- Partha Krishnamurthy
- University of Houston
Goals for the Seminar - Lower the microscope on how decisions are made.
- Increase conscious decision-making.
- Increase sensitivity to the various facets of the decision-making process.
What is a Decision? - Your thoughts on key characteristics of decisions.
- What makes a decision, a decision?
- Question of decision options
- Question of outcomes for the options
- Question of preferences for the outcomes
- Question of decision rule
- Decisions about the decision-making process
Core of Decision Making: Logic of Consequence* - Choice process is consequential and preference-based
- Consequential
- Choice of option is based on likely consequences.
- Preference-based
- Consequences are evaluated based on personal preferences.
- *Source: March and Heath, 1994
The Process of Decision-making - The process of:
- Recognizing decisions, and courses of action.
- Gathering information for each course of action.
- Combining information to form overall impressions of each course of action.
Decision Making and Risk - No risk, no decision, right?
- Risk in decision making
- Options
- A choice between stocks versus bonds.
- Preference for consequence
- Maximize short-term market share or profit to maximize share-holder wealth?
- Suppose you had to choose between a powerful-but-heavy laptop versus a less powerful but ultra-light laptop,
- Is there risk here?
- Is this a decision?
- Where is risk in this decision?
Perspectives on Decision Making - Normative
- How decisions should be made, i.e., what makes for a good versus bad decision.
- Descriptive
- Prescriptive
- What decision making process should be interfered with to make the optimal decision.
What Makes for a Good Decision? Mutual Fund Choice - Suppose, an investment advisor gives you the following two options to invest in:
- Fund A: 7.8% with volatility of about ± 0.6%
- Fund B: 11.7% with volatility of about ± 8%
- Which Fund will you choose?
- What does this mean for decision-making?
- In the end, it is a matter of preferences.
- We can only judge whether the decision process in the light of the preferences.
Coin Toss - Two biased coins.
- You can choose the coin, and the call. If you call correctly, you get 100,000 tax free, 0 otherwise.
- You choose coin B, and call “heads” and it lands “tails” up.
- How good was your decision to choose coin B?
- Clearly Wrong 1---2---3---4---5---6---7 Clearly Right
- A small business has to choose between two technologies, A or B, to incorporate in the planned new product development and launch.
- Based on all information, technology A has a 52% chance of success and B has 48%.
- If they choose the correct technology platform, they will get net after tax profit of 7.5m for the year, and nothing if they fail.
- They choose technology A, and the product fails, and a competitor chooses technology B, and their product succeeds.
- How good was the decision to choose technology A?
- Clearly Wrong 1---2---3---4---5---6---7 Clearly Right
- Source: Russo and Schoemaker, Winning Decisions
What was your response? - Coin toss?
- Product launch?
What Influences Decision Outcomes - Source: Russo and Schoemaker, Winning Decisions
- Good outcomes do not imply good processes, nor do good processes guarantee good outcomes.
- Good processes give the best odds of good outcomes.
Job Profiles - Imagine that you are looking to make choices on whether to apply for an on-campus job.
- Companies vary on the following dimensions:
- Location:
- Very Large Metro
- Metro
- Small Metro
- Compensation
- Career Path
- Accelerated
- Industry Standard
Job Preference Questionnaire - For the attributes of location, compensation, and career path….
- Please indicate much importance did you assess to each of them?
- Complete questionnaire 1, put you ID number, return it.
- Complete questionnaire 2, put your ID number, return it.
Session 1 – Take-aways - Decision making is based on consequentiality and preference.
- Risk and decision-making go hand-in-hand.
- Good decision-making involves good decision process more than outcome.
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