Managerial Decision Making

Comments on Ch. 11 & Related issues

(Improving Decision Making) (Week 13 Fall 2012)

 The story of Moneyball Six key strategies for better decisions

Using the tools of decision analysis Acquiring Expertise Debiasing judgments Reasoning analogically Taking an outsiders perspective Understanding biases in others

Overview

Concluding remarks

Moneyball
Michael Lewis 2003 book & currently released film document the extraordinary success of Billy Beane managing the Oakland As baseball team with the guidance of Paul DePodesta using disciplined statistical approaches instead of relying upon baseball executives intuition

Moneyball
Major mistakes typical of baseball executives as well as other managers include
Overgeneralizing ones own personal experience Overweighting recent performances of players Overemphasizing their own direct observations instead of looking at long-term data

B & M propose six strategies for better decisions

Ill comment briefly on aspects of each but please read the text treatment for all of the points

Using Decision Analysis Tools

Decision Analysis is an established discipline that uses quantitative tools for making decisions (you can take courses in this) Although there are many techniques involved, one key idea is the notion of expected value that weve already discussed For repetitive decisions, it is often useful to use a linear model based upon statistical data (that is, a regression model)

Using Decision Analysis Tools

Linear models often outperform human judgment (even that of experts) due to
the superior ability of the model to integrate relevant data (experts often know what to consider but cant integrate as well) the superior consistency of the model (computer) over human judgment, which is often influenced by extraneous factors like mood, fatigue, stress, etc. specific biases that are triggered in humans by features of the decision situation (models typically arent subject to these)

Using Decision Analysis Tools

People often dont like using linear models though due to
Conceit Belief that intangible intuitions, tastes, gut feelings arent properly included Threat of replacing human decision making with a spreadsheet

So to make better decisions, you should at least consider how linear models can help you

Using Decision Analysis Tools

Example of grad school admissions
Role of correspondence bias Dawes simple linear model using 3 factors (GPA, GRE, quality of undergrad institution) could match and even outperform selection committees

Using Decision Analysis Tools

Example of hiring
Unstructured interviews arent good at predicting job performance relative to other cost effective tools, but people love to interview applicants and make decisions based upon impressions Four major cognitive biases at work in interviews
Availability; Affect; Representativeness; Confirmation

Good selection processes use better tools like tests, work samples, structured interviews, and systematic assessments of work experience

Acquire Expertise
Expertise helps but experts are prone to biases as well and learning from experience (feedback) doesnt necessarily help Northcrafts and Neales distinction: experience (just repeated feedback) vs expertise (strategic conceptualization of what constitutes a rational decision-making process)
Learning from experience is not as simple as people sometimes think and isnt effective when the feedback doesnt lead to an improved conceptual understanding of decision process

Debias Judgments
Fischhoffs four steps:
Warn about possibility of bias Describe the direction of the bias Provide a dose of feedback Offer program of training

Debiasing is often difficult and is usually specific to the context and the particular bias involved

Debiasing Judgments
Lewins approach
Unfreezing crucial first stage
Need to motivate people to change thought patterns they have relied upon and may be comfortable with Overcome resistance of successful people who deny there is anything wrong with their decision making Deal with need for consistency (balance theory) that supports notion of self as currently an excellent decision maker

Change
Clarify specific deficiencies Explain root causes of them Avoid threatening self-esteem

Refreezing constant monitoring and checks

Reason Analogically
Learn more when you can abstract from two or more experiences Achieved through exercises that require person to identify the common (analogical) structure in multiple examples Research and examples from negotiation training revealed need to consider both specific training (two examples illustrating one strategy) and diverse training (two examples illustrating different strategies)

Take an Outsiders View

Insider view: biased decision maker who looks at each situation as unique Outsider view: generalizes across situations to identify similarities
Related to optimism & overconfidence we overestimate our chances of success on the current project but are more accurate (though still overestimate) with respect to general cases of multiple others in similar circumstances Try to adopt the outsiders view before a decision and perhaps ask appropriate outsiders for opinions

Understand Biases in Others

Five steps to adjust the judgments of others
Select a comparison group (always ask Compared to what?) Assess the distribution of the comparison group (Ask if this is an appropriate group or if additional refinements are needed?) Identify and incorporate the experts intuitive estimate as a baseline for subsequent adjustments Evaluate the comparison group data with respect to the intuitive estimate Adjust the intuitive estimate

Concluding Remarks
Improving decision processes isnt easy Constant attention to your decisions and how you go about making them is needed Useful to practice by observing public remarks of others (news reports) that demonstrate certain biases Dont overemphasize results: sometimes good processes lead to bad outcomes and vice versa but over the long run, good decision processes are more likely to produce success

Summary
Chapter 11 sums up some excellent advice about improving decision making. Not every expert would agree with every recommendation that Bazerman & Moore offer, but only because in some special situations there are alternative approaches that might require modifications to the advice, such as with experts making high-stakes decisions under time pressure. However, if you follow the advice in Ch 11, you are more likely to make better decisions over the long run than if you ignore the advice.

References for further reading

NOTE: These are the references Ive included the most throughout the course. The books by Dawes as well as some of the others include material on the linear model issue as well as additional advice about improving decision making.
Dawes, R. M. (1988). Rational Choice in an Uncertain World. Orlando, FL: Harcourt Brace Jovanovich French, S. (1993). Decision Theory: An Introduction to the Mathematics of Rationality. New York: Ellis-Horwood Hastie, R., & Dawes, R. M. (2010). Rational choice in an uncertain world (2nd Ed.). Thousand Oaks, CA: Sage Publications. Kleindorfer, P. R., Kunreuther, H. C., & Shoemaker, P. J. H. (1993). Decision Sciences: An Integrative Perspective. Cambridge, U.K.: Cambridge University Press March, J. G. (1994). A primer on decision making: How decisions happen. New York: The Free Press. Yates, J.F. (1990). Judgment and decision making. Englewood Ciffs, NJ: Prentice-Hall, Inc.

Managerial Decision Making

For Next Time:
Everyone: Finish reading Ch. 11 if you havent yet done so. Next time (after Thanksgiving) we will have Exam 3 for the undergrads. There will be no class meeting after the exam for anyone (no webex session for online students and on-campus grad students need not attend). Grad students should make good use of their time to GET THEIR PAPERS DONE AND PREPARE FOR INFORMAL PRESENTATIONS/Q&A Grad students:
Do assignment 10 (on Blackboard) and submit through Blackboard before class next time. NOTE- this is in an exam format so the procedure may be slightly different from what you are accustomed to, but I dont think youll have any special difficulties. MAKE PROGRESS ON YOUR PAPER!!!!!!

Which of the following conditions can increase ones willingness to engage in altruistic punishment?
50%

a. When the person who is behaving unfairly belongs to an in-group. b. When the person who is behaving unfairly belongs to an out-group. c. When the person who is treated unfairly belongs to an out-group. d. When the person who is treated unfairly belongs to an in-group

21% 14% 14%

Researchers of bounded ethicality claim that the primary flaw of most ethical training is that:
50%

a. It ignores the failure of disclosure to reduce conflicts of interest. b. It fails to convince managers that they can benefit from lessons of ethical behavior. c. It over-claims credit for its contribution to reduce unethical behavior. d. It focuses too narrowly on explicitly unethical behavior.

36%

14%

0%
1 2 3 4

Trust enables value creation through:

a. b. c. Creating contingent contracts. Identifying the parties interests. Facilitating tradeoffs between issues of different relative importance. Sharing information between the parties.

57%

21% 14% 7%

d.

Negotiators often are reluctant to give away information because they assume that:
a. b. c. d. Their information is too important. It will anchor their final outcome. Giving away information is giving away power. If the other side does not ask questions, then their willingness to share information is equally low.
64% 36%

0%
1 2 3

0%
4

The fixed-pie assumption leads negotiators to interpret most situations as:

a. b. c. d. Overly risky Win-lose Integrative Unfair
64%

21% 14% 0%
1 2 3 4

Creating anchors that lead negotiators toward a positive frame may cause these negotiators to:
a. b. Reactively devalue given offers. Put more emphasis on value creation. Make more concessions. Reach an avoidable impasse.
64% 36%

c. d.

0%
1 2 3

0%
4

Which of the following biases did the Oakland Athletics baseball team overcome by implementing linear models in the teams management decisions?
85%

a.
b. c. d.

Overweighting observed player performances. Overgeneralizing from personal experiences. Overweighting recent data. All of the above.

8% 0%
1 2

8%

Which of the following has the lowest predictive power of a graduate students future performance?
a. The students score in the Graduate Record Examination (GRE). The students undergraduate Grade Point Average. The students performance in an interview. The quality of the students undergraduate school.
71%

b.

29%

c.
d.

0%
1 2 3

0%
4