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The Buriden's Ass ‘method’ of decision making

The Buriden’s Ass ‘method’ of decision making is used when two or more equally attractive alternatives exist and it is difficult to make a choice. It is of course based on the old fable of Buriden’s Ass, who starved to death because he was tethered halfway between two equally large and succulent piles of hay – he couldn’t make up his mind which one to walk over to and eat. The approach is really simple; if the outcome of a choice between two options in terms of benefit is equally attractive focus on the drawbacks or downside risk of choosing an option. Pick the option based on minimising the downside – I am not sure how this would have helped Buriden’s ass but let’s put that to one side.

Example

Your kindly old boss wants to increase your salary but in the credit crunch times he offers you these choices:

1. Take an increase in salary,
2. Go part time and work fewer days per week at the current annual salary,
3. Take a long paid sabbatical each year of six weeks and continue at the same annual salary.

In terms of economic value, each of the three choices comes out exactly the same.

Now drawbacks of:

1. Is that I still have to commute each day to the office in rain or snow whilst
2. Means I will have to cope on my current salary for another year and my wife might nag and
3. Although attractive means I will be out of circulation for a long time and may lose track of my grip on the business and my job.

I’d go for 2) as although I get no rise this year there is a good chance I could get one in the future and spend the money on the extra days off I would have in the bank.

Try one yourself:

You are offered a choice of new assignments
1) an ex patriot assignment in Holland for 2 years
2) a promotion to manager of the small department you currently work within and
3) a transfer to the head office in London doing the same job as now but with a higher salary.

All are economically equivalent which would you choose?

People prefer cash back or a free gift to wild discounts

What would you choose a rebate or a discount – five ways why a rebate works

In prospect theory, which a descriptive theory of how people choose under risk, how options are framed affects the choice a person will take. When alternatives are presented people prefer options posed as gains rather than as reduced losses. An example to illustrate what I mean is the case of a discount verses a rebate in a car purchase. A rebate cheque is valued much more by a consumer than a discount on the price even when the financial parameters are identical in value. So a rebate cheque of $2000 is valued more in the eyes of a consumer than a discount of $2000 on the retail price. So in these credit crunch times the rebate in Germany for scrapping your old car is right on target as far as generating extra demand is concerned – however whether this is just pulling forward sales we shall see.

The reason for this is in the way we consumers look at the options before us. When a discount is offered on a good that discount is integrated into the original purchase price – it is possible that this is something we all have learnt to do over time. Bombarded as we are by sales of sofas and other incidental goods that seem to be on constant 50% discount we no longer ‘see’ the original price and ascribe the discounted cost of the good as the reference price. Rebates on the other hand are disaggregated in our minds and processed separately from the purchase price. We interpret the rebate as a gain whilst the discount is seen as a reduced loss and when given a choice which has on the surface the same monetary value we chose the rebate.

This principle seems to apply also to gift items, free goods and other promotions, other things being equal we prefer to have the free items compared to an identical discount due to this process. One caveat here is that the premium must be valued – it is no use offering two for the price of one if the extra package of hot cross buns goes stale or the free item is just not interesting enough to excite interest like a tin of cat food when you do not have a cat! But a well thought through extra in a promotion can be seen as a nice gain for the consumer and can orient a choice in your direction. A lottery ticket is a example with the promise of huge gains that is seen by the consumer as highly attractive compared to the $1 discount price of the ticket. Think about how this also works by removing the choice of buying a lottery by the consumer and all those nasty rationalisations of having no chance of winning!

Another aspect of the way we make choices is the certainty effect – we prefer an option when the outcome is certain or known compared to the situation when there are probabilities at play. For example we prefer to accept an offer of $100 with 100% probability rather than an offer of $112 at a probability of 90% although the expected values are the same. This can be extended in some cases where the certain choice is materially much worse than the uncertain option.

Five aspects why promotions win over discounts

  • It is materially easy for the customer to visualise the gain and little mental processing is needed.
  • They value free promotions as they are seen as a gain rather than a reduced loss.
  • They integrate discounts into the price – the discounted price becomes the reference.
  • The separate the evaluation of promotions from prices.
  • They prefer the certainty of the gain (bird in hand syndrome).

So all in all offering a promotion in the form of a certain win for the customer works much more effectively than ever increasing (or continuous) discounts which are only serving to re-set the price points at ever lower levels.

What makes a good decision maker – the three ingredients

What makes a good decision maker – the three ingredients

A 2004-2005 Teradata Report on Enterprise Decision-Making showed that over 70% of the respondents in their survey said that poor decision-making is a serious problem for their business. Other research in the UK conducted by the research agency YouGov for the Investors in People organization highlighted the negative impact that poor decision-making was having on employees. Other research in the area of organizational performance is consistent, with some suggesting that well over half of all decisions fail in some way. Specifically that the outcomes of the decision making process was poor – the ‘wrong’ decision had been taken or simply never implemented. It seems obvious that if decisions can fail for up to half of the time then organizations need to pay very close attention to the quality of their decisions and the people carrying out this role, but to-date, there is not much evidence that they are.

Decision-making is an age old problem that is being compounded today by increasing knowledge, population, complexity, speed and change. The number of decisions being made is increasing as is the pace of change and the number of people in an organization involved in the thousands of day-to-day decisions, from a new product launch to a decision on a new hire that have to be made. Decision-making is an essential requirement of management especially at the senior level and is perhaps the true core competence of leaders … ‘our society has largely neglected the fact that sound judgment and decision making are the crux of many professions’ (Smith et al 2004). The very best leaders appear able to make crucial decisions effortlessly ‘standing on their feet’ drawing on unseen resources of domain knowledge and experience that set them apart from the crowd. How effective managers and staff are in general at making good decisions is a moot point and understanding the process of high performance decision making is becoming critical to organizational success.

Problem-solving and decision-making are closely linked as each requires creativity in identifying, developing then evaluating options from which a course of action needs to be chosen. A problem always denotes that there are options to be chosen from – if there is a known solution then this is a puzzle not a problem. A decision is basically a problem solving process under uncertainty, so the steps or stages of decision making are more or less the same as those for problem solving. There are many n-step problem solving routines to guide decision making but at the heart of the decision making problem are the following three main aspects: how the problem is seen, how alternatives are generated, and how the decision is actioned.

The three key aspects of high level decision making:

  • Proactive cognition is a feature of people who actively seek to change the environment and not passively react to it. People strong in this feature scan for opportunities in the world preferring to make choices rather than follow procedures and create novel options by seeing problems differently rather than considering just the obvious.
  • Deciding is about making the decision, weighing and chewing over the options and above all considering the risk of alternatives. People who are high in this ability often draw on extensive domain knowledge and experience enabling them to make mental short cuts and come to a decision apparently quickly hiding the deep processes really going on.
  • Finally Action Control – making and enacting the choice. The effective planning and scheduling of actions to deliver the decision are examples of behavior of people who are able to ensure that decisions are not postponed, procrastination is avoided and decisions are implemented without delay.

A good decision is the direct result of clear criteria, the scope of the choice to be made together with the risk of each alternative – then taking action. From this perspective a good decision is the outcome of a process of optimally achieving a given objective from a certain starting point. A good decision is a logical one (or at least defensible and traceable) based on the available knowledge to hand that answers a particular organizational problem. Measuring whether or not decision making is good or bad needs to assess both the process and the outcome, the effectiveness and the quality of the decision making, as these are two quite distinct things. Effectiveness is how well the process of decision making is managed and how learning takes place – what caused a poor outcome to occur is fed back into the process. Output quality is to some extent comes well after the decision has been taken and is a reflection whether the right choice was made as well as on how well the choice was placed into action and implemented. There are many examples, particularly in the political world, where there is an assumption that the decision is the same as the implementation. A good decision making process therefore integrates the choice with the implementation and looks at the outcome to ensure learning takes place.

It is this latter point that completes the circle – it is a balanced decision making process that seems to be about right. Consciously attending to all three areas of the decision making process is key. The seeking of ways to control and act on the world, weighing up options carefully thinking about the choice then ensuring implementation takes place are the three key facets of effective decision making and features of high performers. When this balanced process is in place in more organizations perhaps then can the abysmal performance we currently have in this core area be improved.

Royston

Just sleep on it and make better decisions

Just sleep on it and the solution will come

I suppose many have read about recent research led by a leading expert on the benefits of napping at the University of California that suggests that Rapid Eye Movement (REM) sleep enhances creative problem-solving. At last now when I get caught sleeping on the job I have the perfect excuse. The study by Sara Mednick and Denise Cai graduate student in the UC San Diego Department of Psychology showed that REM directly enhances creative processing more than any other sleep or wake state.

“We found that — for creative problems that you’ve already been working on — the passage of time is enough to find solutions,” said Mednick. “However, for new problems, only REM sleep enhances creativity.”

The reason why taking a nap or leaving a problem for a while works has been researched for many years – and there is indeed evidence that leaving a problem then returning to it later does lead to the solution or more creative ideas emerging. As far as the REM sleep part is concerned it is likely to be a correlational finding and not related to the cause and effect of what they observed.

I like this idea but I think a clearer reason for this effect from information processing theory perspective is the way the brain divides up a problem during solution generation. In the initial representation of the problem the issues are encoded in working memory and a solution strategy worked out usually drawing on longer term constructs in memory from the last time the problem was faced (say). This initial solution strategy in working memory is what we typically use to first tackle the problem – and using this strategy more detail is fleshed out and the problem becomes clearer and more closely defined. This more detailed nature of the problem becomes stored in Long Term Memory.

If we leave a problem for a while, sleep on it say, the initial working memory solution gets forgotten – working memory being more volatile – whilst the more detailed knowledge of the problem gets retained in Long Term Memory. When we return to the problem we remember all the enhanced details of the problem but have to re-construct and make up a new approach to solving ‘it’. As we have more detailed understanding of the problem to be solved a better approach emerges – almost magically. So it is likely that those who take a break from a problem and return to it later are able to solve ‘it’ more effectively due to a process of selective ‘forgetting’ of the initial attempt at a solution.

Thus this is where a strategy of self-regulating your approach to tackling a problem can win dividends. What you have to do is rather than going on with a problem until the bitter end is say to yourself – ‘hold on I am going to do something else for a while and do this tomorrow’. What this implies that in some circumstances to procrastinate and delay is actually the best strategy to solve a difficult problem and going on when you are banging your head against a wall is a fruitless exercise.

Royston

Royston

See More at my Blog on BizBlogs …

Bees show the way to making good decisions

I read with interest an article in the Sunday paper this week on the assertion that Bees ‘Decision Making Strategy’ (sic) could help the business world to come to more informed decisions.

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Apparently swarms send out ‘scouts’ to assess the quality of a potential site for a hive. The insects then report back to the old hive and do a ‘dance’ to describe the benefits of the site. The study concluded that the swarm then comes to a group decision on the best site by revisiting sites recommended by others until a consensus emerges and all the bees are performing the same ‘dance’. Actually of course there is no need for any kind of rationalisation process – bees returning from many potential sites will do a dance (‘large wiggle’ for lots of food, ‘direction of dance’ to show where it is and ‘length of path of dance’ to show distance from here) and bees communicate by ‘imprinting’ the movement of the dance in the hive until they get it then off they fly to have a look. Those sites that indeed have a good supply will result in more returning bees doing a repeat performance of the original dance whilst bees that return dissatisfied give a less that enthusiastic display. As a result of this reinforcement process bees will over time appear more frequently at the good sites which may look like a rational process has occurred but is in fact a conditioning process.

The study published in the Philosophical Transactions of the Royal Society measured the success of different decision-making processes and showed that if the bees relied on the ‘cosmic accident’ as they put it of all the bees eventually stumbling on the same site, it would leave the swarm homeless and vulnerable. On the other hand if the bees blindly followed the recommendations of other bees without checking the sites out for themselves there is no guarantee that it will be the best decision either.

The study concluded that sending out scouting groups resulted in the best decision. From this natural system they then made the leap of faith to suggest if Humans adopted this process then better investment decisions (for example) in the stock market could be made, groupthink avoided and investors will avoid getting stung! There is some truth in this as investment decisions are often made on the basis that if one stockbroker buys stock in a particular company then it must be good – thus a stampede is generated and everyone buys in and a bubble is created that eventually bursts. The lesson being that if decisions are made by considering options, whether there is real worth in a company (dividends etc.) before a decision made then this is a better decision making strategy.

In decision making strategies in the real world this is what is recommended, proactively acting on the world (scouting), deciding effectively by weighing and thinking about options then moving to action is a known and sound strategy. The problem is it takes thinking power to effect such an approach and there are few who actually do this in practice. In the normal run of events, when the economy is growing or things in a company are going well, then we can get away with sloppy decision making. What recent events have shown is that many so-called experts did not engage themselves in a deep way with their decision making, had little idea of what they are deciding and did not engage in down side risk analysis. Unfortunately all things that take significant cognitive resource and effort of will to do well – and in today’s quick and dirt world there is little reward for doing it right especially when sloppy thinking and management practice gets bailed out by the taxpayer as we are now witnessing across the world.

Royston