Faculty
Professor Kent L. Womack
Objectives
Course Theme:The goal of this course is to encourage us to think critically about how we interpret data and make decisions and then to learn how to avoid and correct common decision errors that occur because of faulty, ingrained mental models. Managers are continually barraged with information that may be reliable or not. They must regularly choose courses of action in the face of many uncertainties, often much more rapidly than they would like. Do they make optimal decisions and how should we assess what is “optimal”? This course will contrast how managers do make decisions with how they should make decisions, by thinking about how “rational” decision makers should act, by conducting in-class experiments and examining empirical evidence of how they do act (often erroneously) in managerial situations. An example of a classic topic is overconfidence. There is overwhelming evidence that decision makers assign too high a probability to many if not most of their judgments of “will I succeed at X?”. This is a systematic decision making bias that can obviously have serious consequences. MDM is a “big picture” course that is cross-functional in both its theoretical ideas and its applications. A significant amount of the research to be discussed comes from the social psychology and behavioral economics literatures. This course is appropriate for all managers who will deal with uncertainty and with influencing other people’s decisions: marketers, consultants, bankers, salespeople, and yes, even general managers.
MDM Course Web Site: The MDM website will be the central repository for assignments and readings for the course. Any revisions to the syllabus will be noted there, and important changes will be sent to enrolled students with an email.
Requirements
Prerequisites: There are no prerequisites for this course other than an inquisitive mind. The course is a blend of qualitative and quantitative ideas, and you will be reminded often of applicable Decision Sciences and Statistics principles and skills you should have learned. We will do some modest computations, but nothing beyond basic statistics and algebra are needed.
Materials
Required Textbooks for purchase (RT):
Cialdini, Influence: Science & Practice,
Lewis, MoneyBall: The Art of Winning an Unfair Game
Krakauer,Into Thin Air(bestseller, available anywhere)
Gawande, Complications, A Surgeon's Notes on an Imperfect Science
CP, Course Packet (includes numbered papers and cases)
Grading
Assigning Course Grades
The reading and writing assignments and exam (if chosen) in this class have been designed to maximize how much you learn in the course, not the precision with which I measure how much you have learned. You will rarely be asked a question in class or in writing assignments or exams for which there is a specific right answer; so, all the grading is necessarily subjective. Creativity, insight, and even humor will be highly valued.
The format for the course will be a combination of lecture/discussion and case studies and perhaps one or two guest speakers.
Grades will be determined as follows:
- Decision Making Ideas Diary (1-2 page entries weekly, 5 weeks)
30%
- A Final paper OR Final Exam (your choice) 35%
- (A 10-12 page final paper is somewhat more encouraged than the final exam.)
- Preparation for class discussion:(readings) & web-based surveys 15%
- Wild Card Course Content Submission (see details below)
5%
- Essay on Moneyball or Complications 15%
Weekly Preparation and Attendance: Day-to-day preparation for class and attendance at class discussions and cases is essential and will show up not only in assigning grades but also inevitably in your understanding of the subject and quality of your written work. If you do not like to read (about 90 minutes for each session) and think about what you read, this course is not for you.
In addition to class participation, you must participate in web-based surveys that take 10 minutes every other week. If you know you will miss a class, my expectation is that you will give me advance notice with explanation, in other than emergency situations.
Decision Making Ideas Diary: Create a cumulative MDM journal/diary in Microsoft Word (saved with the name XXXXX MDM.doc, where XXXXX are the five numbers in your Student ID), writing once a week, choosing applications and takeaways from the course. Each week, you may choose from "structured" questions that you may answer or you may choose to examine a "topic" related to the course from your past personal or professional life. I hope you will choose ideas that are particularly relevant to your future work and life. Each weekly entry should be between 1-2 pages, single spaced, and will be handed in after five weekly entries. If you desire feedback on your diary attempts, you may hand it in for a pre-grade after 2-3 weeks.
Proofread your diary for spelling and grammar mistakes, and employ good Man Comm skills. Single space, do not double space your entries. Use 12 point font, Times New Roman. Mistakes in writing form almost always prevent the grader from focusing on the substance of your thought.
Wild Card Paper: To keep you thinking about and looking for example of the course content all quarter long, you are asked to turn in a “wild card.” The definition of a wild card is a picture, advertisement, cartoon, video or audio clip, or current reading (e.g. from The New Yorker or an interesting web site) that classically and pragmatically embodies one of the topics or issues in MDM. From class examples in the first few weeks, you will see what I mean. You should turn in both a “clean” copy of the example (digital preferred) in the course drop box, and you should write up a one-pager explaining why this example is a classic (and hopefully a springboard for discussion in class). Please keep in mind that these examples are primarily for class use and hence should be clever and memorable (and perhaps even funny!) but not offensive. The wild card paper can be turned in any time during the term up to the last class session. If you choose to submit a video clip, it should be delivered in .wmv (Windows Media File) format.
Final Paper (if chosen): A substantial research paper (about 10 to 12 pages) may be submitted which will substitute for the entire final exam. For example, one option is to write a case history of a decision-making disaster, e.g. the Columbia disaster or the Navy submarine incident a couple of years ago. Investigate a decision by some organization and write-up a case history of the decision, including the decision making process, and the outcome. Or, you may investigate a sub-topic of the course in greater detail if your investigation includes the reading of a significant book and synthesis, e.g. how to make interviews more valuable. This paper (or the final exam, if chosen) will count for 30% of the grade. An outline of the topic and its justification as a topic of decision making significance should be sent to the professor by the end of the 5th week (earlier is better). He will OK all topics and give you gentle guidance if he feels the topic is not fruitful. It is OK to work in groups of two, but more will be expected of teams than of single authors. It is encouraged that, if appropriate, you deliver with your paper any media possibilities for making the paper topic into a class example (e.g. digital picture, short video, 2-3 PowerPoint slides).
Final Exam (if chosen): Expect 4 to 5 essay questions and other decision problems and true/false or multiple choices questions that cover the main topics of the course. The exam will be challenging. to give you incentives to do creative work, my weighting of Final Papers will be slightly larger than for Final Exams. That is, it will be slightly easier to get an Honors grade in the course if you have written an excellent final paper than written a good final exam.
Essay on a book reading: What are the important questions and counterintuitive answers that Moneyball (or, alternatively, Complications) suggests for business managers? Write a 3-page essay (single spaced) on how decision making progress in sports or medicine applies to you as a soon to be manager.
Schedule
Session 1
Tuesday, March 24
Day 1: MDM Course Intro: Heuristics and Mental Models
Topics:
Administrative Issues
Course Goals and Themes
Descriptive, Normative, and Prescriptive Modes of analysis
Mental "Limitations", Decision Biases, and Heuristics
Mental Models
Intuition and Gut Feel
Before-class Readings:
***Hogarth, "Educating Intuition", Chapter 1, CP 1-1
***Hayashi, "When to Trust Your Gut", Harvard Business Review, Feb. 2001, CP 1-2
****Munger, "A Lesson in Wordly Wisdom",Outstanding Investor CP 1-3
Before-Class Preparation and Discussion Questions:
When is using intuition or "gut feel" an appropriate decision technique? How does Herbert Simon, in the Hayashi article, define intuition? What can we do to maximize the effectiveness of our intuitions? Is Hogarth's idea in CP 1-1 similar or different?
Charlie Munger (CP1-3) has been Warren Buffett's right-hand man for many years. What are the most important general (not "stock picking") insights in the first few pages of his talk? How should they shape the planning of your daily and weekly activities in your next career? What is your favorite pearl of wisdom (if any) in this reading? What does he mean by "mental models"?
Post-Class DMD Optional Discussion Questions:
Examine explicitly several heuristics you use on a regular basis. Do you understand the tradeoffs that you face when employing those heuristics.
Pick one manageable sub-set of your MBA education, draw a mental model picture lattice of it.
AFTER-class Survey: Web-based Decision Questions (do for use in Session 2)
Important, do immediately after first session!
Click here for MDM Survey #1
Session 2
Wednesday, March 25
Day 2: Rationality and Probability in Decision Making
Topics:
"Rational" Decision Making-the Paradigm: its strengths and weaknesses
Basic Ideas of Probability
Expected Utility Theory
Unbounded versus Bounded Rationality
Satisficing, Mental Shortcuts, and Heuristics
Do the first web-based survey the night before this Session #2
Click here for MDM Survey #1
Before-class Readings:
****"Belkin, The Odds of That", New York Times, August 11, 2002.CP 2-1.
Post-Class DMD Optional Discussion Questions
Do you try to hard to make sense of otensible and "amazing" coincidences? How might you reframe such issues in the future?
Examine your own personal decision making style as a maximizer or a satisficer. In what ways have you found (or not) a balance between the two styles.
Session 3
Monday, March 30
Day 3: Conditional Probability and Bayesian Updating
Topics:
Using new information
Information versus noise
Getting information: Is it Random or is it a Trend?
Priors, Information Acquisition, and Posteriors
Bayes Rule and Bayesian model of updating
Applications of Bayesian Updating: The Black Litterman Model in finance
Before Class readings: Go to http://statisticalengineering.com/bayesian.htm
Post-class Survey: Streak Guestimating (do for use in Session 5): The survey is an Excel workbook in the course folder, where you fill out some guesses and submit back to me.
Post-Class DMD Optional Discussion Questions:
Two Bayesian Updating "issues" are having priors that are too strong and placing too much credence in the "likelihood" or new information that arrives. Which of these errors are you more susceptible to?
Session 4
Tuesday, March 31
Day 4: Decision Making Tools (1): Decision Trees and Real Options
Topics:
The Value of Information: Real Option Theory
The Qualitative Theory of Real Options
Decision Trees: Strengths and Weaknesses
Before-class Readings:
*TreePlan software guide, Word Doc.
***Wu, The Value of Information, CP 4-1
***Wu and Liebler, Canonical Decision Problems, CP 4-2
**Wu, HBS Case 9-894-004, Decision Analysis, CP 4-3
Class Preparation and Discussion Questions:
Prepare, at a minimum, decision trees calculation answers to questions 1-4 of CP 4-2
Post-Class DMD Optional Discussion Question:
Decision Trees are powerful tools for decision-making, but a "man's gotta know" their limitations. What are those limitations? i.e. Decision Trees' strengths and weaknesses. Are there any factors that are not effectively considered when this approach is adopted for decision-making? You have been chosen the Decision Making czar within your organization. You have decided to insist that all major decisions are accompanied by Decision Tree analyses. Is this a good edict? Why or why not? When or when not?
Stay tuned for the next survey. It will be in Week 3.
Session 5
Monday, April 6
Day 5: Heuristics (1) Representativeness
Topics:
Base Rates and Regression to the Mean
The Fallacy of Intervention
Overuse of Casual Data
The Hot Hand and Causal Misattribution
Local Representativeness
Simpson's Paradox
The Conjunction Fallacy
Recommended book for future reading: Gilovich, How We Know What Isn't So
Session 6
Tuesday, April 7
Day 6: Heuristics (2) - Availability and Anchoring
Topics:
Sample and Storage Biases
Vividness
Attentional Blindness
Recommended book for future reading: Schacter, The Seven Sins of Memory
Session 7
Monday, April 13
Day 7: Heuristics (3)
Please bring your Streak survey results to class if you printed them out.
No Reading required.
Session 8
Tuesday, April 14
Day 8: Social Heuristics: Influence and Persuasion
Topics:
Reciprocation
The Concession Principle
Commitment and Consistency: Cognitive Dissonance
Social Proof
Liking
Authority
Scarcity
Before-class Readings:
***Caldini, Influence: Science and Practice, ReqTxt
Discussion Question: to prepare for class:
Describe and analyze a situtation that you experienced in your past organization or private life, in which you influenced others (a boss, client, or subordinate) using one or a few of the "compliance techniques" discussed by Robert Cialdini in his book "Influence"; or in which you fell prey to these techniques and were influenced by others. Was there any ethical and reputational dilemma involved.
Session 9
Monday, April 20
Day 9: Guest speaker Dave Russ
REVISED
Session 10
Tuesday, April 21
REVISED Day 10: Overconfidence and Hindsight Bias
Topics:
The Causes and Costs of Overconfidence
Self-fulfilling Prophecies
Controlling Overconfidence
Good Decisions vs. Good Outcomes
Hindsight Bias
Before-class Readings:
***Griffin and Tversky, "The Weighing of Evidence and the Determinants of Confidence," Cognitive Psychology, 1992. CP 9-1
***Russo and Schoemaker, "Managing Overconfidence," Sloan Management Review, 1992, CP 9-2
AFTER-class Survey: Survey on Risky Gambles (do for use before Session 11)
Post-class DMD Optional Discussion Question:
Consider the following fact: 80% of small businesses fail within their first three years of operations. A friend is unaware of this fact, and wishes to quit his job as an investment banker and open a restaurant in Hanover. As a good friend, you want to be sure that overconfidence is not playing a significant role in his or her decision. You decide a letter is the best way to communicate the dangers of overconfidence. Compose a persuasive letter to your friend, for the purpose of helping him or her navigate the pitfalls of overconfidence. Before writing this letter you might consider the followiong questions: Why might your friend be overconfident about the success of this venture? What are the most important sources of overconfidence? Which of these sources do you believe will be most resistant to your persuasion?
Session 11
Monday, April 27
Day 11: Consumer Behavior (1): Mental Accounting
Topics:
How do consumers make choices?
Mental Accounting
Multi-attribute choice
REVISED, Diary assignment due 4/28/09 (tomorrow)
Before-class Readings:
****Thaler, "Mental Accounting and Consumer Choice," Marketing Science, 1985. CP 11-1
Session 12
Tuesday, March 28
Day 12: Consumer Behavior (2): Reason-based Choice
Topics:
Regrets
Minimizing Regret
Fairness
Turn in Assignment: Decison Making Ideas Diary Due: Weeks 1-5
Make sure to place assignment into the Course Folder in the "P" drive only, do not send direct email to Prof. Womack.
Before-class Readings:
*****Shafir, Simonson and Tversky, "Reason-based Choice," Cognition, Jan. 1993. CP 12-1
****Tierney, John, "The Advantages of Closing a Few Doors", New York Times, February 26, 2008. CP 12-2
Session 13
Monday, May 4
Day 13: Prospect Theory and Managerial Risk Taking
Topics:
Prospect Theory
Managerial Risk Taking
Timid Choices vs Bold Forecasts
The Inside vs. the Outside View
Discussion Question for class:
How can a firm or organization maximize the extent to which its managers take the "outside view" (see Kahneman and Lovallo, pp. 24-25) in their decisions? Pick a particular type of organizational decision and be specific in your prescription.
Before-class Readings:
****Kahneman and Lovallo, "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, Jan. 1993, CP 14-1 (Make sure you get to the very important concept on pages 24-30.)
Session 14
Tuesday, May 5
Day 14: Case: Toro's No Risk Program
Case Questions:
What psychological issues does Sno'Risk exploit?
Was this advertising campaign successful? What are the confounding issues?
What similar products/programs could the concept be applied to?
Before-class Readings:
*****Bell, "The Toro Company's No Risk Program," Harvard Case CP 13-1
Session 15
Monday, May 11
Day 15: Complictions Day. Guest Speaker, Dr. Andrew Torkelson, DHMC
Topics:
Fooling Ourselves in our Health Decision Making
Complications Writing Assignment Due:
(Students must write about either Complications or Moneyball, see Session 16 below)What are the important questions and counterintuitive answers that Complications suggests for business managers?
Before-class Readings:
****Gawande,Complications, A Surgeon's Notes on an Imperfect Science
Session 16
Tuesday, May 12
Day 16: Moneyball Day. Decision Making Tools (3): Linear Models, Pros, Cons and Fixes
Topics:
Linear Models
Pros, Cons and Fixes
Applications
Moneyball Writing Assignment Due:
What are the important questions and counterintuitive answers that Moneyball suggests for business managers? (Students must write about either Complications or Moneyball
Before-class Readings:
*****Lewis, "MoneyBall: The Art of Winning an Unfair Game"
***Lewis, "The No-Stats All-Star", The New York Times, February 15, 2009. CP16-1
Session 17
Monday, May 18
Day 17: Into Thin Air: Group Decision Making
Topics
Groupthink
Optimal Group Decision Making
Cognitive "Repairs"
Centralized vs Decentralized Decision Making in Groups in adverse conditions
Before-class Readings:
***Jon Krakauer, "Into Thin Air"
**William M. Carley, "Swissair 111 Crash Spurs Debate on Following Cockpit Procedure," Wall Street Journal, December 16, 1998. CP 17-1
**Scott McCartney, "Pilots Go To 'The Box' to Avoid Midair Collision," Wall Street Journal, July 18, 2002. CP 17-2
Session 18
Tuesday, May 19
Day 18: A Philosophy of Decision Making and Course Wrap-up
Topics:
Breaking Bad Habits in Decision Making
Course Wrap-up and The top 10 List
TMVH (The Most Valuable Habits)
Last day to hand in wild card assignment
Before-class Readings:
****Heath, Larrick and Klayman, "Cognitive Repairs: How Organizational Practices can Compensate for Individual Shortcomings", Research in Organizational Behavior, 1998. CP 18-1
Friday
May 22, 2009
Final Exam
Exam
Please note the final exam will be held on May 22, 2009 from 9am to NOON. Please remember your laptop as exams are open book, open notes and preferably should be typed.
During the exam the Internet and Email (except to contact Prof. Womack) are not to be use.
Exam locations are Ankeny, Barclay, and Stoneman.
