1. Dr. Abdul Baseer Qazi Capital University of Science and Technology Assessing Policy Alternatives

2. Introduction to myself BSc Electrical Engineering –UET Peshawar, 1994-98 MS in Info. & Comm. Systems –Technical University Hamburg 1999-01 MBA in Technology Management –Northern Institute of Technology, Germany PhD Technology Policy –United Nations University Maastricht, The Netherlands 2007-11

3. Entrepreneurial Activities Founding PrintWorks –Printing and Publishing company Co-founding Comso Computer Works –Computer Sales & Service, Imports Co-founding KTC International –Trading company OECD Negotiator for PISA study –Program for International Student Assessment Founding Member PIF – Pakistan Innovation Foundation

4. Corporate and Teaching Experience Projects at DLR, Siemens, IBM –Germany 3 years at Philips –Stuttgart, Hamburg, Eindhoven 3 years teaching, UET, CECOS, PCE –Peshawar 4+ years teaching and program coordination at MAJU –Islamabad

5. Public Policy Public Policy/Policy Components –Policy ends or aims the basic aims and expectations government have in deciding to pursue (or not) some course of action –Policy means or tools The techniques they use to attain those goals (Walsh, 1994)

6. Introduction How do policymakers use criteria to evaluate the alternatives? Which evaluative criteria are typically used? What methods do policy analysts use to research the likely impacts of alternatives

7. Steps in the Policy Analysis Process Define and analyze the problem Construct policy alternatives Develop evaluative criteria Assess policy alternatives Draw conclusions

8. How Do Policymakers Use Criteria to Assess the Alternatives? Car to purchase Career field to enter/major Evaluative criteria are the important aspects of the item (or policy) on which you will make comparisons. Several criteria are commonly used for every decision.

9. Why Are Criteria Used? Policy decisions are complicated. –Criteria focus you on what’s important. –They organize your thinking. Using criteria leads to better decisions.

10. Evaluative Criteria Evaluative criteria: specific dimensions of policy objectives used to evaluate alternatives –often addressed in measurable terms –multiple criteria used some more relevant than others

11. Typically Used Evaluative Criteria

12. Using Evaluative Criteria Different decisions have different criteria. –The criteria should relate well to the decision. –The situation/context also influences criteria. Decision criteria should be operational measures or indicators – be objective and measurable.

13. Evaluative Criteria: Effectiveness Does the policy alternative reach outcome goals? –Operational measures that define “effective” –An estimate of its likelihood of working Was the Economic Stimulus effective?

14. Cost-Benefit Analysis CBA is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a policy goal. The CBA is also defined as a systematic process for calculating and comparing benefits and costs of a project, decision or government policy.

15. Steps comprising a CBA –List alternative projects/programs. –List stakeholders. –Select measurement(s) and measure all cost/benefit elements. –Predict outcome of cost and benefits over relevant time period. –Convert all costs and benefits into a common currency. –Apply discount rate. –Calculate net present value of project options.

16. © 2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. Time Value of Money 1.Money has a time value because it can earn more money over time (earning power). 2.Money has a time value because its purchasing power changes over time (inflation). Time value of money is measured in terms of interest rate. Interest is the cost of money—a cost to the borrower and an earning to the lender This a two-edged sword whereby earning grows, but purchasing power decreases (due to inflation), as time goes by.

17. Decision Making Making a choice from two or more alternatives. The Decision-Making Process –Identifying a problem and decision criteria and allocating weights to the criteria. –Developing, analyzing, and selecting an alternative that can resolve the problem. –Implementing the selected alternative. –Evaluating the decision’s effectiveness.

18. The Decision- Making Process

19. Step 1: Identifying the Problem A discrepancy between an existing and desired state of affairs. Characteristics of Problems –A problem becomes a problem when a policy maker becomes or is made aware of it. –There is pressure to solve the problem. –The policy maker must have the authority, information, or resources needed to solve the problem.

20. Step 2: Decision Criteria Decision criteria are factors that are important to resolving the problem. –Costs that will be incurred (investments required) –Risks likely to be encountered (chance of failure) –Outcomes that are desired (growth of the firm)

21. Step 3: Allocating Weights to the Criteria Decision criteria are not of equal importance: –Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.

22. Criteria and Weights for Franchise Decision Criterion Weight Start-up costs 10 Franchisor support 8 Financial qualifications 6 Open geographical locations 4 Franchisor history 3

23. Step 4: Developing Alternatives Identifying viable alternatives –Alternatives are listed (without evaluation) that can resolve the problem. Step 5: Analyzing Alternatives Appraising each alternative’s strengths and weaknesses  An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3.

24. Step 6: Selecting an Alternative Choosing the best alternative –The alternative with the highest total weight is chosen. Step 7: Implementing the Decision Putting the chosen alternative into action.  Conveying the decision to and gaining commitment from those who will carry out the decision.

25. Assessed Values of Franchise Opportunities Using Decision Criteria Start-Up Franchise Financial Open Franchisor Costs Support Qualifications Locations History Franchise Curves For Women 10 3 10 8 5 Quiznos Sandwiches 8 7 7 8 7 Jani-King 8 5 7 10 10 Jackson-Hewitt Tax Service 8 7 7 8 7 GNC Vitamins and Nutritional Supplements 7 8 7 8 7 Radio Shack 8 3 6 10 8 Chem-Dry Carpet Cleaning 10 7 8 6 7 McDonald’s 4 10 4 8 10

26. Evaluation of Franchise Alternatives Against Weighted Criteria Start-Up Franchise Financial Open Franchisor Costs Support Qualifications Locations History Total Franchise Curves For Women100 24 60 32 15 231 Quiznos Sandwiches80 56 42 32 21 231 Jani-King80 40 42 40 30 232 Jackson-Hewitt Tax Service80 56 42 32 21 231 GNC Vitamins and Nutritional Supplements 70 64 42 32 21 229 Radio Shack 80 24 36 40 24 204 Chem-Dry Carpet 100 56 48 24 21 249 McDonald’s 40 80 24 32 30 206

27. Step 8: Evaluating the Decision’s Effectiveness The soundness of the decision is judged by its outcomes. –How effectively was the problem resolved by outcomes resulting from the chosen alternatives? –If the problem was not resolved, what went wrong?

28. Rationality in Decisions Objective vs Bounded Rationality –Objective Rationality Optimizing or maximizing the outcome Not possible in reality due to resource constraints (time, money, information) –Bounded Rationality taking into account only those few factors of which one is aware, understands, and regards as relevant Incomplete knowledge, anticipating future, incomplete alternatives

29. Making Decisions Rationality –Policy Makers make consistent, value- maximizing choices with specified constraints. –Assumptions are that decision makers: Are perfectly rational, fully objective, and logical. Have carefully defined the problem and identified all viable alternatives. Have a clear and specific goal Will select the alternative that maximizes outcomes in the organization’s interests rather than personal.

30. Assumptions of Rationality

31. Making Decisions (cont’d) Bounded Rationality –Managers make decisions rationally, but are limited (bounded) by their ability to process information. –Assumptions are that decision makers: Will not seek out or have knowledge of all alternatives Will satisfice—choose the first alternative encountered that satisfactorily solves the problem— rather than maximize the outcome of their decision by considering all alternatives and choosing the best.

32. Influences on Decision Making Escalation of Commitment –Increasing or continuing a commitment to previous decision despite mounting evidence that the decision may have been wrong. The Role of Intuition –Intuitive decision making Making decisions on the basis of experience, feelings, and accumulated judgment.

33. What is Intuition? Source: Based on L.A. Burke and M.K. Miller. “Taking the Mystery Out of Intuitive Decision Making.” Academy of Management Executive. October 1999. pp. 91–99.

34. Decision-Making Styles Dimensions of Decision-Making Styles –Ways of thinking Rational, orderly, and consistent Intuitive, creative, and unique –Tolerance for ambiguity Low tolerance: require consistency and order High tolerance: multiple thoughts simultaneously

35. Common Decision-Making Errors and Biases

36. Decision-Making Biases and Errors –Heuristics E.g. “rules of thumb” to simplify decisions Making an approximation without having to do exhaustive research. –Overconfidence Bias Holding unrealistically positive views of one’s self and one’s performance. –Immediate Gratification Bias Choosing alternatives that offer immediate rewards and that to avoid immediate costs.

37. Decision-Making Biases and Errors (cont’d) Anchoring Effect –Fixating on initial information and ignoring subsequent information. Selective Perception –Selecting, organizing and interpreting events based on biased perceptions. Confirmation Bias –Seeking out information that reaffirms past choices and discounting contradictory info.

38. Decision-Making Biases and Errors (cont’d) Framing Bias –Selecting and highlighting certain aspects of a situation while ignoring other aspects. Availability Bias –Losing decision-making objectivity by focusing on the most available data/recent events. Representation Bias –Drawing analogies and seeing identical situations when none exist. E.g. Believing that all blondes are dumb Randomness Bias –Creating unfounded meaning out of random events.

39. Decision-Making Biases and Errors (cont’d) Sunk Costs Errors –Forgetting that current actions cannot influence past events and relate only to future consequences. Self-Serving Bias –Taking quick credit for successes and blaming outside factors for failures. Hindsight Bias –Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the- fact).

40. Characteristics of an Effective Decision-Making Process It focuses on what is important. It is logical and consistent. It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking. It requires only as much information and analysis as is necessary to resolve a particular dilemma. It encourages and guides the gathering of relevant information and informed opinion. It is straightforward, reliable, easy to use, and flexible.

41. Terms: a.Alternative – a course of action or strategy that may be chosen by the decision maker b.State of nature – an occurrence or a situation over which the decision maker has little or no control Fundamentals of Decision Making Terminology

42. A View of Decision-Making Conditions CertaintyRiskUncertainty Level of ambiguity and chances of making a bad decision LowerModerateHigher The decision maker faces conditions of:

43. © 2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. Decision-Making Conditions State of certainty: –A condition in which the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. State of risk: –A condition in which the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

44. © 2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. Decision-Making Conditions State of uncertainty: A condition in which the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative.

45. Decision-Making Conditions Certainty –An ideal situation in which a manager can make an accurate decision because the outcome of every alternative choice is known. Risk –A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.

46. Decision-Making Conditions Uncertainty –Limited or no information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”.

47.  Decision making under certainty  State of nature is known  Decision making under risk  Several states of nature may occur  Each has a probability of occurring  Decision making under uncertainty  Complete uncertainty as to which state of nature may occur Decision-Making Environments

48. Decision Making Certainty Linear Programming One of best known tools of Management Science Used to determine optimal allocation of an organization’s limited resources

49. Decision Making with Risk Expected Value Approach –If probabilistic information regarding the states of nature is available, one may use the expected Monetary value (EMV) approach also known as Expected Value (EV). –Here the expected return for each decision is calculated by summing the products of the payoff under each state of nature and the probability of the respective state of nature occurring. –The decision yielding the best expected return is chosen.

50. Expected Value of a Decision Alternative The expected value of a decision alternative is the sum of weighted payoffs for the decision alternative. The expected value (EV) of decision alternative d i is defined as:

51. where: N = the number of states of nature p j = the probability of state of nature O ij = the payoff corresponding to decision alternative and state of nature p j

52. Example 1

54. Example 2

55. Decision Making under Uncertainty If the decision maker does not know with certainty which state of nature will occur, then: 1.the optimistic approach (Maximax) 2.the conservative approach (Maximin) 3. the minimax regret approach (Minimax regret) 4.Equally likely (Laplace criterion) 5.Criterion of realism with  (Hurwicz criterion)

56. Optimistic Approach ( Maximax: maximum of the maximum ) The optimistic approach would be used by an optimistic decision maker. The decision with the largest possible payoff is chosen. If the payoff table was in terms of costs, the decision with the lowest cost would be chosen.

59. Conservative Approach (Maximin: maximum of minimum) The conservative approach would be used by a conservative decision maker. For each decision the minimum payoff is listed and then the decision corresponding to the maximum of these minimum payoffs is selected. (Hence, the minimum possible payoff is maximized.)

60. Regret Approach (Minimax) The minimax regret approach requires the construction of a regret table or an opportunity loss table. This is done by calculating for each state of nature the difference between each payoff and the largest payoff for that state of nature. Then, using this regret table, the maximum regret for each possible decision is listed. The decision chosen is the one corresponding to the minimum of the maximum regrets.

62. Criterion of Realizm (Hurwicz) Often called weighted average, the criterion of realism (or Hurwicz) decision criterion is a compromise between optimistic and a pessimistic decision. –First, select coefficient of realism, , with a value between 0 and 1. When  is close to 1, decision maker is optimistic about future, and when  is close to 0, decision maker is pessimistic about future. –Payoff = [  x (best outcome) + (1-  ) x (worst outcome)]

63. Equally Likely (Laplace) Criterion Equally likely, also called Laplace, criterion finds decision alternative with highest average payoff. First calculate average payoff for every alternative. Then pick alternative with maximum average payoff.

64. Game Theory Future states of nature and their probabilities replaced by decisions of a competitor

65. © 2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. Groupthink A situation that occurs when a group or team’s desire for consensus and cohesiveness overwhelms the goal of reaching the best possible decision.

66. Exercise Pick a local policy based on your personal preference [Hint: pick a policy of which you have knowledge of at least three salient features] Evaluate the policy based on the evaluation criterion given If possible, assess the policy and offer alternatives that could have reached the outcome goals in an improved manner Estimated Exercise Time : 15 minutes

67. Questions?