Decision Making

Part one
 Decision-making Definitions
 Decision-making is the study of
identifying and choosing alternatives
based on the values and preferences
of the decision maker

 This implies that there are alternative

choices to be considered. We want to
identify as many alternatives as possible
and choose the best one.
 Decision-making Definitions
 Decision making is the process of
sufficiently reducing uncertainty and
doubt about alternatives to allow a
reasonable choice to be made
 This definition stresses information
gathering. Note that uncertainty is to be
reduced not eliminated. Few decisions can
be made with absolute certainty. Every
decision involves a certain amount of risk.
The word DECISION
comes from the Latin
words
Cut off
 Decisions
 Life is a series of
decisions

 Most decisions are

insignificant and
we are not even
aware that we
make them
 How many decisions
have you made today?
 We make as many decisions
 in one year as our
grandparents did..

 in 10 years

 WHY?
 Kinds of Decisions
 Decisions whether: this is the
yes/no decision that must be made
before we proceed to choose an
alternative.
 Should I buy a new car?
 Should I travel this vacation?
 Decisions whether are usually made
by weighing the pros and cons
 Kinds of Decisions
 Decisions which: These involved a
choice of one or more alternatives.
The choice is based on how well each
alternative measures up to
predefined criteria.
 Choice of: products, services,
people, alternatives
 Kinds of Decisions
 Contingent Decisions: these are
decisions that have been made but
put on hold until the condition is
met.
 Ex: I will buy a house, IF I get the
right location at the right price.
 Contingent Decisions
 Most people carry around a set of
already made, contingent decisions,
just waiting for the right conditions.
 Ex: Should I get married? (That is a
whether decision)
 I’ll get married if I can find the right
person is a contingent decision.
 The Decision Environment
 Every decision is made with an
environment, the info, alternatives, values
and preferences available at the time.
 Ideal decision environment would include
all information, all of it accurate and every
possible alternative.
 However both info and alternatives are
constrained by time and effort to gather
info and identify alternatives.
 Decision Environment (cont)
 Since decisions must be made within a
limited environment, the major
challenge of decision making is
uncertainty.
 Since the decision environment continues
to expand many people choose to put off
the decision until close to the deadline.
 They are also sometimes looking for
justification for a decision not voiced but
silently taken.
 Effects of Quantity
 Many people have a tendency to
seek more information than required.

 Too much info can cause overload.

 Mental fatigue can result in decision

paralysis, with no decision being
made at all
 Decision Streams
 Decisions are not made in isolation.
 Rather, decisions are made in the
context of other decisions. There is a
stream of decisions surrounding a
given decision, many decisions made
earlier make it both possible and
limited. Many other decisions will
also follow it.
 Decision Streams, (cont)
 Every decision:
 Follows from previous decisions-
 Enables future decisions-
 Prevents other future decisions-

 Every decision you make affects the

decision stream and has far reaching
consequences
 Decision Strategies
 Optimizing: this means choosing
the best possible alternative.
 Satisficing: this word comes from
satisfactory and sufficient. It means
taking the first satisfactory
alternative.
 Ex: any restaurant if you’re hungry,
rather than best one.
 Strategies
 Maximax – means maximize the
maximums, go for the best possible
alternative. Strategy of the optimist
 Maximin – means maximize the
minimums. Strategy of the
pessimist. Cut losses, cash out.
 Ex: quiz show. Win 10,000 euros. Go
for 20,000 and risk losing the 10 or
stop?
 Classic Decision Strategy
 Identify the decision and the goals it
should achieve.
 Get the facts, (as many as possible) but
remember every decision must be made in
partial ignorance
 Develop alternatives – (including the
choice of doing nothing)
 Rate each alternative (pro and con)
 Rate the risk of each alternative
 Make the decision
 Classic Risk Evaluation Theory
 Example: lottery
 Investment is 1 euro. Prize is $6,500,000.
chance of winning is one in 14,800,000
 Divide $6.5million by 14.8 million gives
expected value of ticket at 43.9 cents.
Since ticket costs 1 euro, more than 2x
value, conclusion is that it is a poor risk.
 Only when value meets or exceeds
expense is the risk worth taking
This works for some
things in our lives
But doesn’t work for others!
 From Marketing
 The decision to buy

 The decision to buy is first an

emotional decision.
 “I want it”
 You don’t argue a person into buying
something
 Example: Coco-cola
 Application of risk evaluation
theory
 The theory says: Only when value
meets or exceeds expense is the risk
worth taking.

 How do we apply that to the decision

of who to meet, date?
We rarely marry the person we’re
most attracted to
 Why?

 Optimizing or
satisficing?
 Optimizing or Satisficing
 We rarely hire the
best person for the
job?
 Why?

 We rarely take the

best job for us?
 Why?
Decision Making
Part Two
All our information is about the
past, while all our decisions are
about the future

The past does not dictate the

future
 Scientific rationalism
 Western countries glorify scientific
rationalism
 Data in – answers out
 When we weigh pros and cons,
analyze stats, apply probability
theory & use computer models, the
analysis is only as good as the
quality of information available
 Decision Analysis Tools
 PMI – (Plus/Minus/Implications) Tool
for weighing the pros and cons
technique
 Grid Analysis
 6 Thinking Hat Analysis – considering
different perspectives
 Cost/benefit analysis
 Tree analysis
 Paired comparison analysis
 Grid Analysis
 Making a choice when many factors
have to be considered.
 List options and factors that are
important in the decision.
 Work out relative importance of the
factors. Give each a number by
importance
 Example of Grid Analysis
 Windsurfer wants to replace his car. Needs one that can
carry a board and sail, also good for business travel. Likes
sports cars. No car he can find is good for all three
purposes.
 His options: 4 wheel drive SUV
 Comfortable family car
 Station wagon
 Sports car
 Criteria:
 Cost
 Ability to carry a sail board
 Ability to store sails and equipment securely
 Fun
 Nice look and quality car
 Today’s business world
 CEOs of major firms cannot know
everything about their organizations
 Often forced to make decisions based
on incomplete information

 Jeff Bezos: Most business decisions

today are made with about 50% data
 A decision….
 Is the action an
executive must
take when he has
information so
incomplete that the
answer does not
suggest itself
 The information age
 Today we have an enormous amount
of information.
 It’s often impossible to differentiate
the reliable from the bogus.
 Information today has shorter shelf
life than before. It becomes obsolete
quickly
 How can we determine when to act,
and which portions of available info
are true or meaningful?
The answer is:
intuition
When a decision has to
be made, make it.
There is no totally right time
for anything
 Intuition in the information age
 Intuition is becoming increasingly
more important today, simple
because there is so much data to
process. What’s important and
what’s not? How do we know when
we have enough? Do we keep
looking or go with what we have?
“A conclusion is the place
where you got tired of
thinking”
Matz’s Maxim, sometimes also
referred to as the
“fuck-it factor”
“The only real valuable
thing is intuition”
Albert Einstein
 Intuition:
The direct knowing or
learning of something without
the conscious use of
reasoning
 Most decisions are spontaneous
judgments
 You can create a
rationale for
anything, but in
the end, most
decisions are based
on intuition and
faith.
 Intuitive decision making
 Intuition means relinquishing control
of the thinking mind and trusting the
vision of the unconscious
 Because this cannot be rationally
justified, it is more often than not
opposed
 When we trust our intuition, we are
really turning to the wisdom of the
unconscious
 “When making a decision in vital matters,
such as the choice of a mate or profession,
the decision should come from the
unconscious, from somewhere within
ourselves”

Sigmund Freud
 If someone tells you they are going to
make a realistic decision, you immediately
understand that they have resolved to do
something bad
 “Intuition does not denote
something contrary to reason, but
something outside the province of
reason”

Carl Jung, Swiss psychologist

 Trusting your intuition
 Most people don’t trust their
intuitions
 If you make a decision intuitively,
how do you explain it to your family,
boss or directors?
 How do you defend yourself if it goes
wrong?
The mind gives us thousands of ways
to say no, but there is only one way to
really say yes, and that’s from the
heart.

If your heart is not in a

decision it is not your
decision, you’re letting
someone else decide for you.
 “I just knew it”
 Ted Turner, on being asked how he
could have known that a market for
a cable news services existed before
the launch of CNN.
 Fred Smith on being asked how he
could have known that a market for
an overnight delivery service existed
before launching Federal Express
“Knowledge is the distilled essence of
your intuitions, corroborated by
experience”

Elbert Hubbard, American

editor, educator
 The world of business
 Students believe that management is
analysis, and specifically the making of
systematic decisions that lead to the
formulation of deliberate strategies.
 They are therefore ill prepared for the
predominant work of managers, which
involves messy, value-laden, ambiguous
problems that more often than not have
no clear solutions.
Decision-making
influences
Part Three
 Classic decision-making
influences
 Our experience
 Family, background, culture, reference
groups
 Education, accumulated knowledge
 Society, laws, rules, customs, morality
 Other people
 What we want, our goals, desires
 Our fears
 Rutgers University Alcohol
Research Experiment
 Male university students were
recruited to drink a vodka and tonic,
wait 20 minutes, then speak in
private with a highly attractive
woman in an attempt to make a
favorable impression.
 Others were given only water to
drink.
 The experiment
 Some were given alcohol
 Some were given water
 Some were given water (liquid) that
tasted like alcohol
 Alcohol experiment continued
 The experimenters found that subjects who
thought they had been given alcohol
showed much smaller increases in heart
rate than those who thought they had been
given water alone, regardless of whether
subjects had actually drank alcohol.
 People were affected by whether or not
they believed they had been given alcohol
 Expectations influenced actions and
decisions
 United Nations Problem
 Is the percentage of African countries in
the United Nations greater or less than
65?
 What is the exact percentage of African
countries in the United Nations?
 Is the percentage of African countries in
the United Nations greater or less than
15?
 What is the exact percentage of African
countries in the United Nations?
United Nations problem, continued
 Answers were 62% for the first
group and 25% for the second
group.
 People’s decisions were influenced
by the sample numbers proposed.
 Coin Problem
 A normal, (unbiased) coin is flipped 3
times, and each time it lands on
Heads. If you had to bet $100 euros
on the next toss, what side would
you choose?
 Coin problem (continued)
 People are influenced by the past,
by what has happened before.
 People are influenced by probability
 People are influenced by
superstition.
 Headache problem
 Do you get headaches frequently,
and if so, how often?
 Do you get headaches occasionally,
and if so, how often?
 How many headache remedies have
you tried, 1 – 5 – 10?
 How many headache remedies have
you tried, 1 – 3 – 5?
 Headache problem continued
 Do you get headaches frequently, and if
so, how often? Mean answer 2.2 week
 Do you get headaches occasionally, and if
so, how often? Mean answer 0.7 week
 How many headache remedies have you
tried, 1 – 5 – 10? Average 5.2 products
 How many headache remedies have you
tried, 1 – 3 – 5? Average 3.2 products
 Line comparison problem
 A group of 7-9 university students
were asked to match the length of a
line shown on a card with one of 3
comparison lines. The comparisons
were easy to make. A control group
averaged over 99% correct.
 What subjects did not know was that
in every group all but one person
were assistants of the experimenter.
 Line comparison problem,
(continued)
 The experiment was done with 3 different
patterns of lines and all answered correctly.
 On the 4th try, the confederate students
were all instructed to pick a line which was
obviously wrong.
 75% of the subjects, who always sat near
the end of the group, conformed on at least
one trial and 33% conformed on half or
more trials. Most students gave at least
some judgments that contradicted their
senses.
 Line problem, (continued)
 People were influenced by other
people,
 By the decisions of other people
 By peer pressure
 Cal Tech Experiment
 California Institute of Technology
 Asked 20 people to sample wine while
undergoing MRI of their brains
 Told they were to sample 5 different red
wines sold at different prices
 Only 3 wines were used, 2 being offered
twice at different prices
 A $90 wine was provided marked with the
real price and again marked at $10.
another was presented at it’s real price of
$5 and also marked at $45
 Cal Tech Experiment
 Testers brains showed more pleasure
at the higher price than the lower
ones, even for the same wine.

 Pleasure and decisions are affected

by assumed quality of an item
 Value problem
 You are about to buy a jacket for
$125 euros and a calculator for $15.
The salesman tells you that the
calculator is on sale for $10 euros at
another branch store, located a 20
minutes drive away. Would you
make the trip to the other store to
save the 5$?
 Value problem, continuation
 You are about to buy a jacket for
$15 euros and a calculator for 125.
The salesman tells you that the
calculator is on sale for $120 euros
at another branch store located 20
minutes drive away. Would you
make the trip to the other store?
 Value problem, (continued)
 The majority of people said yes to
the first sale and no to the second.
 They were influenced by the relative
value savings.
 MIT experiment
 Peer Soelberg taught a course in decision-
making skills at the MIT Sloan School of
Management.
 He taught a classic decision-making strategy:
Identify options, evaluate them, rate them,
and pick the option with the highest rating.
 He decided to later test whether students
used the strategies he taught to determine
which job offer they should accept upon
graduation.
 MIT Experiment, (continued)
 To his surprise, he discovered that
his students rejected the theory they
had been taught. Instead they made
gut choices. They then compared
other job offers with their favorite, to
justify that their favorite was indeed
the best choice.
 Horse-racing experiment
 People who were about to bet a small
sum on a horse were asked to rate the
chances of that horse winning on a
scale of 1 to 7.
 Mean was 3.48

 Others who had just made a small bet

were asked to do the same thing.
 Mean was 4.81
 Horse Racing (continued)
 People became more confident after
taking a decision, irregardless of
whether that the decision was the
correct one or not.
Decision-making
Part four
Every accomplishment
starts with the decision
to try
The most difficult thing is
to act
The rest is mere tenacity
Nothing will ever be attempted
if all possible objections must
first be overcome
 Procrastination
We postpone making decisions,
it’s called procrastination. Why do
we do that?
 Reasons for Procrastination
 We give away the responsibility for
the decision to:
 Time, (fate)
 Circumstances
 Other people
Putting off an easy thing makes it
hard, and putting off a hard thing

Usually makes it
impossible
 Behavioral traps in
decision-making
 A behavioral trap is
a situation in which
people start
something that
later becomes
undesirable or
difficult to escape
from
 Types of behavioral traps
 Time delay traps
 Ignorance traps
 Investment traps
 Deterioration traps
 Collective traps
 Time delay traps
 In time delay traps momentary
gratification clashes with long term
consequences
 Example: over weight
 Not enough exercise
 smoking
 The person says, I’ll worry about the
effects later
 Ignorance traps
 In ignorance traps the negative
effects of behavior are not
understood or foreseen at the outset
 Examples: smoking in the first half of
the 20th century.
 Second hand smoke 20 years ago
 Asbestos
 Deterioration Traps
 Similar to other traps, except that
the costs and benefits of the
behavior change over time
 Example: smoking as a way of
combating stress, drinking for stress
 Collective Traps
 In collective traps, the pursuit of
individual self-interest results in
adverse consequences for the
collective
 Examples: rush hour traffic
 Taking the car yourself instead of car
pooling or taking mass transit
 A married person having an affair
Decision-making
And ETHICS
 Decisions 1
 Your younger sister has a serious illness
for which doctors have recommended
surgery. If she has the operation there is a
60% chance she will recover and live 50
years. There is a 20% chance she will live
only 20 years. There is a 20% chance she
will die in the operation.
 If she does not have the operation, 60%
chance she will live only 5 years. 15%
chance she will live 15 years. 25% chance
she will recover and live 50 years.
 Should she have the operation?
 Decisions 2
 The Godfather Decision
 You own a profitable family flower export
business in Colombia, S.A.
 The drug mafia approaches you and wants
you to export a shipment of cocaine with
your flowers. They offer a deal: export the
cocaine one time only. If you do they will
put 100 million dollars in a Swiss bank
account for you tomorrow. If not, they will
torture and kill you and your entire family
slowly. You have ten minutes to decide.
What do you do?
 Decisions 3
 You are living in Madrid with your
girlfriend or boyfriend and are trying
to decide what to do for the holidays.
 They want to go to the beach and
you don’t.
 What do you do?
 Decisions continued
 You give in and decide to go to the
beach. Reason: you want to please
your partner and hope to be happy
(or happier) because they are happy.
 Not your decision and yet it becomes
yours
 It still doesn’t feel like your decision.
It becomes another’s scenario if it’s
not what you really want
 Decisions 4
 You are diagnosed with early stage
cancer. Your doctor recommends
that you begin chemotherapy.

 What do you do?

 Decisions 5
 Same scenario, only that you are
married with 3 children. Does this
influence your decision? If so, how?

 Same scenario, except that it is your

child who is diagnosed with the
cancer.
 Decisions 6
 Would you flip a switch to send a train
with 50 people on it onto a different track
and thus save their lives? If you do, one
person will die.
 Would you physically push one person
onto the tracks to derail a train and save
the lives of 50 people?
 You have a choice. Your parent (or
partner) dies or 500,000 people on the
other side of the planet die.
“I prefer my children to my cousins and
my cousins to my neighbors and my
neighbors to my countrymen”

Jean-Marie Le Pen
Decision-making
Part five
 “Nothing is more difficult, and
therefore more precious than to be
able to decide”

Napoleon Bonaparte
Your life changes the
moment you make a
decision
Any decision!
 Life is all about choices
 Every situation is a choice
 You choose how to react to situations
 You choose how people will affect
your mood
 It is your choice to be in a good
mood or bad one
 Your choice to be tired or
enthusiastic in the morning
It’s your choice how
to live
“Our life is what our thoughts
make of it”

Marcus Aurelius, Roman

Emperor
 Attitude toward life
 Nature has given us control over only
one thing in our lives and this is our
own thoughts
 This, coupled with the fact that
everything which we create begins in
the form of a thought, leads us to
the idea that every person had the
ability to control his mind and with it
his attitude towards life
“The greatest discovery of every generation is
that human beings can alter their lives by
altering their attitudes of mind”

Albert Schweitzer
 Existentialism
 Existential philosophy stresses that
humans have almost unlimited choice
 The constraints we feel from authority,
society, other people, morality and God
are largely because we have internalized
them, we carry the constraints around
with us
 Existentialism is a philosophy that stresses
the importance of individual choice
“It’s only in our decisions that
we are important”

Jean Paul Sartre, French

philosopher
 Responsibility
 When we realize how much we are
capable of doing and becoming, we
must accept responsibility for our
actions, for our successes and
failures and also for our happiness.
 That’s a lot of responsibility, in fact
it’s too much.
 Who has it better, the child or the
adult?
 Right or Wrong
 The inevitability of
evil is the price we
pay for freedom
 This means the
chance of making
the wrong choice
as well as the right
 Responsibility of
being wrong
 Responsibility (continued)
 Responsibility means that to find a
solution for your problems you have
to yourself and no one else.
 It means admitting that you, not
circumstances determine your
success or failure.
 We have no excuses
“Take your life in our own hands and
what happens? A terrible thing!

You have no one to blame”

Erica Jong, American author
 The best years of life are the ones in
which you decide things for yourself
 You don’t blame
your problems on
someone else or on
circumstances
 You realize that
you control your
own destiny
 You start to do
things instead of
just wishing you
could
 Lives of Compromise
 The compromise that we accept is a life which is
predictable and trouble free as possible versus
one that asks you to take responsibility for your
life and actions.
 Not accepting responsibility for your actions
means living a life of compromise. You settle for
what you can get instead of what you want
 A life of compromise means that you cannot
create nor have what you truly want. The
decision to accept a life or compromise or not is
one of the greatest decisions we have to make in
life.
 Lives of Compromise
(continued)
 If you ask a child which kind of life
they would like to live, none opt for a
life of compromise, yet almost all
adults do.
 The tragedy of life is that we never
fully invest in a compromise.
Therefore a lot of us do not fully
invest in our lives.
“Conclusions arrived at through
reasoning have very little or no
influence in altering the
course of our lives”

Carlos Casteneda,
Spanish philosopher
If we decide our attitudes, then we can
choose to be happy rather than sad,
interested rather than indifferent

It’s our decision

Decision Making
Part Seven
 “Most people and most companies
don’t like to make choices. And they
particularly don’t like to make a few
choices that they really have to live
with.”

Alan Lafley, CEO of P&G

 Avoiding Choices
 Choice by limitation – choosing only
what seems possible or reasonable. The
result of choice by limitation is
compromise.
 In all companies you find people who are
there because of a choice of limitation.
They know they are living a compromise,
but try to be reasonable. They look upon
their lives as they best they can expect
from the limitations offered.
 Avoiding Choice
 Choice by default – the choice not
to make a choice. What happens
seems to be inevitable.
 Because of an inability or
unwillingness to choose, the person
assigns power to the situation. All
that is left is reaction.
 Avoiding Choice
 Choice by consensus – choosing by finding out
what everyone else around you is willing to
recommend. Sometimes called the public
relations strategy.
 My boss is hard to talk to, and I’ve been bored
lately in my job. I have no support from the rest
of the staff, and I haven’t gotten a raise in ages.
Meantime, I’ve just had this new job offer in an
exciting organization, which seems challenging
and important. What do you think I should do?
Do you think I ought to quit and take it?
 Answers you get will be “yes” because of the way
you framed the choice.
 Avoiding Choice
 Inall avoiding choice instances, the
situation is abdicated or handed over
to something or someone else.
 Point of No Return
 It occurs just before an accident,
some micro-seconds before
 ”I don’t know why I did that, but it
saved my life”
 Refusal to give in, to give up. Refusal
to give your decision making
capacity away
 Decision-making in restaurants
 Procedure number one: study each
offering and compare them to each other
 Number two: look immediately for what
you want to eat
 When you attempt to avoid missing some
possibility that might be a good one, you
learn to be indecisive, you also are prone
to second-guess yourself and this leads to
frustration: could have – should have
Decision-making
Part-Eight
Nice patients die faster

What do you think?

 Article in the Journal of the
American Medical Association
 2 groups of cancer patients
 Feisty, combative patients survived
longer. They were more demanding
of doctors and rated by medical staff
as less well adjusted.
 The other group was calmer and
more positive toward their doctors.
They died earlier.
 Explain this -
 Cancer study group
 One explanation is
that the 2nd group
gave away their
responsibility of
fighting the disease
to the doctors.
 Refusal to give in,
to give up. Refusal
to give your
decision making
capacity away
 Responsibility for health
 When you discuss the need for the
individual to take responsibility for
his own health, the tendency is to
interpret it as an attack on the
medical profession, or as an
adventure into “alternative medicine”
 Preventive medicine. What do you do
to keep yourself healthy? What are
you willing to give up?
Do we decide to be sick
or healthy?
Is that a decision we make or
is it thrust upon us?
 How much of our health are we
able to control?
 The hanging on to illnesses, or the
difficulty in asserting one’s freedom and
responsibility toward illnesses, is well
known.
 “Disease is shrinking one’s world so that
with lessened responsibilities and
concerns, the person has a better chance
of coping. Health on the other hand, is a
free of the person to realize his capacities”
Rollo May, American psychologist, author