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Strategy and
Decision
Making
Week 1 Lecture
 • Identify and organise credible sources of data and
information

Module • Critically evaluate information to support decision making

Learning • Appraise results of the decision-making process

Outcomes
• Assess and critically evaluate the range of tools and
techniques available as support for managerial decision
making
Semester Plan

• Week 1: Process of decision making, psychological traps in decision making

• Week 2: Heuristics (No lecture on the 2nd of May)
• Week 3: Escalation of commitment, emotions and ethics in decision making
• Week 4: Groups and decision making, decision making in a cross-cultural context
• Week 5: Decision-Making using the Simple Multi-Attribute Rating Technique (SMART)
• Week 6: Scenario Planning
The process of decision making
Common decision-making techniques

The rational model of decision-making

The psychology of decision-making: “System One” and “System Two” thinking

Implications of how the brain works: “satisficers” and the use of “heuristics”

Decision-Making is a part of everyday life: personal, family, community and work

Decision-Making is when there is a choice is to be made between alternatives (Bazerman & Moore 2013:2)
 • Previous Experience

• Examples: where to sit in the lecture theatre; diagnosing

faults
Decision
• Frames of Reference
Making
Technique (1) • This refers to the accumulated body of experience –
concepts, beliefs, values, emotions – that defines how
individuals view their world (Mezirow 1997: 5-6)

• Examples: what to do on a night out with friends; what to

eat as a family meal
 • Cognition

• The process of acquiring knowledge – thinking,

understanding, reasoning
Decision
Making • Examples: buying your first car; choosing a post graduate
university degree
Technique (2)
• Instinct or ‘gut feeling’

• Example: choosing lottery numbers

Applicatio
n to How reliable are common decision-making
techniques?
Business Can they be applied to business and
& management?

Manageme Is decision-making in business and

management more of a rational process?
nt
What are the consequences of sub-optimal
Decision decision-making? For you? For your business?
Making
Rational Model of Decision Making
• Bazerman & Moore (2013: 2-3) identify a six-step rational decision-
making model using the following assumptions:
Step Assumption
Define problem Problem is perfectly defined
Identify problem All relevant criteria are identified
Weigh criteria All criteria accurately weighed
Generate alternatives All alternatives are known
Rate alternatives on each criteria Each criteria are accurately
assessed
Calculate optimal decision Calculation is accurate and
option with highest perceived
values is selected
System One and
System Two
System One System Two
Thinking
Intuitive Slow
• Stanovich & West (2000) identify a
distinction between ‘System One’ and Fast Conscious
‘System Two’ thinking: Automatic Effortful
Effortless Explicit
Implicit Logical
Emotional
 How the brain works
• Implications

• Most decisions are taken using System

One thinking; in many cases this is fine –
refer to earlier examples.

• However, important management

decisions require System Two thinking
(such as the Rational Model of Decision-
Making)

• Unfortunately due to pressures of time

managers all too often use System One
thinking (Chugh 2004) – resulting in sub-
optimal decisions being made.
‘Satisficers’ not
Maximisers:
Use of Heuristics
• Specifically, managers may set out to make
rational decisions but find that they frequently
lack key information:

• Time and cost limit the quality and quantify of

available data
• The human memory can only retain a small
amount of usable information
• There are limits on what can be understood
and errors of perception

• As a consequence, managers often overlook

optimal decisions in favour or ones that seem
favourable or reasonable – ‘satisficers’ or, in
other words, ‘good enough’. (Bazerman and
Moore (2013:5)
Heuristic Example:

You are looking to hire a marketing MBA

student for your company.
You decide to limit your search to new MBAs
from the top six management schools.
The Bounds of Human Attention and
Rationality
• Do we always go for the ‘best’ solution?
• Prescriptive vs. descriptive models
• We are satisficers, not maximizers
• We use heuristics (cognitive short-cuts)
• We discount the future
• We care about others’ outcomes
• Bounded awareness
• Bounded ethicality
Use of Heuristics

• Managers also tend to use heuristics – or short cuts - to assist with decisions making.

• Positives – can save time, some professionally derived heuristics can be reasonable
accurate

• Negatives – misapplied or applied to an inappropriate situation can lead to sub-

optimal outcomes.
Overconfidence

• Not surprisingly, managers are generally confident and optimistic people – after all they
often have a track record of success

• However, being overconfident can lead to managers assuming what psychologists term
the ‘illusion of control’ or the tendency to overestimate one’s abilities.

• This can lead to some disastrous managerial decision making!

 1. Apollo moon landing project was subject to stringent safety
Overconfidence: testing.
Examples • Once rocket launching became routine, safety standards
were lowered.
• The Challenger spaceship exploded in 1986 before a
television audience of millions.

2. Attitudes towards nuclear energy relaxed after the Three Mile

Island and Chernobyl memories faded.
• Until 2011 earthquake in Japan when people started to think
about nuclear power again
• The accident can be traced to poor location of the reactors,
poor preparation, and weak regulation
 
Overconfidence: Toyota refused to recall its cars with faulty accelerator
pedals
Examples
 Only after huge reputational damage was done to the
company did it decide to recall 4 million vehicles
worldwide.

 Part of the problem was that Toyota was too confident

with its assessment that its products could not be
anything but perfect
 • Gamblers assume that they are in control
Illusion of • For instance, shaking the cup harder if they want a higher
control and dice number
• Are we super natural human beings?
overconfidence • Overconfidence creates frequent changes in the market
• The traders assume their exchange will be so successful
that can exceed the transaction cost
• This leads to believing that our success is always driven by us
and not randomness
• Sun Tzu’ advice to commanders: “be as careful in victory as in
defeat”. It is a good advice for businesses too!
Psychological Traps
Quick Question

• Complete the following sum in 5 seconds without using a calculator……..

• 102 + 29

• Now think how you did this… did you use a method, estimation or guesswork? Did you
check that it was correct?
Lazy brains….
• Because life is complicated, time is limited and sometimes we haven’t had to make the
decision before we use a variety of techniques:
• Frames of reference (Mezirow, 1997)
• Estimation
• Using previous knowledge
• Drawing conclusions
Heuristics

• These points can be drawn together under the word ‘heuristics’

• Heuristics are based on our system of thinking
• Definition: involving or serving as an aid to learning, discovery, or problem-solving by
experimental and especially trial-and-error methods (Merriam-Webster, 2016)
• These heuristics are often well adapted to the structure of people’s knowledge of the
environment, for example you take into account previous experiences
• Quick ways of making decisions, which people use, especially when time is limited, have
been referred to as “fast and frugal heuristics”
Three of Availability
the most
Representativeness
common
heuristics Confirmation
Availability Heuristics

A mental shortcut that relies on immediate examples that come to mind when
evaluating a specific topic, concept, method or decision
Problem1: Causes of Death
• Rank order causes of death
• Estimate death rates
Rank Cause of Death Deaths in 2014

War and civil conflict

Nutritional deficiencies, including starvation

Respiratory infections, and lung diseases

Drowning

Diarrhoeal diseases
Problem 1: Causes of Death
• Rank order causes of death
• Estimate death rates
Rank Cause of Death Deaths in 2014

1 Respiratory infections, and lung diseases ~3,104,000

2 Diarrhoeal diseases ~1,498,000

3 Nutritional deficiencies, including starvation ~457,000

4 Drowning ~372,000

5 War and civil conflict ~120,000

Source: WHO-2014
 Just as with the maths problem, because you
had limited time, you might have thought
about what came to mind when asked the
question.

Explanatio You might use the news, experiences,

probability…..
n
You used the sources available to you.
 • Ease of Recall Bias – so if you can easily
recall something (e.g. you see something on
the news) you believe that it is more likely
Biases and that the most available information in
your mind is representative of the larger
emanating pool of possible events that exists in the
from world.

availability
• Retrievability Bias – you estimate likelihood
by how easily you can retrieve information
(see next slide for an example)
Lottery
• What are the odds of
winning lottery?

• The answer is approximately

1 in 14 million
Airport
security check
• In December 2001, on
American Airlines, the
so-called ‘shoe bomber’
Richard Reid attempted
to ignite explosives in
his shoes.
• What is the chance of
having explosives in
passengers’ shoes?
Ease of recall bias example:
How assertive are you?
• Schwarz et al (1991) conducted a study about assertiveness
• We are going to repeat this experiment…..
• A first group were asked to write six examples of their assertiveness
• A second group were asked to write 12 examples
• The second group found themselves to be less assertive because it is more difficult to find 12
examples than 6 examples
• BECAUSE the events of assertiveness was not present to them

• In many ways this becomes a matter of perception

Retrievability bias (based on memory structure)

• Tversky and Kahneman (1983) conducted an experiment asking participants about the
frequency of these words, again we will repeat their experiment:
• Which of the following occur more frequently?
• Seven-letter words with letter ‘n’ as their sixth letter
• Seven-letter words with ‘ing’ as their three ending letters
• They found that participants would find the latter category more frequent !!!
• When mistakes like this are made it is called a conjunction fallacy
 How can we use this in business?

We need to get the We need to ensure that

customers to use they are able to extend
availability heuristics to what they already
make their choices. know to our benefit.
 • Brand extension is a
business strategy which
relies on this heuristic that
consumers use

Brand • A Honda lawn mower with

a claim of superior engine
extension technology and reliability
offers distinctive benefits
that flow from the essence
of the brand’s reputation.

• Starbucks’ coffee machine

• BiC’s disposable plastic

razors
 • The clustering of businesses
Other examples • Businesses rely on the retrievability bias:
Consumers think about a place to go rather than
necessarily a particular shop.
Representativeness Heuristics

Representativeness heuristics are used when making

judgments about the probability of an event under
uncertainty
 Insensitivity to base rates

Insensitivity to sample size

Biases originating
from the
Representativeness Misconceptions of chance
Heuristic
Regression to the mean

The conjunction fallacy

Problem 2: A person’s job
- A person is selected from a pool of people 20% of which are engineers and 80%
are lawyers. A description of the person is:
- “He is mathematically inclined and shy”
- How likely is the person to be a lawyer?
 People tend to ignore the base rate in the
presence of base rate information when
specific background information is provided
Insensitivit
y to base However, participants do use base rates in
the absence of other information

rate Negative outcome: Entrepreneurs spend far

too much in dream of success ignoring the
base rate for failure
This also
applies to
risk
Problem3: Hospitals
A certain town is served by two hospitals. In the larger hospital, about
45 babies are born each day. In the smaller hospital, about 15 babies
are born each day. As you know, about 50 percent of all babies are
boys. However, the exact percentage of boys born varies from day to
day. Sometimes it may be higher than 50 percent, sometimes lower.
For a period of one year, each hospital recorded the days in which more
than 60 percent of the babies born were boys. Which hospital do you
think recorded more such days?
a. The larger hospital
b. The smaller hospital
c. About the same (within 5 percent of each other)
Insensitivity to sample size
• Most people answer C to the above question.
• The insensitivity to sample size causes that problem
• To assist your understanding:
• Imagine a hospital with two babies born per day and a
hospital with 100 babies born per day
• Which hospital has the higher number of days with all
(100%) born babies being boy
 We can use this representativeness
heuristics to persuade consumers.
Consider the following advertisement:
• 4 out of 5 dentists use X toothbrush
What does
this mean in Without mentioning the exact number of
Business? people in the sample, the results are not
that useful or relevant

If only five or 10 dentists were sampled,

that is not representative of the overall
population
 Remember that we also have our own
inbuilt bias.

This may be cultural, organisational,

historical, social or even something as
Bias simple as sporting….

A quick test of bias……..

Problem 4: Having a Baby

A couple have had three children together, all of them girls. Now that they are expecting
their fourth child, you wonder whether the odds favor having a boy this time. What is the
best estimate of your probability of having another girl?
a. 6.25% (1 in 16) – odds of getting 4 girls in a row
b. 50% (1 in 2) – equal chance of getting either
c. Something in between (6.25-50%)
An
experiment….

• We will toss a coin……..

Misconception of chance
• Kahman and Tversky (1972) asked which pattern is more likely after
flipping a coin six times in a row?
• H-T-H-T-H-T
• H-H-H-T-T-T
• People constantly mentioned the 1st order is more likely because that
appears more random. However, both have a similar chance (0.5)^6
• We are constantly looking for patterns – this can be linked to
superstitions
The Gambler’s fallacy
Sports fans

• The significance of a ‘hot hand’ and a player being ‘on fire’

• When a player scores three goals in a row we tend to believe that he is more likely to
score the fourth
• However, the analysis of athletes’ performance suggest that there is no direct link
between the performance of a player and their immediate prior shot performance
(Gilovich et al. 1985)
• For random events (e.g. flipping a coin) the representativeness heuristic leads us to
believe the chance is self-correcting (as it better resembles the chance process)
• For outcomes driven by intentional actors we see streaks as intentional or representative
of actors’ abilities
Quick Question
• If your sports team are doing poorly , sack the manager and replace
them with a new person. What is the most likely outcome?

• Very little (ter Weel, 2001), more evidence at

http://www.soccermetrics.net/paper-discussions/manager-turnover-e
ffect-on-team-performance-weel-paper
Problem 5: Goals Scored
• CJ has scored the following number of goals:
• 2015-16: 0 goals
• 2014-15: 2 goals
• 2013-14: 0 goals
• 2012-13: 2 goals
• 2011-12: 28 goals
How many will he score in 2016-17?
 Remember….extreme conditions are followed by
extreme conditions

Regression to An exceptionally high sale in one season is usually

followed by a low sale in the following season
the mean
Because of the representativeness heuristic, we
tend to predict the future events based on the
past instead of attending to the role of chance and
longer-term average
A Few Examples
• Apple
• Internet Explorer
• Marks and Spencer

• Are there any examples that do not follow this pattern?

The conjunction
fallacy
• One of the fundamental laws of
probability:
• A subset always has a lower
probability than the original set
• A conjunction cannot be more
probable than a large set
• However, our
representativeness heuristic
may fail us
• Because it ‘feels’ more correct
Confirmation Heuristics

Confirmation heuristics are the tendency to search for, interpret, favour, and
recall information in a way that confirms one's pre-existing knowledge.
A Few Examples
• Perceiving people you meet who you don’t agree with as inferior.
• Holidays – quaint or rundown?
• What happens when a product you bought breaks
 Confirmation bias

Biases
emanating
from the Anchoring bias

confirmation
heuristic Hindsight and the curse of
knowledge
Problem 6:
Guess the rule
You have the following sequence
of the numbers and your task is
to diagnose the rule. You can
present other sequences and ask
me if this follows the rule.
Then you identify the rule. The
sequence is:
2-4-6

Answer: the rule is any sequence

with ascending numbers
The confirmation trap

• We seek information consistent with our belief system

• We accept information uncritically unless there is an unavoidable reason not to
• Two reasons for this
• Our memory: When we think about a hypothesis, we retrieve information consistent with that hypothesis
• Our way of searching for information is also a factor
• When you want to make a decision (buy a new phone) do you search data in support for your final decision?
• The implication is that paying attention to disproving evidence will be most useful
• The role of consultancy firms! They usually confirm what the client want. Businesses spend large money to
hear what they want to hear.
Problem 7: • Write the last three digits of your phone
number and add 1 to the front of the

Guess the string, as if it were a year: _________

• Was the Taj Mahal completed before or

Date after the date formed by your phone

number?
___Before ___After

• What year was the Taj Mahal completed?

• The correct answer is 1648
 • Anchoring bias is when we start our decision making with
an initial position. No matter how irrelevant the anchor is,
it might still affect our judgement
The anchoring • The reasons for this:
bias • First, we often develop estimates by starting with an
initial anchor
• Second, we search information consistent with the
anchor
 Does anchoring affect graduate salaries?

Graduate MBAs often complain about the

anchoring effect their previous job has had on
Anchoring their salary
bias This is because employers offer take into
account an anchor

Those graduates who negotiate aggressively

tend to earn higher salaries later on
 First impressions

Other Racial and ethnicity

examples of • A study suggests that the same
anchoring behaviour may be perceived by
Americans as more aggressive if it
is exhibited by an African-American
than when exhibited by European
Americans (Duncan, 1976)
Bias:
Hindsight
and curse of
knowledge
Examples
• A wrong turn taken in the road, after 5 miles you say: I KNEW IT
• An extensive marketing study suggests a particular direction. Once the results are
presented the manager says: I KNEW IT
Summary
• Heuristics simplify our decisions
• Often, they save us time
• We don’t apply them appropriately
• The three main approaches (and associated biases) that come from heuristics include
availability, representativeness, and confirmation
Further reading
Bazerman M.H. and Moore D.A. (2013) Judgment in Managerial Decision Making.
Eighth Edition. New York. Wiley

Chugh, D. (2004) ‘Societal and Managerial Implications of Implicit Social Cognition:

Why Milliseconds Matter’ Social Justice Research 17 (2)

Drummond H. (2012) The Economist Guide to Better Decision-making. London. Profile

Books

Mezirow, J. (1997) ‘Transformative Learning: Theory to Practice’ New Directions for

Adult and Continuing Education 74 pp 5-12.

Stanovich, K.E. and West, R.F. (2000) ‘Individual differences in reasoning: Implications
for the rationality debate’ Behavioral & Brain Sciences 23 pp 645-665