Insightful Decisions: Introduction

Ronald S. Lau, Ph.D.

HKUST – ISOM

Why do we need to make decisions?

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“He who has a choice has trouble.”

Danish proverb

We all face the same problems…

Business decisions Strategic, tactical, operational

Other dimensions to define a decision problem Simple vs complex

Small vs large scale

Individual vs group

Principal vs agent

…

What are those hard decisions? Serious consequences

Not reversible

Urgent

… 3

Why is it difficult to make good decisions?

Common reasons: Undefined objective and unclear priority

Fear of failure or bad choice

Being biased or judgmental

What really causes the problem?

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Example of bad decisions

5

So what caused the salt shortage?

What do we know? Some salt contains iodine

Potassium iodide can help block radioactive iodine from being absorbed by the thyroid gland

But…

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How about this?

A myth of Yakult? "Yakult's billions of friendly bacteria

help keep your gut healthy and a healthy gut helps make for better digestion and stronger natural defense."

Followed by many health claims… Lose weight

Cold medicine

Protect infection

…

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Are we going too far?

Even more claims… Enlarge breast size

Whitten skin

Prevent cancer

…

Whose responsibility to stop this kind of claims?

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Basic ingredients in making a decision

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Decision

Basics for effective decision making and problem solving

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Critical Thinking

Analytical Thinking

Statistical Thinking

Decision Making

Problem Solving

Reasonable reflective thinking focused on deciding what to believe or do

Active systematic process of understanding and evaluating arguments

Break down complex problem to identify causes and effects pattern and analyze problems to arrive at appropriate solutions

Works best where there are established criteria for analysis

Focus on analyzing variations, identifying any explanation, and making generalization or prediction

Dialogue with data from experiments or observations

How common do we make flaw decisions? Example

Given: The forecast demand of a product is between 50,000 and

150,000, with an average of 100,000 units, for next year

Each unit of product sold will generate a profit of $100

Questions: How would you decide on the production capacity?

What is your expected profit based on your production capacity?

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Problem with “Just give me a number”

Forecast demand for next year Between 50,000 and 150,000 units

Just give me a number: 100,000 units

Expected profit: 100,000 units x $100 per unit = $10,000,000

What’s the problem? You can only generate $10M profit if the demand ≥ 100,000

When demand > 100,000, profit remains at $10M

When demand < 100,000, profit will be = demand x $100

Therefore, the expected profit = ???

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Answer for the “Just give me a number” problem

For demand between 50,000 and 100,000 units, expected profit =

For demand between 100,000 and 150,000 units, expected profit =

Therefore, for this range of demand, the expected profit is:

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Total

Profit

Demand 50,000 150,000 100,000

$5M

$10M

Lesson learned

Plans based on average assumptions are wrong on average

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How to capitalize on the mistakes that other people make?

Learn about the mistake

Recognize the problems in context

Mitigate the potential mistakes

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Aware of those decision flaws

Make decisions with insights

Effective decision

Effective decision is about making smart choices Most important decisions are not trivial

The ability to make smart choices is a fundamental life skill dealing with opportunities, challenges, and uncertainties of life

Everyone can learn?

What to decide vs. How to decide No one can teach you what to decide, but you can learn how to

decide

The odd of making a better decision can be raised by learning how to use a good decision making process

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Eight elements of effective decision making

The core of a decision making process (Key attribute: Proactive)

Elements help clarify decisions in volatile or evolving environments

Source: Smart Choices (2002) by Hammond, Keeney, and Raiffa 17

ProblemObjectivesAlternativesConsequencesTradeoffs

UncertaintyRisk toleranceLinked decisions

Decision making is a thought process in choosing the most logical choice among those available…

Example: Let’s make a deal

Let’s make a deal (a popular TV game show)

The contestant's decision To switch doors or to stay with the original choice?

What are the chances of winning in either case?

Play the game: http://math.ucsd.edu/~crypto/Monty/monty.html

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Explanation of the “Monty Hall” problem

19 http://www.youtube.com/watch?v=mhlc7peGlGg

Switching the door as the winning strategy

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Grand prize is in door #

You choose door #

Host opens door #

You switch to door #

Result

1 1 2 or 3

1 2 3

1 3 2

2 1 3

2 2 1 or 3

2 3 1

3 1 2

3 2 1

3 3 1 or 2

Prob(Lose) =

Prob(Win) =

2 or 3

1 or 3

1 or 2

1

1

3

2

2

3

Lose

Win

Win

Lose

Lose

Win

Win

Win

Win