Reversals (Acquisitional Utility)

The utility (to you) of whatever product or service you acquire.

Understand notion of positive illusions and Bazerman's and Moore's recommendation for "well calibrated" judgments (i.e., realism) as the superior approach to unrealistic positivity (or negativity)

The value of calibrated judgment. Controversy regarding the claims of the "positive psychology" crowd. Some experts (e.g., Bazerman & Moore) are skeptical regarding the recent claims that overconfidence (positive illusions) is (are) on balance beneficial for mental health. They argue that the best approach is to be well-calibrated (neither overconfident nor underconfident).

Concepts and Examples of "Overplacement"

This is the tendency to falsely believe we rank higher than others on certain dimensions. This leads to people being overly competitive because they falsely believe they can win when they can't (in negotiations, litigation, wars, etc.) Essentially the same as the "better than average" effect. Consequences include arrogance, bitterness, envy, belief one is treated unfairly. Complicated though because while we "overplace" on easy tasks we "underplace" on difficult tasks. Neglecting to use appropriate "reference group" for comparisons is often the cause.

Mathematics of Rationality (Prescriptive Approach)

Tries to "prescribe" help for us to make better decisions when we can't reach the ideal.

Signal Detection Concepts (Specificity)

True negative rate

Concepts and examples of "overestimation" (Self-Enhancement)

View selves more positively than accurately & believe our groups are better than other groups.

Negotiator Cognition (Myth of fixed pie -reactive devaluation )

We discussed integrative vs distributive negotiation last time (slicing the pie vs expanding the pie aka claiming value vs creating value). Key to overcoming the problem is to recognize this "incompatibility bias" and realize that both parties may have shared goals and interests. Be aware of and try to avoid "reactive devaluation" - devaluing offers or outcomes just because they are proposed by the other side.

Why Evolution Programmed Us To Use Framing

We do not have unlimited sensitivity to pleasures and pains (subjective utility). Evolution has resulted in a system that allows us to (with appropriate time for the particular context) adapt our reference point (often the status quo) and then adjust our "utilities" to our new reference point. This leads to a "hedonic treadmill" where no amount of any "good" ever seems to be permanently satisfactory - we adapt to our increased wealth, take it for granted and soon desire more - that's one reason (not the only one) why really rich people keep working.

Framing and Preference Reversals (Role of framing and insurance; examples)

We generally will accept a certain loss more readily as part of a decision process if the certain loss is described to us as "insurance" or a "paid warranty". Insurance providers generally can only be profitable if the expected value of the stream of premiums exceeds the expected value of the losses they might incur. Thus one can argue that insurance is often a bad buy because you are likely to pay more in premiums than you will receive in benefits.

Decisions Under Uncertainty (Hurwicz's Optimism-Pessimism Index)

Weighted average of pessimism and optimism levels: αpi + (1- α)oi where α is the o-p index *Know that these 4 rules aren't accepted as completely rational by every expert*

Insensitivity To Base Rates (From Representativeness Heuristic)

When assessing the likelihood of events, individuals tend to ignore base rates if any other descriptive information is provided--even if it is not relevant.

Insensitivity to Sample Size(From Representativeness Heuristic)

When assessing the reliability of sample information individuals frequently fail to appreciate the role of sample size.

Satisficing

choosing a solution that meets some minimum qualification, one that is good enough.

Bias

draw an incorrect solution based on different factors

Bounded Rationality

represents the notion that decision makers are "bounded" or restricted by a variety of constraints when making decisions.

Signal Detection Concepts (Sensitivity)

true positive rate