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WARNING!!! These lectures contain explicit decisions (Multiple Objectives, Risks, Biases) This material is rated ??? Naïve managers should not read on.

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Presentation on theme: "WARNING!!! These lectures contain explicit decisions (Multiple Objectives, Risks, Biases) This material is rated ??? Naïve managers should not read on."— Presentation transcript:

1 WARNING!!! These lectures contain explicit decisions (Multiple Objectives, Risks, Biases) This material is rated ??? Naïve managers should not read on. Uncritical acceptance has been found to negatively affect careers and mental health. 9/12/2011 1

2 ©Chelst & Canbolat Value-Added Decision Making Chapter 1 Need for structured decision tools Chapter 1 Need for structured decision tools  Decision fiascos  Decision making difficult  Known biases – (Chapter 13 &14 expanded)  Problem Symptoms 2

3 ©Chelst & Canbolat Value-Added Decision Making Frustrations – 1 to 4 1. We never have enough time to make the right the decision the first time but we always have enough time to review the decision over and over again! 2. Engineering, marketing, manufacturing and finance never seem to reach a consensus. Each group leaves the meeting more frustrated than when they came feeling that their voices were not adequately heard! 3. We spend more time justifying the decision we made than determining what the best decision should be! 4. Every time a new manager is appointed, we have to review the decision and it seems like we start over from scratch! 3

4 ©Chelst & Canbolat Value-Added Decision Making Select Most common decision making challenge and illustrate (1 – 4) 1. Timing of decisions and review, review 2. Different groups compete 3. Analysis  justify decisions 4. New manager  review decision 4

5 ©Chelst & Canbolat Value-Added Decision Making Frustrations 5. Finance keeps raising the bar for ‘return on investment’ and the corporate technologists increasingly exaggerate the potential value of a new technology. And the game goes on! 6. We don’t have enough data to nail the decision; yet, we have more data than we could possibly process in time to make a timely decision. 7. Risks! All of the alternatives involve significant risk; so let’s not worry about them. We are paid to take risks. 8. We just had an executive review and he said ‘I recently bought a $10,000 home sound system. I know what a good system sounds like and I do not like the performance of the sound system in this vehicle. Change it!’ Why should we bother with customer surveys when our executives know everything and overrule us with their educated gut feel ! 5

6 ©Chelst & Canbolat Value-Added Decision Making Select most common decision making challenge and illustrate (5 – 8) 5. Financial hurdle for approval  exaggerate 6. Data: too little and too much 7. Risks – Do NOT worry! 8. Non-expert offering expert opinion 6

7 ©Chelst & Canbolat Value-Added Decision Making Decision Making Environment (describe your world)  Many ONE TIME Decisions  Multiple technical experts – often narrowly focused  Market forecasting experts  Finance: experts – controllers  Cut across organizations  Multiple levels of higher management reviews  Extremely competitive business 7

8 ©Chelst & Canbolat Value-Added Decision Making Definition of a Decision Definition of a Decision A commitment of resources that can not be reversed without incurring a significant penalty in terms of either dollars, time or image. What is a GOOD DECISION? 9/12/2011 8

9 ©Chelst & Canbolat Value-Added Decision Making Good Decision = Good Outcome? Rewarding decision outcomes tends to overemphasize short-term impacts and pushes for quick hitting solutions. 9

10 ©Chelst & Canbolat Value-Added Decision Making What is a GOOD DECISION? Flip a Coin 8 Times Select the best choice regarding the outcome?  Equal number of heads and tails  Number of heads and tails differs by exactly 2  Number of heads and tails differs by 3 or more  Results of 8 flips – match your decision? What Is a Quality Decision Process? 9/12/2011 10

11 ©Chelst & Canbolat Value-Added Decision Making Decision Effectiveness  Process (Decision Quality)  Output – achieve corporate goals  increased communication  shared understanding  facilitated communication with stakeholders  mechanism for auditing public decisions  Outcome  Kodak $1 billion over ten years 178 decisions  Best practice users – Companies 5 times more likely to be high performing 11

12 ©Chelst & Canbolat Value-Added Decision Making QED –Decisions  Quality  Needs and values of all stakeholders  Hard and soft (subjective data)  Robust and defensible  Efficient  Templates  Review and Update  Disciplined and Proven!  Replicable  Broadly applicable 12

13 ©Chelst & Canbolat Value-Added Decision Making Quality Efficient Discipline  Clarity of Action  Meaningful Reliable Information (Expert & less biased)  Integrate hard data and expert opinion  Clear Values and Tradeoffs  Clear statement of uncertainty of risk and rewards  link to key input variables  Logically Consistent Reasoning  Appropriate Decision Frame  Creative doable alternatives – wide ranging  Commitment to action  Easy to review, update, and revise 13

14 ©Chelst & Canbolat Value-Added Decision Making Two Major Sets of Decision Tools in Book  Multi-criterion Decision Analysis (MCDA)  Tradeoff multiple objectives  Multi-attribute Utility Theory (MAUT)  Analytic Hierarchy Process  Software: Logical Decisions  Decision and Risk Analysis  Decision involving uncertainty  Decision Trees  Software: PrecisionTree 14

15 ©Chelst & Canbolat Value-Added Decision Making Gut Feel  Problem 45% of executives use intuition more than analysis  Mergers and Acquisitions  Stock market votes negative 60% of time  11 of 53 successful – high tech  AOL-Time Warner, WorldCom, Tyco, Daimler Chrysler  Delusions of Success  Known Biases – (e.g.) Sunk cost, Motivational 15

16 ©Chelst & Canbolat Value-Added Decision Making Value-Added vs. Gut Feel  Strengths and Weakness of Best Alternatives  Risk Management of uncertainty  Create Hybrids or Seek Alternatives that are better than those on initial list 16

17 ©Chelst & Canbolat Value-Added Decision Making Maximize vs Satisfice  Maximize utility function  Consider range of alternatives & gather data  Rank order on some utility scale  Satisfice  Accept 1 st alternative that is GOOD ENOUGH  Limits search and data collection 17

18 ©Chelst & Canbolat Value-Added Decision Making Personal Maximizers (Symptoms)  Whenever I make a choice, I’m curious about what would have happened if I had chosen differently.  When I am in the car listening to the radio, I often check other stations to see if something better is playing, even if I’m relatively satisfied with what I’m listening to.  I’m a big fan of lists that attempt to rank things (the best movies, the best singers, the best athletes, the best novels  I never settle for second best. 18

19 ©Chelst & Canbolat Value-Added Decision Making Satisfice – Psychological Healthy  Less social comparison  Regret less  More optimism and self-esteem  Happier and satisfied  Maximizers found higher paying jobs (+20%) but were less happy with their final selection. 19

20 ©Chelst & Canbolat Value-Added Decision Making Biases  Sunk Cost  Motivational  Chapters 13 and 14 20

21 ©Chelst & Canbolat Value-Added Decision Making Discuss What Makes a Decision Hard? Provide examples of complexity, context and impact  Complexity of issues and relationships e.g. tightly linked decisions ___________________________________ _______________  Context of decision making environment e.g. management inexperience ______________ ______________  Major impact of decision e.g. significant $$$$ ______________ ______________ Class Activity - Turn-to-your neighbor - Identify 2 example(s) in each category. Class discussion. Blah, Blah, Blah, Blah…. 9/12/2011 21

22 ©Chelst & Canbolat Value-Added Decision Making Context complicates decisions. 9/12/2011 22  Management turnover  Multiple organizational perspectives  Time pressure  Global cultures  Competitive pressures  Negotiated decision  Strong personalities  Poor quality and availability of data  Dynamic environment  Competing interests: equity versus efficiency  Long lead times to implement

23 ©Chelst & Canbolat Value-Added Decision Making Symptoms of Organization’s Poor Decision ProcessScore 1)Too few alternatives (often only one) 2)Multiple objectives often not considered 3)Uncertainty Ignored 4)Decisions arbitrarily revisited 5)Strong personalities dominate 6)Inexpert opinion affects decisions 7)Decisions poorly linked to implementation 8)Lack of long-term accountability for decisions 9)Other - Specify TOTAL SCORE 0 = not a problem; 1 = occasional problem; 2 = recurring problem; 3 = major problem 9/12/2011 23

24 ©Chelst & Canbolat Value-Added Decision Making Symptoms of Person’s Poor Decision ProcessScore 1)Too few alternatives (often only one) 2)Multiple objectives often not considered 3)Uncertainty Ignored 4)Decisions arbitrarily revisited 5)Family and friends overly influence your decisions 6) Delay making decisions as long as possible TOTAL SCORE 0 = not a problem; 1 = occasional problem; 2 = recurring problem; 3 = major problem 9/12/2011 24

25 ©Chelst & Canbolat Value-Added Decision Making Motivated Yet? Or Just Confused? 9/12/2011 25

26 ©Chelst & Canbolat Value-Added Decision Making Alternative Decision Aids & Processes  Star Gazing  Gut-feel  Seat-of-the-Pants  Debating contest 9/12/2011 26

27 Pros and Cons 9/12/2011 27

28 ©Chelst & Canbolat Value-Added Decision Making Homework 1 – Hard Decision Identify a difficult decision you are aware of (company, government, or personal) that was made within the past two years Discuss (600-800 words) The decision context and the specific decision that was made Major subsequent decisions, if any, influenced by this decision The primary objective and any secondary objectives that drove the decision The factors that made it a hard decision. This discussion should be based on major impact, complexity and organizational context as discussed in section 1.7. The dollar magnitude of the decision The risks associated with the decision Time pressures if any If the decision was revisited, explain the circumstances Constraints surrounding the selection of viable alternatives Globalization’s potential impact or role in the decision, if any What concerns would you have with the quality of the process used to make the decision? 9/12/2011 28


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