Improving your decision making

Business and Economic Review, Apr-Jun 1998 by Main, Daphne, Lambert, Joyce C

How you "frame" a matter, i.e., emphasize certain factors while ignoring others, affects managerial judgments and decisions.

The primary duty of managers is decision making. These decisions can be straightforward or complex, mundane or long-range.

But rarely do managers receive explicit education in making decisions, beyond some statistical training. Because managers provide value to their organizations through their judgment and ability to make effective decisions, improving decision-making skills is crucial.

Regardless of the complexity of the problem, people typically use shortcuts (or rules of thumb). Research indicates that professionals, including business executives, auditors, and physicians, are unaware of the pitfalls that can occur when using decision shortcuts. It should be noted that while these shortcuts often produce a reasonable approximation of the optimal decision, an unthinking application can result in a less than satisfactory conclusion.

Framing

A common shortcut affecting managerial decisions is framing. To demonstrate how the various forms of framing can affect your judgments and decisions, answer the set of questions in the exhibit following.

Exhibit

Make the following decisions before reading further! Note your first response to each decision, as well as your final choice.

1. Day Planner: You've purchased a day planner for $50, and you haven't used it yet. Now you realize you've lost it, and there is no way to get your money back. Would you spend another $50 to buy another day planner?

What if, instead, you've decided to buy a day planner that costs $50. As you approach the store, you realize you've lost $50 in cash, although you have sufficient money to buy the planner. Would you still buy the planner?

2. Plant Closing: A manufacturer is considering closing 3 plants and laying off 6,000 employees due to economic difficulties. There are 2 alternative suggestions to avoid the crisis. Which would you select?

A. This plan will save 1 of the 3 plants and 2,000 jobs.

B. This plan has a 1/3 probability of saving all 3 plants and all 6,000 jobs, but has a 2/3 probability of saving no plants and no jobs.

If, instead, the options were described as below, which would you select?

A. This plan will result in the loss of 2 of the 3 plants and 4,000 jobs.

B. This plan has a 2/3 probability of resulting in the loss of all 3 plants and all 6,000 jobs, but a 1/3 probability of losing no plants and no jobs.

3. Stock: You received 100 shares of stock in the XYZ Company several years ago as a gift, when the value of the stock was $45 a share. Since then, the stock price has dropped to $30 a share. The company is about to launch a new product that may turn out to be a big "hit." On the other hand, it could be a flop. If the product takes off, the stock price is forecasted to go back up to $45 a share. If it flops, the stock price is expected to drop to $15. Do you want to sell your shares now for the current market price of $30?

4. Casino Bet: You're at the casino. You've lost $90 and are considering a $10 bet on a 10:1 long shot just before you go home. Would you take the bet?

5. Printer Cartridge: Imagine you are about to buy a printer ink cartridge for $70. The salesperson says the cartridge is on sale at the other branch for $35 off, but it's a 20minute drive. Would you go to the other store?

Now imagine you're buying a 17" computer monitor for $700. The salesperson says the monitor is on sale at their other branch for $35 off, but it's a 20-minute drive. Would you go to the other store?

Framing relates to how we perceive or structure a decision. A decision frame emphasizes certain factors or consequences in a decision, while hiding other factors, much like the placement of a window frame in a wall focuses our attention on one of many possible views. Often we are not aware of the perspective we have taken on a decision, either because of habit or because our perspective may seem complete (it's hard to put yourself in someone else's shoes, even when reminded to do so!).

There are three aspects of decisions that can create a frame: (1) the boundaries selected, (2) the reference point or perspective, and (3) the measurement of success or failure.

Boundaries

Boundaries may be derived from assumptions we have made by our training or cultural background. We have a hard time identifying the boundaries because we do not question our (often automatic) assumptions.

The automotive industry provides an illustration of the pitfalls of using an inappropriate boundary. For decades, U.S. automakers based their efforts to increase efficiency for production runs on an assumed 6-8 hour change over time for production lines. This assumption had been made to simplify the quantitative models developed in the early 1950's to optimize production by minimizing changeovers. But the result was a costly investment in large inventory stocks.

On the other hand, Japanese automakers realized they could increase overall efficiency by reducing the changeover time between models (to as little as 44 seconds in one plant), so they did not need to manufacture cars that would sit in inventory. The U.S. automakers drew their boundaries around the efficiency question too tightly by failing to periodically re-examine their implicit assumptions.