university of notre dame · 1. july 19 understanding yourself and others 2. july 20 individual...

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University of Notre Dame

EMBA 60616

Leadership and Decision-Making

Timothy A. Judge

South Bend – Cincinnati EMBA Program July 20, 2012 (800 AM – 1030 AM)

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1. Case Discussion: “Alex Sander”

Exercise Discussion: Retirement Party

2. Individual Decision-Making

3. Exercises: Silent Auction, Used Car

4. Preparation: “Rinaldi”, “TerraCog”, “Jamie

Turner” Cases

Get Carter Exercise

CLASS #2

Note--Course materials are posted on website:

http://www.timothy-judge.com/




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1. July 19 Understanding Yourself and Others

2. July 20 Individual Decision-Making

3. July 21 AM Group Decision-Making

3. July 21 PM Group Decision-Making (cont.)

4. August 11 AM Making Decisions About People…

4. August 11 PM And Motivating Them

5. August 30 Leadership

6. Sept 1 Leading the Dark Side

7. Sept 28 In-Class Essay

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Today’s Schedule

800-830 Discussion on Alex Sander

Auction Exercise

830-840 Learning Objectives

840-910 Individual Decision-Making

910-940 Used Car Exercise

940-1010 Individual Decision-Making

1010-1025 Q&A – reports, extra credit, ARP outline

1025-1030 Discussion on Retirement Party

Timing is flexible—we will often run behind!

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Class #2

Section 1

Sander Case and Auction

Discussion: Sander Case

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A Day in the Life of Alex Sander:

Driving in the Fast Lane at Landon Care

Products

Silent Auction

• I am selling a special bottle of wine

• Complete the form, including your submitted bid

• Highest bid gets the wine (for the price of the bid)

• Only bid what you will pay (the actual sale will be completed on Saturday)

Please, no internet searches for this exercise. 8

La Vilella Alta, Black Slate (2010) Winemaker’s Notes:

The inspiration for the Black Slate Project is a Burgundian concept of village nomenclature, applied to the Priorat. One region, nine historic villages, each with its distinct character but all unmistakably Priorat. Sun scorched vines cling to breathtakingly steep hillsides with their roots deeply plunged in the llicorella soils of this pristine, ancient region.

Bodegas Mas Alta is a joint project with renowned Rhone negociant and winemaker, Michel Tardieu, and noted French enologist, Philippe Cambie. It is located in the middle of D.O.C. Priorat, based in the village of Vilella Alta. The estate vineyards are high density plantings at approximately 1050 feet above sea level, in front of Serra del Montsant, a mountain range that reaches 3300 feet. Very steep and abrupt, the altitude, inclination, and slopes make a decisive influence on grape’s maturity. 9

La Vilella Alta, Black Slate (2010)

A project of acclaimed Rhone Valley winemakers Philippe Cambie and Michel Tardieu from one of Priorat’s nine villages, La Vilella Alta, the 2010 Black Slate was fashioned from 60% Garnacha, 35% Carignan and 5% Cabernet Sauvignon, aged 12 months in French oak, and bottled unfined and unfiltered. Notes of graphite, blueberry liqueur, raspberries, crushed rocks and spring flowers jump from the glass of this inky/purple-colored wine. It possesses fabulous intensity, a multidimensional mouthfeel, supple tannins and a long finish. The natural alcohol pushes 16%, and there are 1,000 cases exported to the United States. It should keep for 5-10+ years. Priorat wines such as this normally sell for over $100 a bottle.

94 Points (out of 100) Robert Parker, The Wine Advocate (June, 2012) Notes of pencil, blueberry, raspberries, crushed rocks and cut flowers on the nose of this inky/darkly-colored wine. It is intense, it is big and complex, yet supple with nice tannins and a long finish. Highly recommended.

Wine Correspondent (July, 2012) 12

Name: _________________________________________ Bid($): ________ Questions: 1. In developing your bid, what was most influential?

_________________________________________ _________________________________________

2. On a scale of 1-10, how much would you like to buy this

bottle of wine?

1 2 3 4 5 6 7 8 9 10

3. Estimated probability that my bid is the winning bid: ______ %

4. Estimated market value of wine: $ ________

Please, no internet searches for this exercise. 13

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Class #2

Section 2

Learning Objectives

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Understanding

YOURSELF Do you know yourself? Do

others know you?

• Personality

• Values

• Attitudes

Understanding

OTHERS Do you understand others? Do

others understand you?

• Personality

• Values

• Attitudes

Deciding/Solving

YOURSELF What decisions do you make?

How do you analyze and solve

problems?

How can you better understand:

• Analytical tools to objectively

evaluate decisions?

• Limits of rational decision-

making?

• Cognitive biases so as to

avoid “blind spots”?

Managing/Leading

OTHERS • How do you lead and follow?

• Are there effective methods

and models of leadership from

which you can learn?

• How well do you understand

the dark side of power and

influence?

Making Decisions

ABOUT OTHERS • How can you make more

effective hiring decisions?

• How can you evaluating

those decisions more

effectively?

FUNDAMENTAL APPLIED

INNER

PRIVATE

SELF

Animus

OUTER

PUBLIC

SELF

Persona

Living Well

YOURSELF • Can you formulate a plan to

improve your ability to live a

happy and productive life?

Contributing to

ORGANIZATION • Do you leverage your skills

effectively?

• How do you cooperate and

conflict with others?

Motivating

OTHERS • Do you use the most effective

means of motivating others?

• Are there ways to improve

your motivations?

MODEL 1: Model of Effectiveness We Will Follow Throughout Course

Deciding/Solving

WITH OTHERS • How can you better under-

stand -- and thus resist where appropriate -- group pressure –

for conformity?

• How do you decide in group?

• How do you make the most of

your group’s resources?

Do you achieve synergy?

1. Leading and managing is art and science • There are principles and methods by which we can lead,

manage, and make decisions more effectively

2. The most under-appreciated skill in effective

managers is analysis • Use metrics and rigorous analysis

3. Personality matters and yet has paradox • Understand yourself and others through knowing your

personality; every bright(dark) side casts a shadow(light)

4. Biases dominate every decision • Learn the biases and how to recognize them in yourself

and in others 16

Learning Objectives The 16 Takeaways: 1–4

5. Individuals often make decisions based on

needlessly limited information • Ensure that you have as full a picture of the ‘conceptual

field’ as possible (it’s the foundation of the house)

6. The average group is not effective • Be a facilitator to get the most out of your group

7. Cooperation is a poor negotiation strategy • The best negotiators hold true to their interests

8. To negotiate effectively, one must first focus on

interests rather than positions (yours and others) • First share information on your interests, and try to find

out others’ interests—expand the pie before dividing it 17


9. The most important people decisions (e.g., hiring)

are poorly evaluated, if at all

• Evaluate decisions using validity and utility

10. The best predictor of performance is IQ • Hire/promote employees using intelligence tests

11. Good motivators and decision-makers know the

power of framing • In negotiating, motivating, and leading, use framing

12. The most effective leaders are seen as

charismatic and transformational • Learn to be a visionary leader

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13. The best motivator is setting very difficult goals • Set hard and specific goals for yourself and others

14. The two best influence tactics are the least used • Gain commitment through consultation, inspirational

appeal

15. Far and away, the most important predictor of

job satisfaction is…the work itself • Increase your – and others’ – job satisfaction by focusing

on the intrinsic nature of the work itself

16. We spend too much of our time – and money –

on things that don’t make us happy • Spend your time and resources on what matters most

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Understanding


others know you?

• Personality

• Values

• Attitudes

Understanding



• Personality

• Values

• Attitudes

Deciding/Solving



problems?



evaluate decisions?


making?



Deciding/Solving

WITH OTHERS • How can you better

understand – and thus resist

where appropriate – group

pressures for conformity?

• How do you decide in a

group?

• How do you make the most

of your group’s resources?


Managing/Leading







influence?

Making Decisions





effectively?

FUNDAMENTAL APPLIED

INNER

PRIVATE

SELF

Animus

OUTER

PUBLIC

SELF

Persona

Living Well




Contributing to


effectively?



Motivating




your motivations?


1. Leading and managing is art and science • There are principles and methods by which we can lead,

manage, and make decisions more effectively

2. The most under-appreciated skill in effective

managers is analysis • Use metrics and rigorous analysis

Thursday, July 19

21

Understanding


others know you?

• Personality

• Values

• Attitudes

Understanding



• Personality

• Values

• Attitudes

Deciding/Solving



problems?



evaluate decisions?


making?



Deciding/Solving






group?




Managing/Leading







influence?

Making Decisions





effectively?

FUNDAMENTAL APPLIED

INNER

PRIVATE

SELF

Animus

OUTER

PUBLIC

SELF

Persona

Living Well




Contributing to


effectively?



Motivating




your motivations?


3. Personality matters and yet has

paradox • Understand yourself and others through

knowing your personality; every bright(dark)

side casts a shadow(light)

Thursday, July 19

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Class #2

Section 3

Individual Decision-Making

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Understanding


others know you?

• Personality

• Values

• Attitudes

Understanding



• Personality

• Values

• Attitudes

Deciding/Solving



problems?



evaluate decisions?


making?



Deciding/Solving






group?




Managing/Leading







influence?

Making Decisions





effectively?

FUNDAMENTAL APPLIED

INNER

PRIVATE

SELF

Animus

OUTER

PUBLIC

SELF

Persona

Living Well




Contributing to


effectively?



Motivating




your motivations?


4. Biases dominate every decision • Learn the biases and how to recognize them in yourself and in

others

5. Individuals often make decisions based on needlessly

limited information • Ensure that you have as full a picture of the ‘conceptual field’ as

possible (it’s the foundation of the house)

Friday, July 20

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Individual Decision-Making Learning Objectives

• Recognizing decision-making errors/biases

– Situational fallacy

– Inert knowledge problem

– Availability heuristic

– Representativeness bias (gambler’s fallacy)

– Illusory correlation

– Spurious correlation

– Anchoring and adjustment

– Winner’s curse

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• Managers often overestimate effect of

situation on individual behavior in

organizations

• Implications?

• Four powerful examples

1. Sexual abuse

2. Winning lottery

3. Marriage (and divorce, widowhood)

4. Stress management program

Situational Fallacy

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Symptom k N r

Alcohol 8 1,645 .07

Anxiety 18 7,365 .13

Depression 23 7,949 .12

Eating disorders 10 2,998 .06

Obsessive – compulsive 7 1,934 .10

Paranoia 10 2,052 .11

Self-esteem 16 3,630 .04

Sexual adjustment 20 7,723 .09

Social adjustment 17 4,332 .07

Somatization 19 4,376 .09

Suicide 9 5,425 .09

r

Rind, B., Tromovitch, P., & Bauserman, R. (1998). A meta-analytic examination of assumed

properties of child sexual abuse using college samples. Psychological Bulletin, 124, 22-53.

Childhood sexual

abuse was coded,

across studies, as

either dichotomy

(yes-no) or frequency

degree to which

individual was victim

of one of four types

of sexual abuse (no

strong differences by

type of abuse).

Situational Fallacy Sexual Abuse and Adult Adjustment

k=# of studies

N=combined number

of people

r=ave. correlation

27 Source: Brinkman, Coates, & Janoff-Bulmann, JPSP, 1979

Situational Fallacy Winning the Lottery

Sample: Winners of

Illinois State Lottery

Average Prize

$480,000 ($1.58M

2009 USD).

Size of prize was not

related to happiness.

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Year of Event

Source: Diener, Lucas, & Scollon, American Psychologist, 2006

Lif

e S

ati

sfa

cti

on

Individuals are tracked

on within-person basis

Life satisfaction rated

on 1-10 scale

Situational Fallacy Marital Status and Happiness

Year From Event (0) (-5=Five Years ago; 5=Five years after)

29 Source: Le Blanc et al., Journal of Applied Psychology, 2007

0.7

0.8

0.9

1.0

1.1

1 2 3

Occasion

Bu

rno

ut

Control

Treatment

Difference after

intervention was

slightly smaller

than before

intervention

started!

Situational Fallacy Stress Management Program

Treatment

Participated

in stress

management

program

Control

No program

Intervention

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• Be cautious about effect of interventions on individuals and organizations

– This does not mean nihilism (―nothing matters‖)

– And, of course, the opposite can happen

– Take people as they are

• If we start with the assumption that the person is not likely

to (easily) change (in ways we control), how would they like

their job and work structured?

– Fit jobs to people—and invest in hiring

• More on this in future classes

– Capitalize on strengths (implications for you too)

Situational Fallacy Summary

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Inert Knowledge Problem

• It is difficult to transfer knowledge from one area

to another; the ability to use prior knowledge to

solve current problems depends on the accessibility

of relevant knowledge (Gillespie et al., 1999)

– This is a problem: solving one problem barely improves

the likelihood that one will solve related other problem

– We often fail to recall what is ultimately most useful

• What problems does this pose for decisions?

– The key: analogical encoding—comparing and

contrasting cases to abstract a common principle that

can be used in prospective cases

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Availability Heuristic

• People estimate the frequency of an event, or the

likelihood of its occurrence, ―by the ease with

which instances or associations come to mind‖

(Tversky & Kahneman, 1973)

– When presented with lists of famous and non-famous

names, individuals recall 50% more famous names

– Individuals overestimate how many words begin with

―r‖ and underestimate how many words have ―r‖ as

the third letter

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Representativeness Bias (Gambler’s Fallacy)

• A misconception that chance is a ―self-correcting

process in which a deviation in one direction

induces a deviation in the opposite direction to

restore equilibrium‖ (Kahneman et al., 1982)

– If red has come up 4 straight times, it must be time for black to

come next

– Throughout the semester, you discover that you have a 50/50

chance of correctly picking football games with the point spread.

During your vacation in Las Vegas you decide to wager on

football. Unfortunately, you lost the first three games on which you

bet. Approximately what percentage chance do you have to

correctly pick the next game?

• 35% of University of Maryland students estimated the odds

different from 50/50

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Illusory Correlation

• People tend to associate rare events when

they co-occur

– Rain on weekends

– Crime rates of minority groups (e.g., mafia)

• Study (Jackson, 2001)

– Individuals read about behaviors of 2 groups

• Group A: 26 positive, 8 negative behaviors

• Group B: 13 positive, 4 negative behaviors

• So, both positive and negative behaviors rarer in

Group B than in Group A (same proportions)

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31%

46%

51% 52%

0%

10%

20%

30%

40%

50%

60%

Study 1 Study 2

A

B

Percent of Statements Attributed to be Negative

Illusory Correlation

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Spurious Correlation

• Examples

– Children with longer feet know more vocabulary words

– Students who use tutors have lower test scores

– The correlation between the number of churches and the

number of violent crimes is r +.85

– There is a strong correlation between the total amount

of losses in a fire and the number of firefighters putting

out the fire

• Solution? Search for alternative explanations or

you may make unwarranted inferences in making

decisions

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Spurious Correlation Example

1. Teenage girls eat lots of chocolate.

2. Teenage girls have acne.

3. Therefore, chocolate causes acne.

Source: Green & Sinclair, Australasian Journal of Dermatology, 2001

38

• High fat

diet may

cause

cancer, but

correlation

also may

be spurious

Spurious Correlation Another Possible Example

39

• Everyone reads white INTRODUCTION AND

BACKGROUND INFORMATION form

• Form a dyad based on the person near you

• With each dyad, one person must decide be

either a seller (pink) or a buyer (green)

• Follow instructions on your pink or green

handout—do not read the other handout

• You have 15 minutes to reach a settlement

– Turn in the white form when finished

Exercise Used Car

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Class #2

Section 4

Individual Decision-Making (cont’d.)

41

Anchoring (and Adjustment)

• Used when one needs to estimate an unknown

value—one begins by anchoring on a salient

available point and continues by making

adjustments away from the anchor

– Example: If people estimate population of Chicago after answering

question: ―Is the population of Chicago more or less than 200,000?‖

their absolute estimates are far lower

• Adjustment is typically insufficient, thus yielding a

final estimate that is overly affected by the anchor

– Negotiators with specific difficult goals generally more profitable

– First offers have disproportionate impact

• Initiators negotiate better agreements (Ritov, 1996)

• Simple experience does not appear to reduce effect of anchoring

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Anchoring

273,300

253,500

236,700

258,100

294,400275,600

200,000

210,000

220,000

230,000

240,000

250,000

260,000

270,000

280,000

290,000

300,000

Low Medium High

First counteroffer

Last counteroffer

Buying a House Negotiation Exercise

Seller’s Initial Offer (Manipulated)

Price ($)

43

Study shows that criminal

sentences are longer when a

high anchor is used and

lower when a low anchor is

used (anchor was sentence

demanded by prosecutor) –

experts were sitting judges

or those with judicial

experience.

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Non-expert Expert

Low anchor High anchor

Anchoring

sentence (z-score)

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• Not just hypothetical

– Other research shows that actual defense

attorneys anchor their sentence

recommendations based on prosecutors’ anchor

(Englich et al., 2005)

• In most Westernized countries, prosecutors present

their recommendations first, with the idea that the

defense has the ―last word‖ – but the effect appears

to operate in a manner opposite to that intended

Anchoring

45

5000

5200

5400

5600

5800

6000

6200

6400

6600

6800

3000 4000 5000 6000 7000 8000

Initial Offer

Fina

l Settle

ment

In g

enera

l, h

igher

initia

l off

ers

resu

lted i

n h

igher

final se

ttle

ments

(buy

er

and s

eller

da

ta p

oole

d)

Anchoring Data From Recent EMBA Class

Note: Each negotiating pair had same set of figures

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• Why is adjustment insufficient?

– Because adjustment process terminates once

plausible value is reached

– Example: Is the gestation period of elephants

more than that for humans (9 months)?

• So, this is an example of irrationality that

can be used to your advantage

Anchoring Implications

• What was winning bid?

• How many bidders bid $0?

• How many bidders bid over market value?

Silent Auction Results

47

49

Winner’s Curse

• Company T worth $0-$100, depending on results

of exploration (each dollar value equally likely),

which is known by Company T but not Company A

before offer is accepted or rejected

• Company T is worth 50% more to you (Company

A) than it is to Company T

• Expected value of Company T

– $50 to Company T / $75 to Company A

– So bids between $50 and $75 would be expected to

be profitable

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• Problem: asymmetric information – sellers

often have better valuation information than

buyers

• In this case, for any accepted bid > 0, your

expected loss is 25% of bid

– Example: Your offer of $60 is accepted, which

means Company T is expected to be worth $30

to Company T and $45 to you (Company A)

– EVSELLER=$30; EVBUYER=$45; buyer loses $15

(EV=-25%)

Winner’s Curse

51

• In this situation, rational bid is 0

• Difficult to unlearn (Ball, Bazerman, &

Carroll, 1991; Foreman & Murnighan, 1996)

• In 20 chances, after each bid, computer

displayed ―true‖ value, whether bid was

accepted, and how much money was won or

lost

Winner’s Curse

52

Winner’s Curse Samuelson & Bazerman

Bids No incentives With incentives

0 9% 8%

$1-$49 16% 29%

$50-$59 37% 26%

$60-$69 15% 13%

$70-$79 22% 20%

$80+ 1% 4%

Note: Monetary incentives are that participants are paid some

portion of the profits from the sale.

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0

10

20

30

40

50

60

70

1 3 5 7 9 11 13 15 17 19

Source: Ball, Bazerman, & Carroll, OBHDP, 1991

Trail

Mean B

id

Implications:

• Set aspirations

• Know value

- as much as you can

- how to calculate

• If you know about

winner’s curse you

may be less susceptible

Winner’s Curse Do People Learn?

54

Escalation of Commitment

• Escalation of commitment is persistence with

a losing course of action

• Why is this bad in decision-making?

• Example: NBA draft choices (Staw & Hoang,

1995)

– First-round picks played in the NBA 3.3 years

longer than second-round picks, controlling for

all aspects of performance and position

– First-round picks were 72% less likely to be

traded than second-round picks

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• Like many errors, easy to see in hindsight

• But, some actions that may help

• Set limits/goals (Simonson & Staw, 1992)

• Accept offer no worse than BATNA

• Reduce the ego threat (Simonson & Staw, 1992)

• Assure decision-maker that results are not reflection

of true abilities (lowers justification)

• Recognize sunk costs for what they are

• This is key: Water under bridge is valueless!

Escalation of Commitment Can It Be Avoided?

56

Conclusion

• We make lots of mistakes in decision-

making!

• Be aware of these tendencies

– In yourself

– In the other party

• Combat them

– Awareness is the first step

– Realize these errors are for a reason

• Serve to limit the scope of possibilities

– Bring in additional information

57

• ―Martha Rinaldi‖, ―TerraCog‖, and ―Jamie Turner‖

case question discussions

• Group Decision-Making

• Exercises: Lost, Get Carter

• To Do List before tomorrow

– Textbook chapter 9

– Read cases and prepare answers

– Look over ARP material

– Read Get Carter instructions

– Complete extra credit report, if elected

Next Class Group Decision-Making

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