Managerial Decision Making John S. Carroll E52-563,

Business v Introductions v Syllabus v Requirements v Style and etiquette

Conceptual Skills for Managers v Knowledge of self and others v Diagnostic skills v Analytical tools v Enhanced intuition

Individuals in Context v How do managers (and others) decide? v Can we make money off mistakes? v How can we make better decisions? v How about groups? v Negotiations and markets v Organizational decision making

Comparison of Models v Descriptive - how people behave - limitations, errors, biases - creative, intuitive leaps v Normative - theoretically optimal - economic rationality - consistency v Prescriptive - advice for better decisions

Decision Making Framework v Noticing v Structuring v Information gathering v Judgment/choice v Action v Feedback/learning

Intuition or Rationality? v Western tradition of rationality: - facts, analysis, consistency v Romantic/mystical view of great leaders and key decisions v Is intuition just bad decision making? v Is intuition deep knowledge, mastery? v Is rationality a strong or a weak method of decision making?

Modular Minds v Sigmund Freud - id, ego, superego v Dick Thaler - planner vs. doer v Thomas Schelling - want self vs. should self v Marvin Minsky - “society of mind” v Steven Pinker - separate routines, e.g., a rational calculator and an intuitive thinker v Imagine the Myers-Briggs dimensions as separate voices in our heads!

Knowing What We Know v Estimates and forecasts are difficult to evaluate for quality or degree of confidence v What will the Dow Jones be six months from now?

Estimation Questions v How many employees (in total) did IBM have worldwide on Dec. 31, 1999? v After making your best estimate, give a low estimate and high estimate so you are 95% sure that the true answer falls within these limits Low_____________ High______________

More Estimation Questions v General Electric’s assets in 1998 v World population in 1999 v Total advertising costs for P&G in 1995 v Microsoft assets in 1999

Overconfidence

More Overconfidence v “A severe depression like that of is outside the range of probability” Harvard Econ. Society Weekly Letter, Nov. 16, 1929 v “With over 50 foreign cars already on sale here, the Japanese auto industry isn’t likely to carve out a big slice of the U.S. market for itself” Business Week, August 2, 1968 v “There is no reason anyone would want a computer in their home” Ken Olson, DEC founder, 1977

Medical Diagnosis Example v 389 schoolboys screened by a panel of three doctors: 45% judged to need their tonsils removed v 215 who were judged not to need their tonsils removed were examined by a new panel of doctors v What % should be judged to need their tonsils removed?

Medical Diagnosis Continued v Results: 46% v 116 boys judged twice not to need their tonsils out were judged by a new panel of three doctors v Results: 44% v Relative vs. absolute judgments v Experience is not enough!

Framing Effects of Wording v Which do you prefer? A: a 1 out of 100 chance of losing $1000 B: buy insurance for $10 to protect you from this loss v Which do you prefer? A: a 1 out of 100 chance of losing $1000 B: lose $10 for sure

Coke vs. Pepsi v 1950s hourglass bottle is Coke’s “most important competitive advantage” v 1958 Pepsi swirl bottle weakly imitates Coke’s bottle v 1970s John Scully, Pepsi’s V-P Mkt: “How should problems such as this be approached?”

Exercise 1: Choosing A Job v the readings for next time will help v a one-two page report (+ tables) v the exercise is due Feb. 12

Buzz Groups v Break up into groups of 2-3 people v Individually, think of a decision you had to make that was particularly difficult v What made it difficult? v Share your thoughts and see if any themes pop out