decision making competitive advantage of our times
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DECISIO
N-MAKIN
G
T H E C O M P E T I T I V E A D V A N T A G E O F O U R T I M E S
C A F É D I S C U S S I O N W I T H
F R E D E R I C K C . M I L I T E L L O , J R .
C E O / S E N I O R T H O U G H T L E A D E R
H T T P : / / F U T U R E C H A N G E M A N A G E M E N T . CO M.
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
QUESTIONS TO EXPLORE…
What constitutes making a decision?
What constitutes making a good versus “poor” decision?
How do we actually make decisions?
How can decision-making impact the competitive position of an organization?
How can we improve our decision-making capabilities?
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
AND LET’S PONDER…
Why my Sicilian grandmother was a better decision-maker than most business people
Why the founder of Facebook is perhaps one of the most socially disconnected decision-makers of our times
Why some of our most revealed decision-makers (e.g., Rocky Balboa) appear to emphasize emotions over intellect
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
AND FURTHERMORE…Why the financial crisis of 2007/2008 was a
failure in decision-making above all else
Why greater knowledge of decision-making has become a source of manipulation and exploitation
Why our beliefs (and values) about the external world have a profound impact on decision-making approaches and business models
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
REALITIES…
We make an extraordinary number of decisions each day – the range of agreement, as to how many, is extreme
Many of these are made in our subconscious; many are deliberative
Just regarding food/eating, we make more than 200 decisions per-day (Cornell University Study, Journal of Environment and Behavior, 2007)
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THE ASSAULT OF DECISIONS…
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N A G E M E N T C O P Y R I G H T 2 0 1 1 6
IMPACTS…
This assault of decisions has resulted in what is called “decision-making fatigue”
The effect/term was coined/recognized by social psychologist Roy F. Baumeister
Increasingly, this “fatigue” is leading to forms of manipulation and exploitation
For example, recent studies done by Jonathan Levav of Stanford University and Shai Danziger of Ben-Gurion University
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N A G E M E N T C O P Y R I G H T 2 0 1 1 7
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
IMPACTS…
“…decision fatigue can make quarterbacks prone to dubious choices late in the game
and CFOs prone to disastrous dalliances late in the evening. It routinely warps the
judgment of everyone, executive and non-executive, rich and poor…. Yet few people are aware of it, and researchers are only beginning to understand why it happens
and how to counteract it.”(As reported in the New York Times, August 17, 2011)
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
WHY IS THIS IMPORTANT…
Leads to questioning of the rational choice model of decision-making
Goes beyond decision-making biases and decision-making models based on pattern recognition
There is a certain emotional intelligence (or lack of ) in decision-making—perhaps explained by biological causes as well
Key here: Socrates’ guiding rule — “know thyself” (or others will know you better than thyself)
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
SO I PUT IT TO THE TEST…
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
WHAT DID I FIND?
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The Front of the Store…produce and Front of store view…focus
on healthful items….
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
AND WHAT ELSE DID I FIND?
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Back of store view and checkout….decision fatigue at its best!
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
SO HOW DO WE DECIDE?
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SO HOW DO WE DECIDE?
“The story I have to tell is marked all the way through by a persistent tension between
those who assert that the best decisions are based on quantification and numbers,
determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the
uncertain future. This is a controversy that has never been resolved.”
Peter L. Berstein, Against the Gods: The Remarkable Story of Risk
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N A G E M E N T C O P Y R I G H T 2 0 1 1 14
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
THE DIVERSITY OF CHOICE
Automated Reflective Model
The Recognition-Primed ModelMisused Analogies Outdated Mental Models
The Rational Choice ModelCognitive Biases Heuristics
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Tacit and Explicit Knowledge
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
The StepsIdentifies the set of
options
Identifies the ways of evaluating these options
Weighs each evaluation dimension
Does the rating
Picks the option with the highest score
The BiasesOverconfidence
Sunk-costs
Availability
Others
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THE RATIONAL CHOICE MODEL
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
Can look at cost versus risk mitigation preferences
Such as making a choice between incurring increased costs for reducing risk
Risk reduction can be looked at as increased flexibility
The more flexibility you prefer the higher the cost you incur—are willing to pay
Can extend model to making matching product preferences
Looking for the optimum mix of cost versus flexibility (relative to existing capital structure)
Trade-off Model
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EXAMPLE
Cost
Flexibility
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
RECOGNITION-PRIMED DECISION-MAKINGSEE THE WORK OF GARY KLEIN, SOURCES OF POWER: HOW PEOPLE MAKE DECISIONS
Does not compare choices
The focus is situational
Looks for the first workable solution—not the best/optimum (more of a “gut reaction”)
Generates and evaluates choices one at a time—avoids comparisons
Focus is on the choice being carried-out—thus improvement focused
The emphasis is on action…not analysis
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
RPD MODEL
Intuitive Decision-making
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Situation
Cues
Patterns
Action Scripts
Mental Stimulatio
n
Mental Models
TWO SYSTEM AUTOMATED/REFLECTIVE “MODEL”
Blends intuition with analysis—thus, avoiding communicative/credibility issues as well as experience/inexperience conflicts
The automatic system (intuitive) is fast, effortless, emotional and uses tacit knowledge
The reflective system (cognitive) is slower, conscious, effortful, deliberate, and uses explicit knowledge
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N A G E M E N T C O P Y R I G H T 2 0 1 1 20
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
EXAMPLE: FRAMING MATTERS
The fall and rise of General Motors
The past – viewed the world very cognitively…more as a threat…more analytical…more focused on cost reduction
The present – view the world very experientially…more as an opportunity…more emotional…more focused on being car people than numbers people
The ten reasons why methodology…need both (the whys and the why not's) but which drives the business model?
See Bob Lutz (former vice chairman GM), Car Guys versus Bean Counters: The Battle for the Soul of American Business (2011)
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BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
1. Experience versus inexperience
2. Tacit versus explicit knowledge
3. Intended versus unintended outcomes
4. Ambiguity and complexity
5. Pattern recognition and mental simulation
6. Values, beliefs and culture
7. Individual and collective conscience
7. Stories—experiential transference
9. Bias awareness and adaptability
10. Knowing thyself—the EQ of decision-making
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MAKING “BETTER” DECISIONS: CONSIDERATIONS
BY F R E D E R I C K C . M I L I T E L L O / F U T U R E C H A N G E M A N AG E M E N T C O P Y R I G H T 2 0 1 1
DECISION BLISS
Decisions, Decisions, Decisions…I Made Mine!
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How About You?Thanks….
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