DecisionMaking - Example: Multi-Criteria Decision Making...

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Unformatted text preview: Example: Multi-Criteria Decision Making Multi M lti-C it i D i i M ki Criteria (weight) Tuition Cost (4) Reputation (5) Climate Cli t (3) Culture (1) Kellogg High (1) High (5) Bad B d (1) Fair (3) CAL Fair (3) Good (4) Fair F i (3) Good (4) Kellogg = (4*1)+(5*5)+(3*1)+(1*3)=35 CAL= (4*3)+(5*4)+(3*3)+(1*4)=45 The Rationally Bounded Decision Maker Don't have full information Don't know what information is important or how to use it Have limited information processing p capabilities Heuristics Quick l Q i k rules of thumb f th b that reduce information processing demands on decision makers Problem 1 The following 10 corporations were ranked by Fortune g g g magazine to be among the 500 largest United States based firms according to sales volume for 1991: Group A: p Levi Strauss, Coca-Cola Enterprises, Apple Computers, Quaker Oats, Zenith Electronics Group B: Conagra, Allied-Signal, Textron, Weyerhauser, United T h U i d Techonologies l i Which group of organizations listed (A or B) had the larger total sales volume? Availability Judging the frequency or likelihood of an event by how easily instances of the event come to mind Problem 1b Are there more words in the English language lang age that start with the lette " " sta t ith letter "r" or have "r" as the third letter? a. a Start with the letter "r" r b. Have "r" as the third letter Problem 3 Which of the following causes more deaths i th U it d St t d th in the United States each year? h ? a. Stomach Cancer b. b Motor vehicle accidents Availability: Biasing Factors Ease of Recall Familiarity Vividness Recency Problem 4 Mark is finishing his MBA at a prestigious y y university. He is very interested in the arts and at one time considered a career as a musician. Is he more likely end up with a job in? a. a management consulting firm? b. th b the management of th arts? t f the t ? Representative Heuristic Making a judgment based on the resemblance to a typical case while ignoring information about averages i i i f i b o p o p obab t es or prior probabilities Problem 4 If I were to toss a coin eight times, which of the following sequence of coin flips is more likely? a. TTTTTTTT b. TTTTHHHH c. c THTTHHHT Gambler's Fallacy "Law of Small Numbers" The belief that data collected by a y random process will look random; however, however the sequence collected is too short for the process to express itself statistically lf ll Problem 5 A town is served by two hospitals. In the larger hospital about 45 babies are born each day and in the smaller hospital about 15 babies are born each day. As you know, about 50% of all babies are boys but the y , y exact percentage varies from day to day. For a period of one year, each hospital recorded the days in which more than 60% of the babies were boys. Which hospital do you think recorded more such days? _____ The larger hospital _____ The smaller hospital _____ About the same Representative: Biasing Factors Not sensitive to statistical information Not sensitive to sample size Misconceptions of chance p Anchoring and Adjustment Using an initial judgment as an g j g anchor on which subsequent decisions are based Anchoring and Adjustment: Biasing Factors Uncertainty y Low Confidence Problem 6 Choose between: a. A sure gain of $240,000 g $ , b. 25% chance to gain $1,000,000 and 75% chance to gain nothing Problem 6 Choose between: a. A sure loss of $700,000 b. b 75% chance to l h lose $1 000 000 $1,000,000 25% chance to lose nothing g Framing Tendency to make different decisions based how b d on h a problem is presented bl i t d (g (gains vs. losses) ) Problem 7 bl A large car manufacturer has recently been hit with a number of economic difficulties and it appears as if three plants need to be closed and 6,000 employees laid off. The vice president vice-president of production has been exploring alternative ways to avoid this crisis He has developed two crisis. plans: Plan 1: This plan will save one of three plants and 2,000 jobs Plan 2: This plan has a 1/3 probability of saving all three plants and all 6,000 jobs, but has a 2/3 probability of saving no p p y g plants and no jobs. Which plan would you select? Plan C: This plan will result in the loss of two of the three plants and 4,000 jobs Plan D: This plan has a 2/3 probability of resulting in the loss of all three plants and all 6,000 jobs, but has a 1/3 probability of losing j p y g no plants and no jobs. Which plan would you select? Framing Effects: An Empirical Demonstration 80% People avoid risk when an outcome is framed positively (72%) ( ) 70 60 50 40 30 (28%) People seek risk when an outcome is framed negatively (78%) Percentag Preferrin Outcom ge ng me (22%) Positive frame ("lives saved") Certain Outcome Negative frame ("lives lost") Probable outcome 8 Prospect Theory: Attitudes Toward Gains and Losses Utility Losses Gains Gains= Risk Averse Losses=Risk Losses Risk Seeking Problem 6a Imagine that you are about to purchase a calculator for $50. The calculator salesperson $50 informs you that the calculator you wish to buy is on sale at the store's other branch located a 20 minute drive away. What is the highest i h h hi h price that the calculator could cost l l ld at the other store such that you would be willing to travel there for the discount? Problem 6b Imagine that you are about to purchase a color television set for $500. The television salesperson informs y that this television p you is on sale at the store's other branch located at 20 minute drive away What is the highest 20-minute away. price that you would be willing to travel there for the discount? Framing: Biasing Factors Choice of Reference Point Transaction vs. Acquisition Utility $20 Auction Call out bids in multiples of $1 until no further bidding occurs Highest bidder will pay the amount of the bid and win $20 Second highest bidder must also pay the th amount th t h / h bid and does t that he/she dd not win anything Escalation Continuing to commit additional resources to a seemingly failing endeavor based on gy g the hope that there will be a positive change or to justify previously made decisions Escalation: Biasing Factors Perceptual biases (confirmation) Look for disconfirming evidence Judgmental biases (loss from initial investment) ) Seek other reference points Impression Management Reward for process not just outcome Competition Examine why continuing actions Remedies for Escalation Set limits on your involvement and commitment in advance Avoid looking to others Actively determine why you are continuing Remind yourself of ultimate costs involved Problem 9 Listed below are 6 uncertain quantities. For each, write down your best estimate of the quantity. Next, put a lower and upper bound around your estimate such that you are 98% confident that your range surrounds the actual quantity. 1. 2. 3. 4. 5. 6. 6 General Motors' 1991 profit General Electric's assets in 1991 Total number of people serving in the U.S. Armed Forces in WWI p p g Total advertising expenditures by Procter & Gamble in 1989 Rice exported (in metric tons) by Thailand in 1989 Number of deaths due to pneumonia and influenza in the U.S. in 1990 US Problem 9 Listed below are 6 uncertain quantities. For each, write down your best estimate of the quantity. Next, put a lower and upper bound around your estimate such that you are 98% confident that your range surrounds the actual quantity. 1. General Motors' 1991 profit (-$4,452,800,000) 2. General Electric's assets in 1991 ($168,259,000,000) 3. Total number of people serving in the U.S. Armed Forces in WWI (4,743,826) 4. Total advertising expenditures by Procter & Gamble in 1989 ($1,779,300,000) 5. 5 Rice e ported (in metric tons) by Thailand in 1989 (3 927 000) exported b (3,927,000) 6. Number of deaths due to pneumonia and influenza in the U.S. in 1990 (78,640) Overconfidence The tendency to believe in your ability to be correct or accurate more often than is really true Problem 8 It is claimed that when a particular analyst predicts a rise in the market, the market always rises. You are to check this claim. Examine the information available about the l i E i th i f ti il bl b t th following four events (cards): Card C d1 Prediction: Favorable Report Card C d2 Prediction: Unfavorable Report Card C d3 Outcome: Rise in the Market Card C d4 Outcome: Fall in the Market You currently see the predictions (cards 1 and 2) or outcomes (cards 3 and 4) associated with four events. You are seeing one side of a card. ) g On the other side of cards 1 and 2 is the actual outcome, while on the other side of cards 3 and 4 is the prediction that the analyst made. Evidence about each claim is potentially available by turning over the card(s). Which cards would you turn over for the evidence that you need to check the analyst's claim? Confirmation Bias The tendency to look for information that confirms rather than disconfirms our hypotheses yp Improving Managerial\ Managerial\ Decision Making Identify areas where your judgments may be biased bi d Examine the causes of the bias Psychological Distance Change organizational reward structure Effects of Group Processes Process Gains Synergy Potential Group Effectiveness Process Losses Potential Group Effectiveness Social Loafing g Advantages and Disadvantages of Group Decision Making Pooling of Resources/info / f Different Perspectives Waste time Conformity Pressure Specialization of labor Decision Acceptance Advantages Group conflict or domination Ambiguous Responsibility Disadvantages Should groups be used to make decisions? Groups Decision Making: Complex vs. Si l Problems Simple bl Complex Problems Simple Problems P bl Group members are heterogeneous. Members have complementary skills. Ideas may be freely communicated. municated Good ideas are accepted. Does anyone in the g p y group have the correct answer? Yes Will the group members accept the correct answer? p No Group performs worse than the best individual Group performs as well as the best individual Groups are superior to even the best individuals Summary: Group Decision Making Decision-making D i i ki Large groups facilitate the pooling of information about complex tasks Smaller groups are better suited to coordinating and facilitating the implementation of complex tasks Simple, routine standardized tasks reduce the need that group processes be effective in g pp order for the group to perform well Five Steps for a Rational Problem Solving Process bl S l i Define and analyze the situation Set objectives Develop alternative courses of action Identify obstacles and adverse consequences Reach consensus decisions ...
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