Program Concepts 3

8/3/2019 Program Concepts 3

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Decision Making

Program Concepts

Tool: Avoiding Hidden Decision-Making Traps, Key Points................................................2

Tool: Decision Making Example and Worksheet, Key Points..............................................4

Tool: Strengthening Your Managerial Intuition, Key Points................................................6

Scenario Summary...................................................................................................................7


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Harvard Business Publishing, eLearning: Decision Making

Program Concepts Page 2

Copyright 2010 by Harvard Business School Publishing. All rights reserved. Harvard Business Publishing is an

affiliate of Harvard Business School.

Tool: Avoiding Hidden Decision-Making Traps

Key Points

The Key Points for this Tool are based on the research and writings of John S. Hammond, RalphL. Keeney, and Howard Raiffa as presented in The Hidden Traps in Decision Making Harvard

Business Review, SeptemberOctober 1998.

Hammond, Keeney, and Raiffas Decision-Making TrapsThe Trap Example Avoiding the Trap

Anchoring: Givingdisproportionate weightto the first informationyou receive

A product developerdecides which featuresto add to a consumerproduct based on astatistic in a journalarticle

Pursue multiple lines of thought.

Think through the problem onyour own before seeking advice.

Status quo: Favoring

choices that perpetuatecurrent conditions

An electronic-newspaper

publisher makes thepaper look very muchlike its print precursor

Ask if the status quo really serves

your objectives.Ask if youd choose the statusquo if it werentthe status quo.

Downplay the cost of switchingfrom the status quo.

Sunk costs: Makingchoices in a way that

justifies past, flawedchoices

An investor refuses tosell a stock or mutualfund at a loss, forgoingother, more attractiveinvestments

Get advice from people whowerent involved in the earlierdecision.

Remind yourself that everyonemakes mistakes.

Dont encourage fear of failure.

Confirming evidence:Seeking informationthat supports your pointof view

An entrepreneur leaningtoward starting up a newengineering-consultingcompany seeks advicefrom a friend who madea similar decision in thesame way

Check whether youre examiningall evidence with equal rigor.

Ask a respected colleague toargue againstyour potentialdecision.

Avoid yes-men.

(continued on next page)


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Tool: Avoiding Hidden Decision-Making Traps

Key Points (Continued)

Hammond, Keeney, and Raiffas Decision-Making Traps

The Trap Example Avoiding the TrapFraming: Posing adecision in a way thatdistorts your judgment

An executive frames anacquisitions decisionsolelyin terms of gainsand lossesthen shiesaway from theacquisition to avoid thelosses

Dont automatically accept thedecisions initial framewhetheryou or someone else formulatedit.

Pose problems in a neutral waythat deemphasizes rather thanhighlights gains and losses.

Estimating andforecasting: Assessingprobabilities with toomuch confidence,prudence, or influencefrom past events

The owner of a newstart-up assigns a higherchance of her ownbusiness failing after shelearns that a closefriends new businesshas failed

Reduce overconfidence in yourprobability assessment: Setextreme high and low ends for thepossible outcomes.

Avoid overprudence: Stateestimates honestly and reviseoverly conservative ones.

Reduce the impact of recallability:Ensure that your assumptionsarent unduly influenced bymemories. Get actual statistics.


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Tool: Decision-Making Example and WorksheetKey Points

The Key Points for this Tool are based on the research and writings of John S. Hammond, RalphL. Keeney, and Howard Raiffa as presented in Even Swaps: A Rational Method for Trade-offs,Harvard Business Review, MarchApril 1998.

Hammond, Keeney, and Raiffas Even-Swaps Method of Decision-Making

What MakesComplex DecisionsDifficult

Youre usually pursuing many different objectives (or criteria) in making adecision. For example, if you want to f ly from New York to SanFrancisco, you want a low fare, a convenient departure time, a direct flight,an aisle seat, and so on.You thus have to make trade-offs among these various objectives.To further complicate matters, each objective in your alternatives has itsown basis of comparison. For example, you might compare somealternatives using percentages; others with broad relational judgments suchas high, low, and medium; yet others with purely descriptive terms suchas yellow,orange, and blue.

Why the Even-SwapsMethod Works

It lets you make trade-offs among anyset of objectives, across a range ofalternatives.It forces you to think about the value of one objective in terms of another.It simplifies and codifies the trade-off process, thus letting you focus allyour mental energy on deciding the real valueto youof various coursesof action.



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Tool: Decision-Making Example and WorksheetKey Points (Continued)

Hammond, Keeney, and Raiffas Even-Swaps Method of Decision-MakingHow to Use the

Even-SwapsMethod

Make a consequences table showing the various alternatives

youre considering, and the various objectives that your decision entails.Rank all the alternatives relative to one another on each objective.

Eliminate dominated alternatives (those that are outranked by otherson most or all the objectives), one at a time, until the remainingalternatives have a mix of advantages and disadvantages relative toone another (that is, no alternative is clearly outranked by any other).

Make even swaps to eliminate objectives until an alternative isoutranked by another. Eliminate that dominated alternative. Keepmaking even swaps and eliminating objective rows and thenalternatives until you have just one alternative leftand thats yourdecision.

Use these steps to follow the even-swap process:

Step 1: Redraw your consequences table, showing only the data forany remaining alternatives.Step 2: Determine the change necessary to cancel out an objective(row). Then decide what change in that same alternative (column)would compensate for the first change made.Step 3: Make the even swap in your consequences table.Step 4: Cancel out the now-irrelevant objective (row) in yourconsequences table.Step 5: See whether an alternative (column) outranks another. If so,eliminate the dominated alternative. If youve got just one alternative remaining, thats your decision. If not, follow the above steps again asoften as necessary until you have one alternative left.


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Tool: Strengthening Your Managerial IntuitionKey Points

The Key Points for this Tool are based on the research and writings of Alden M. Hayashi aspresented in When to Trust Your Gut, Harvard Business Review, February 2001, and on YourManagerial Intuition: How Much Should You Trust It? Can You Improve It? Harvard

Management Update, June 1997.

Hayashi and Harvard Management Updates Insights on Intuition

What Is Intuition? Knowing something without knowing how you know it.

Gut instinct, a hunch, professional judgment, a visceral feeling.

The direct knowing of something without the conscious use ofreasoning.

Why Balance Intuitionwith Intellect?

Managers have little time to absorb and weigh all the informationrelevant to a decision.

Intuition lets managers make decisions faster, before the informationrequired becomes obsolete or irrelevant.

How Can You BestUse Your Intuition?

Balance it with your intellect.

Dont ignore it completely, but dont follow it blindly either.

Consider it another form of data in making decisions.

On particularly tough or high-stakes decisions, check your instinctsaccuracy through self-reflection and discussion with others not involvedin the decision.

How Can YouStrengthen YourIntuition?

Build expertise in a particular area.

Develop a diverse professional and personal background.

Engage in meditative, distraction-free activities to let thoughts connectrandomly in your mind.

Keep a journal or diary about your intuitive feelings and your thoughts.


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Scenario Summary

Thinking Traps

Decision making is a critical skill in almost any business situation. Because we fall victim tounconscious psychological traps that influence our decisions, its easy to make bad decisions. JohnS. Hammond, Ralph L. Keeney, and Howard Raiffa believe that we can compensate for these biases

and distortions and make good decisions.

Weighing Information

Decision makers fall into the anchoring trapwhen they give disproportionate weight to the firstinformation they receive. It can be avoided by:

Seeking information from a variety of sources

Pursuing other lines of thought in addition to the first one that occurs

Decision makers also seek information that supports their point of view, which Hammond, Keeney,and Raiffa call the confirming evidence trap. It can be avoided by:

Asking a colleague to play devils advocate

Examining all evidence with equal rigor

Avoiding yes-men

Righting Wrongs

Making decisions that justify past choices leads decision makers to fall into the sunk cost trap. It canbe avoided by:

Allowing yourself to be wrong

Remembering that even the best managers make mistakes

Getting opinions from people who were not involved in the original decision

Perspective on the Past

Making decisions that require action means taking risks. Hammond, Keeney, and Raiffa point out thatpeople often subconsciously make decisions that perpetuate the status quo in order to avoid suchrisk. This is the status quotrap. It can be avoided by:

Asking whether the current situation really serves the desired objectives

Asking if you would chose the current situation if it were not the status quoDownplaying the cost or effort of switching from the status quo

Decision makers fall into the estimating trapwhen they are overly influenced by vivid memories whenassessing possibilities. The estimating trap can be avoided by:

Considering the extremes, then challenging them

Getting actual data, not just impressions

Processing Decisions

When decisions are complicated, a process can be applied to ensure that the right issues are beingexamined and the right decision is made. Hammond, Keeney, and Raiffa suggest creating a matrixthat lists the objectives of the decision and shows the alternatives.

Setting up the decision this way lets you make trade-offs among various objectives. A matrix can help

you reduce a decision that seems overwhelming into something that seems manageable.



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Scenario Summary (Continued)

Making Even Swaps

Hammond, Keeney, and Raiffas Even-Swaps method is a technique for using a matrix to simplifycomplex decisions.

It lets you make trade-offs among anyset of objectives, across a range of alternatives.

It forces you to think about the value of one objective in terms of anotheror to think about whatis most important to you, then see what trade-offs need to be made to compare alternativesbased on the most important criterion.

It simplifies and codifies the trade-off process, allowing you to focus all your mental energy ondeciding the real value of different options.

Trusting Your Gut

In certain situations, the best decisions are made simply by trusting your gut. According to Alden M.Hiyashi, trusting your instincts is important when:

Logical methods are not enough

Decisions are complex and ambiguous

Decisions are time-sensitive and there is not enough time to analyze all options

Data supporting all options appears the same

Thinking in the Fast Lane

In todays fast-paced world, managers must leverage their knowledge to make intuitive decisions inthe face of insufficient time and inadequate data. Harvard Management Updateholds that it is betterto make a decision quickly and be right seven out of ten times than to delay while searching for theperfect solution. Fast decisions give you options slow ones dont. To be right seven out of ten times, decision makers have to trust their intuition.

Market testing at an early stage allows decision makers to get feedback from the people who willultimately use the product or service, which then helps shape its development.

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Program Concepts 3