bchfp strategic decision making handout

2017BCFHPSAnnualConferenceVancouverBC September28,2017

©ProfessorMichaelParent 1

Strategic Decision Making

Making better decisions

Professor Michael ParentBCHFP Conference28 September 2017

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.



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



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

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

Propensity for risk may limit the amount of information needed to arrive at a decision• risk takers may require less information

than risk avoiders



Bounded Rationality

Problem Space

Simon refers to this as “satisficing”

Whatisintuition?

SubconsciousMentalProcessing

Cognitive-basedDecisions

Value-basedDecisions

Affect-basedDecisions

Managersusedatafromtheirsubconscioustohelpthemmakedecisions

Managersmakedecisionsbasedonskills,knowledge,andtraining

Managersmakedecisionsbasedonfeelingsoremotions

Managersmakedecisionsbasedonculturalvalues

Managersmakedecisionsbasedontheirpastexperiences

Intuition

Experience-basedDecisions



System 1 (Thinking Fast)

• Operates automatically and quickly, with little or no effort and no sense of voluntary control

• Example:– 2 + 2 = ?

System 2(Thinking Slow)

Our two systems of thinking

• Allocates attention to the effortful mental activities that need attention

• Example:– 17 x 22 = ?

Framing

Confirmation

Self-Serving

Overconfidence

ImmediateGratification

Anchoring

SelectivePerception

StatusQuo

SunkCosts

Randomness

RepresentationAvailability

Decision-MakingErrors&Biases

Common Decision-Making Errors & Biases



Framing

OverconfidenceAnchoringStatusQuo

RepresentationAvailability

Decision-MakingErrors&Biases

Top 6 Most Common Decision-Making Errors & Biases

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



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



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

GainsLosses

- +

Value of outcome



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?



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 risk-seeking 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 6th position)?

– 0-5

– 5-10

– 10-20

– 20-30

– 30-50

– 50+



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”)?

– 0-5

– 5-10

– 10-20

– 20-30

– 30-50

– 50+

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 6th letter.



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 ltteerbe at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit porbelm. Tihs is bcuseaethe huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe.



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 MeansThe 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



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 badConfirming Evidence – Most people seek out evidence to support their existing thoughtsPresent vs Future – Present concerns tend to have more weightingEndowment Effect – we value those things we are more involved with more highly



The Four Mental FunctionsPeoplewhoprefer

STSensingandThinking/Objective

SFSensingandFeeling/Relative

NFIntuition andFeeling/Relative

NTIntuitionandThinking/Objective

Focus attentionon Facts Facts Possibilities Possibilities

Andhandlethesewith

NonpersonalAnalysis

Personalwarmth Personal warmth NonpersonalAnalysis

Theytendtobecome

Practical andmatteroffact

Sympatheticandfriendly

Enthusiasticandinsightful

Logicalandingenious

Andfindscope fortheirabilitiesin

Technicalareaswithfactsandobjects

Practical helpandservicesforpeople

Understandingandcommunicationwithpeople

Theoreticalandtechnicaldevelopments

WhatyourPersonalityTypesaysaboutDecisionMaking

How do you make good individual decisions?

“Don’t just do something, stand there.”



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’



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



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.



The symptoms of groupthink

4. Poor information searchThe 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.



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.



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 Arielypresented 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!

bchfp strategic decision making handout

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