Managerial Decision Making

John S. CarrollE52-563, 3-2617jcarroll@mit.edu

Business

Introductions Syllabus Requirements Style and etiquette

Conceptual Skills for Managers Knowledge of self and others Diagnostic skills Analytical tools Enhanced intuition

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

Comparison of Models

Descriptive - how people behave- limitations, errors, biases- creative, intuitive leaps

Normative - theoretically optimal- economic rationality- consistency

Prescriptive - advice for better decisions

Decision Making Framework

Noticing Structuring Information

gathering Judgment/choice Action Feedback/learning

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?

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!

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?

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______________

More Estimation Questions

General Electric’s assets in 1998 World population in 1999 Total advertising costs for P&G in

1995 Microsoft assets in 1999

OverconfidenceRespondant Topic Target Result

HarvardMBAs

Trivia facts 2% 46%

KelloggMBAs

Startingsalary 49% 85%

Chemicalemployees

Industry &co. facts 10% 50%

Computermanagers

Business:co. facts:

5%5%

80%58%

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 isn’t 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

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?

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!

Framing Effects of Wording Which do you prefer?A: a 1 out of 100 chance of losing $1000B: buy insurance for $10 to protect you

from this loss

Which do you prefer?A: a 1 out of 100 chance of losing $1000B: lose $10 for sure

Coke vs. Pepsi

1950s hourglass bottle is Coke’s “most important competitive advantage”

1958 Pepsi swirl bottle weakly imitates Coke’s bottle

1970s John Scully, Pepsi’s V-P Mkt: “How should problems such as this be approached?”

Exercise 1: Choosing A Job the readings for next time will help a one-two page report (+ tables) the exercise is due Feb. 12

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