Managerial Decision Making

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Managerial Decision Making
John S. Carroll E52-563, 3-2617 jcarroll_at_mit.edu
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Business

• Introductions
• Syllabus
• Requirements
• Style and etiquette

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Conceptual Skills for Managers

• Knowledge of self and others
• Diagnostic skills
• Analytical tools
• Enhanced intuition

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Individuals in Context

• How do managers (and others) decide?
• Can we make money off mistakes?
• How can we make better decisions?
• How about groups?
• Negotiations and markets
• Organizational decision making

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Comparison of Models

• Descriptive - how people behave
• - limitations, errors, biases
• - creative, intuitive leaps
• Normative - theoretically optimal
• - economic rationality
• - consistency
• Prescriptive - advice for better decisions

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Decision Making Framework

• Noticing
• Structuring
• Information gathering
• Judgment/choice
• Action
• Feedback/learning

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Intuition or Rationality?

• Western tradition of rationality
• - facts, analysis, consistency
• Romantic/mystical view of great leaders and key
  decisions
• Is intuition just bad decision making?
• Is intuition deep knowledge, mastery?
• Is rationality a strong or a weak method of
  decision making?

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Modular Minds

• Sigmund Freud - id, ego, superego
• Dick Thaler - planner vs. doer
• Thomas Schelling - want self vs. should self
• Marvin Minsky - society of mind
• Steven Pinker - separate routines, e.g., a
  rational calculator and an intuitive thinker
• Imagine the Myers-Briggs dimensions as separate
  voices in our heads!

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Knowing What We Know

• Estimates and forecasts are difficult to evaluate
  for quality or degree of confidence
• What will the Dow Jones be
• six months from now?

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Estimation Questions

• How many employees (in total) did IBM have
  worldwide on Dec. 31, 1999?
• After making your best estimate, give a low
  estimate and high estimate so you are 95 sure
  that the true answer falls within these limits
• Low_____________ High______________

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More Estimation Questions

• General Electrics assets in 1998
• World population in 1999
• Total advertising costs for PG in 1995
• Microsoft assets in 1999

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Overconfidence
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More Overconfidence

• A severe depression like that of 1920-1921 is
  outside the range of probability
• Harvard Econ. Society Weekly Letter, Nov. 16,
  1929
• With over 50 foreign cars already on sale here,
  the Japanese auto industry isnt likely to carve
  out a big slice of the U.S. market for itself
• Business Week, August 2, 1968
• There is no reason anyone would want a computer
  in their home
• Ken Olson, DEC founder, 1977

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Medical Diagnosis Example

• 389 schoolboys screened by a panel of three
  doctors 45 judged to need their tonsils
  removed
• 215 who were judged not to need their tonsils
  removed were examined by a new panel of doctors
• What should be judged to need their tonsils
  removed?

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Medical Diagnosis Continued

• Results 46
• 116 boys judged twice not to need their tonsils
  out were judged by a new panel of three doctors
• Results 44
• Relative vs. absolute judgments
• Experience is not enough!

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Framing Effects of Wording

• Which do you prefer?
• A a 1 out of 100 chance of losing 1000
• B buy insurance for 10 to protect you from
  this loss
• Which do you prefer?
• A a 1 out of 100 chance of losing 1000
• B lose 10 for sure

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Coke vs. Pepsi

• 1950s hourglass bottle is Cokes most important
  competitive advantage
• 1958 Pepsi swirl bottle weakly imitates Cokes
  bottle
• 1970s John Scully, Pepsis V-P Mkt
• How should problems such as this be approached?

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Exercise 1 Choosing A Job

• the readings for next time will help
• a one-two page report ( tables)
• the exercise is due Feb. 12

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Buzz Groups

• Break up into groups of 2-3 people
• Individually, think of a decision you had to make
  that was particularly difficult
• What made it difficult?
• Share your thoughts and see if any themes pop out