Strategic Decision Making

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1 Strategic Decision Making Making better decisions BCHFP Conference 28 September 2017 Professor Michael Parent Our Goals This Afternoon 1. To understand individual and group decision making processes in greater depth. 2. To understand the main biases that affect us all when making strategic decisions. 3. To learn about mitigating and coping strategies. Professor Michael Parent 1

2 2017 BCFHPS Annual Conference Vancouver BC September 28, 2017 Strategic planning (and execution) is the process of making decisions about the allocation of scarce resources. Let s Explore the Sources Competitive Advantage Value Activities Resources/ Capabilities Professor Michael Parent 2

3 Rationality Managers make consistent, value-maximizing choices with specific constraints. Rationality assumes that decision-makers: Are perfectly rational, fully objective, and logical Have carefully defined the problem and identified all possible alternatives Have a clear and specific goal Will select the alternative that maximizes outcomes in the organization s interests rather than in their personal interests. Cognitive Limitations Human decision makers can retain only a few bits of information in short-term memory 7 plus or minus 2 Propensity for risk may limit the amount of information needed to arrive at a decision risk takers may require less information than risk avoiders Those who think in concrete rather than abstract terms tend to be somewhat limited in their ability to process information inside versus outside the box Professor Michael Parent 3

4 Bounded Rationality Problem Space Simon refers to this as satisficing What is intuition? Managers make decisions based on their past experiences Managers make decisions based on cultural values Experience-based Decisions Managers make decisions based on feelings or emotions Value-based Decisions Affect-based Decisions Intuition Subconscious Mental Processing Cognitive-based Decisions Managers use data from their subconscious to help them make decisions Managers make decisions based on skills, knowledge, and training Professor Michael Parent 4

5 Our two systems of thinking System 1 (Thinking Fast) Operates automatically and quickly, with little or no effort and no sense of voluntary control Example: =? System 2 (Thinking Slow) Allocates attention to the effortful mental activities that need attention Example: 17 x 22 =? Common Decision-Making Errors & Biases Status Quo Overconfidence Anchoring Self-Serving Immediate Gratification Sunk Costs Decision-Making Errors & Biases Selective Perception Randomness Confirmation Representation Availability Framing Professor Michael Parent 5

6 Top 6 Most Common Decision-Making Errors & Biases Status Quo Overconfidence Anchoring Decision-Making Errors & Biases Representation Availability Framing Anchoring Trap When considering a decision, the mind gives disproportionate weight to information already received Be open minded, think about the problem from many different perspectives Be careful not to anchor to your colleagues or advisors Professor Michael Parent 6

7 Status Quo Decisions Which would you rather do? Win $800 for sure Accept an 85% chance of winning $1000 and a 15% chance of wining $0 Professor Michael Parent 7

8 Decisions Which would you rather do? Pay an $800 fine for sure Take an 85% chance of paying $1000 and a 15% chance of paying $0 Prospect Theory Value of outcome Losses - + Gains Professor Michael Parent 8

9 Question There are 600 people in a town that have been infected by a certain virus. There are two competing programs, of which one has to be selected. If Program A is adopted, 200 people will be saved If Program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved Which of the two programs would you favor? Same Question? There are 600 people in a town that have been infected by a certain virus. There are two competing programs, of which one has to be selected. If Program C is adopted, 400 people will die If Program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die Which of the two programs would you favor? Professor Michael Parent 9

10 Framing Effects The two sets of choices are objectively identical. Changing the description of outcomes from lives saved to lives lost is sometimes sufficient to shift prototypic choice from risk-averse to riskseeking behavior. Availability In four pages of a novel (about 2,000) words), how many words would you expect to find that have the form _ n _ (7-letter words that have n in the 6 th position)? Professor Michael Parent 10

11 Availability Example 2 In four pages of a novel (about 2,000) words), how many words would you expect to find that have the form i n g (7-letter words that end with ing )? Retrievability Did you respond with higher number for Problem 2a than for 2b? Retrievability of 7-letter words ending with ing apparently easier than 7-letter words with n as the 6 th letter. Professor Michael Parent 11

12 Availability Heuristic What is readily available in memory influences the people s judgments. A person s choice may be influenced by: Their closeness (in time or space) Vividness of their experience in dealing with the situation People tend to make judgments using retrievability of information. Can you read this? Aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it deosn't mttaer in waht oredr the ltteers in a wrod are, the olny iprmoetnt tihng is taht the frist and lsat ltteer be at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe. Professor Michael Parent 12

13 The next one has got to be a winner! You are at the Roulette table and a Red number has come up 9 times in a row. You put all of your chips on Black because on average it has a higher likelihood of coming up next. This thinking is: (a) Correct (b) Incorrect Representation What this Means The performance of the tenth stock is independent of the performance of the first nine. The Gamblers Fallacy - We have an inappropriate tendency to assume that random and non-random events will balance out they don t! After holding bad cards on ten hands of poker, the player believes she is due for a good hand. After winning $1,000 on the BC Lottery, a woman changes her regular number (after all, how likely is it that that number will come up twice.) A gambler will wait to play a slot machine that someone has put a lot of money into without any big payouts Professor Michael Parent 13

14 Overconfidence Bias Decision-makers generally ascribe more credibility to data than is warranted and hence overestimate the probability of success merely due to the presence of an abundance of data Predictive accuracy reaches a ceiling at an early point in an information gathering process and confidence in decisions continues to climb as more and more information is obtained This bias is most extreme in tasks of great difficulty Consequentially, Overconfident managers stop gathering and processing information about an issue sooner Preempts the collection of disconfirming evidence Reduces analysis of data and discourages the examination of alternative ideas and solutions Other Traps Sunk Cost Most people have a tendency to throw good money after bad Confirming Evidence Most people seek out evidence to support their existing thoughts Present vs Future Present concerns tend to have more weighting Endowment Effect we value those things we are more involved with more highly Professor Michael Parent 14

15 The Four Mental Functions People who prefer ST Sensing and Thinking/Objective SF Sensing and Feeling/Relative NF Intuition and Feeling/Relative NT Intuition and Thinking/Objective Focus attention on Facts Facts Possibilities Possibilities And handle these with They tend to become And find scope for their abilities in Non personal Analysis Practical and matter of fact Technical areas with facts and objects Personal warmth Personal warmth Non personal Analysis Sympathetic and friendly Practical help and services for people Enthusiastic and insightful Understanding and communication with people Logical and ingenious Theoretical and technical developments What your Personality Type says about Decision Making How do you make good individual decisions? Don t just do something, stand there. Professor Michael Parent 15

16 The Importance of Setting Goals First Groupthink is a mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members striving for unanimity overrides their motivation to realistically appraise alternative courses of action Professor Michael Parent 16

17 Why does Groupthink happen? Team members want to get along above all else Critical information is withheld because individual members censor themselves Ideas often accepted without careful consideration of the pros and cons Pressure to not consider alternative view points Maintain togetherness by protecting the team from outside information Diffusion of responsibility How to recognize groupthink The First Step in Avoiding it! Options rejected during discussion are never brought up again Information that might challenge the team s thinking is not actively sought Different perspectives offered are often quickly dismissed No alternatives offered When positions presented (especially by leader), people focus on why it is right Professor Michael Parent 17

18 Factors giving rise to groupthink Rationalization Direct pressure Illusions of invulnerability Belief in inherent group morality Isolationism Self-censorship The symptoms of groupthink 1. Incomplete surveying of alternatives The group fails to seek out all of its possible alternatives. The group picks one idea and goes with it, paying no attention to substitute ideas. 2. Incomplete surveying of objectives The group never takes into consideration all of the possible objectives they have to choose from. This could cause the best objective not to be chosen. 3. Failure to examine major costs and risks of the preferred choice. The group overlooks possible negative outcomes when other alternatives were available. Professor Michael Parent 18

19 The symptoms of groupthink 4. Poor information search The group fails to seek out all the possible information needed to make an effective decision. An incomplete information search could either be done improperly or incompletely. 5. Selective bias in processing information at hand. The group demonstrates a tendency to choose from certain information; excluding other valuable pieces of information. 6. Failure to reconsider originally rejected alternatives. The group fails to review previously rejected alternatives, ignoring possible positive alternatives. 7. Failure to work out detailed implementation, monitoring, and contingency plans. The group fails to make contingency plans, ignoring possible future problems. Another scenario is the group ineffectively creates contingency plans. How to avoid groupthink Promote an open climate. Avoid isolation of the group. Invite outsiders in when making decisions. Engage in critical evaluation. Appoint a rotating Devil s Advocate Conduct a pre-mortem Allow true dialogue without undue influence from the leader. Sometimes, even, the leader could not be in the room when critical issues are first discussed. Professor Michael Parent 19

20 Reference Class Forecasting (RCF) (Kahneman & Tversky, 1979) Key Take-Aways Today: 1. Pay attention to the decision frame re-frame if necessary 2. Base decisions on evidence and make sure you consider ALL the evidence you need confirmatory & disconfirmatory Are your displays of evidence clear? compelling? Don t take a straw poll it commits people to positions As a leader, avoid statements about your preferred alternative Use devil s advocacy and pre-mortems Promote the use of RCF for critical resource-allocation decisions 3. Be consciously aware of the bias(es) that might be influencing you. Professor Michael Parent 20

21 Selected Bibliography all of these books were NY Times Bestsellers and offer more detail on the incredible science behind decision making. Daniel Kahneman (2011). Thinking, Fast and Slow. An epic book summarizing a lifetime s research, and expanding on Systems 1 and 2. A bit technical and dense at times, but very readable. Richard Thaler & Cass Sunstein (2009). Nudge: Improving Decisions About Health, Wealth and Happiness. One of the first non-academic books dealing with the new science of behavioral economics. Dan Ariely (2009). Predictably Irrational. The book that details many of the examples Ariely presented in today s videos. Michael Lewis (2016). The Undoing Project: A Friendship That Changed Our Minds. One of the best books of the year! Provides the origin and back stories of Tversky and Kahnneman s incredible lifetime of collaboration. Thank You! Professor Michael Parent 21

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