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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.
2017BCFHPSAnnualConferenceVancouverBC September28,2017
©ProfessorMichaelParent 2
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
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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
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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
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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
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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
2017BCFHPSAnnualConferenceVancouverBC September28,2017
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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
2017BCFHPSAnnualConferenceVancouverBC September28,2017
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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
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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?
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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+
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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.
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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.
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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
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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
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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.”
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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’
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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
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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.
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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.
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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.
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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!
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