Decision Making
Executive Education
Prof. Paul Pfleiderer
Graduate School of Business
Your culminating assignment in this course is the Capstone Decision Making Problem, which will help
guide your decision making for a problem that you or your organization is facing. Complete Part 1 of this
document for the assignment due at the end of Module 4, and complete Part 2 of this document for the
assignment due at the end of Module 8.
Capstone Decision Problem, Part 1
Complete Part 1 of this document for the assignment due at the end of Module 4.
Step 1: Describe Your Decision Problem
In the space below, provide a brief, but sufficiently descriptive, overview of the decision problem that will give the
background necessary for an outsider to understand the situation and to understand what makes the decision
challenging. Discuss how the problem arose (if that is important) and other important aspects of the context. In
Steps 2 and 3, you will list the objectives and alternatives that have been identified, so do not include those in this
description. Avoid using special terms in your description that would not be widely understood, or (if this cannot be
avoided) define the terms so that an outsider will be able to understand.
We are working in the Saudi Energy Efficiency Center to improve energy efficiency in key sectors,
including buildings, industry and transportation, and I am currently working as a director of the
industrial department in the center.
In this department, we focused our efforts on the sectors that consume the most energy, which are
petrochemicals, cement, iron and aluminum, and we have set appropriate frameworks, targets and
requirements that companies must achieve.
In this context, we started thinking about expanding the scope covered by us and trying to include other
medium and small industrial sectors. We faced a problem in the appropriate mechanism of dealing with
the medium and small industrial sectors, as they do not have sufficient capabilities and competencies
such as large companies, and their infrastructure is weak on the one hand. Track data and know the
places of consumption and others.
In addition, the level of awareness of the importance of energy efficiency is low in these sectors and
they are not aware of the importance of having policies to govern energy consumption in these sectors.
On the other hand, it may not be fair to leave these companies or sectors without targets on them similar to the main sectors mentioned previously – and so we thought about the appropriate mechanism
that can be put in place to improve the energy efficiency of these facilities.
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Step 2: Identify the Objectives
In the space below, (1) list the objective(s) that you or your organization have, (2) list the additional objectives of
others involved in the decision, and (3) if there are multiple objectives, discuss what you perceive to be the order of
importance and how they should be prioritized.
Improving energy efficiency is one of the most important goals we have in managing the industry, and
raising the level of awareness among individuals and small and medium enterprises is one of our most
important strategic goals.
Moreover, we are working to be fair and equitable in the mechanism of setting targets and for everyone
to be covered by targets that help them improve their energy efficiency.
Finally, we believe that the objectives and requirements must be logical and applicable, and do not
require additional burdens that may contribute to the exit of companies from the market.
Step 3: Identify the Alternatives
In the space below, list the alternatives, or decision choices, you or others have identified as potential solutions to
the decision problem.
We initially thought of following the basic methodology that we followed with the main sectors, which is
to set targets based on international standards, but unfortunately we faced several difficulties, the most
prominent of which was the lack of reliable sources of global standards for the medium and small
sectors.
Also, we have faced the problem of the diversity of production processes in it, which makes the
comparison unfair.
In addition, the medium and small sectors do not have the systems that help them to know the sources
of energy and places of waste and identify opportunities for improvement and other capabilities that
exist with major companies and do not exist with them.
Step 4: Clarify the Objectives
Careful framing of the objectives is a very important part of good decision making. It is often useful to ask if there
are higher objectives than the ones that have been laid out. For example, recall Leland Enterprises’ decision
problem where it seemed that the objective was to replace a supplier that could not deliver in a timely way, but
there was actually a higher-order objective which was to keep customers happy. Can you identify objectives that
are higher order than the ones you have listed in step 2? Are there additional goals that are implicit that should be
made explicit?
In the space below, list any new objectives you have identified or changes in the way objectives are stated after
attempting to clarify your objectives. (You may revise this list as you complete other steps and Part 2 of this
assignment.)
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The ultimate goal of the center is to systematically improve energy efficiency. Hence, it can be said that
the improvement includes both reducing energy consumption in addition to increasing productivity, and
finally raising and improving awareness levels among individuals and establishments.
Building a sustainable energy efficiency system, regardless of the means or tools used, contributes to
preserving natural resources, limits the negative effects of climate change, and helps preserve the
environment in a sustainable manner.
Step 5: Cast a Wider Net for the Alternatives
Good decision making requires that we diligently avoid “narrow framing,” which results when we don’t make a
concerted effort to identify alternatives outside of the few that come readily to mind. Better decisions are generally
made when more than a few (e.g., two) alternatives are identified. In this step, you should attempt to identify
additional alternatives that might exist beyond the ones you listed in Step 3. Recall some ways to do this:
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Ask what you would do if none of the alternatives that you laid out were feasible.
Identify constraints (either ones that are explicitly given or are being implicitly assumed) and ask what you
might do if one or more of those constraints were relaxed or not imposed.
If you have multiple objectives, ask — for each of those objectives — what you would do if you were only
trying to meet that one objective.
Attempt to identify any decision problems that have been solved in the past that are similar to yours in
meaningful ways. Do the choices that were made to solve those problems suggest any new alternatives
that might be useful to consider for your decision problem?
It is not expected that all of these approaches will be useful in identifying additional alternatives, but make a
valiant effort to “think outside of the box” and see if there are choices that you may have missed. In the space
below, list any additional alternatives you identified after casting a wider net. (You may revise this list as you
complete other steps and Part 2 of this assignment.)
Considering the appropriate tools to improve energy efficiency, the application of energy management
system can be proposed as one of the solutions that can be implemented on the medium and small
facilities ISO 50001.
ISO 50001 is an international standard that allows organizations of all sizes to systematically improve
energy practices in their operations and promote more efficient energy management, a management
system that can be applied to all types of organizations from small to large in every sector, and can be
implemented either alone or integrated with systems other management.
On the other hand, awareness campaigns and workshops are one of the possible solutions to raise and
improve the energy efficiency of medium and small enterprises, but the challenge lies in the difficulty of
measuring the impact of these campaigns and the lack of clarity in the extent to which establishments
desire to join awareness campaigns and workshops.
Also, one of the solutions may be to provide rewards and incentives for facilities that initiate initiatives
that contribute to improving their energy efficiency, which will encourage other companies to follow the
same path.
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Capstone Decision Problem, Part 2
Complete Part 2 of this document for the assignment due at the end of module 8.
Step 1: Evaluate the Alternatives (with a Pre-Mortem and Pre-Celebration)
Consider your complete list of alternatives from Steps 3 and 5. Choose the one that you believe may be the best
alternative given what you know at this point and perform a pre-mortem on this alternative. In other words,
assume that this alternative was the ultimate choice made but that it failed dismally. Taking its failure as given, ask
what is likely to have caused it to fail. (Optional Extension: Choose an alternative that you view as less promising
and perform a pre-celebration. Assume that it was the ultimate choice and that it succeeded in a very satisfying
way. Taking its success as given, ask what is likely to have caused the good outcome.)
In the space below, (1) provide a brief description of the failure scenario(s) that you uncovered in your pre-mortem
(and the success scenarios from your pre-celebration) and (2) discuss what you learned from the pre-mortem (and
pre-celebration), including any risks that you need to address, any information you need to consider acquiring
before making the decision, and any other change(s) that might be good to make in your approach.
After looking at the available options, we realized that the most promising idea was to invoke targets as
per the international standards. At the same time, we realized that awareness campaigns and
workshops did not promise much success because it does not compel reluctant firms to follow a
regulation. However, after conducting a pre-mortem, we realized that sourcing relevant platforms with
the formulated international standards was a challenge. Therefore, it would be better if the relevant
international standards were defined and formulated before invoking the regulation. At the same time,
a pre-celebration uncovered that addressing the problem with an information point of view would help
in persuading firms to use energy efficiently. Therefore, investing heavily on campaigns and awareness
workshops would play a key role in addressing the issue.
Step 2: Create a Decision Tree
For some decision problems, it is fairly straightforward to see how a decision tree can be helpful. For example, in
many business problems, objectives are measured in profits or other outcomes that are clearly quantifiable, which
makes a decision tree approach easier. Decisions and the sequence in which they must be made may also be fairly
apparent. While the probabilities of various outcomes are rarely known with precision in any decision problem, in
many business contexts, there is some knowledge about how likely various events would be, e.g., the likelihood is
closer to 60% than it is to 30% or 90%. However, for many decision problems, it is less clear how the problem can be
readily addressed using a decision tree, and yours may be one of those. Even in cases where it is not obvious how a
decision tree can be used, it can often be worth the effort to see if some insights can be gained by using a decision
tree approach. The very process of laying out, even in crude form, the sequence of decisions one must make and the
range of outcomes possible can alert one to issues that are important or risks and opportunities that might have
been missed and need to be taken into consideration.
Make an effort to see if you can capture your decision problem — or parts of your problem — in a decision tree.
Think about the decision choices you face at the beginning and choices you may need to make later. Think about
places where chance will play a critical role. If outcomes are not measurable in money, you can still attempt to
place a numerical value on outcomes that reflects their desirability. The analysis you undertake may not give you a
clear-cut answer, but it has the potential to lead to some insights that may be helpful.
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In the space below, (1) insert your decision tree and (2) discuss any insights you gained by creating the tree (at least
1-2 sentences).
From the decision tree, more information based on the two choices (set targets based on the
international standards and embracing awareness and campaign workshops) have been elaborated
further. Setting targets based on international standards is objective and compels companies to
incorporate such standards but there is limited information regarding the standards. Embracing
awareness and campaigns workshops, on the other hand, seeks to equip institutions with the relevant
information. However, rogue institutions will never implement measures.
Step 3: Determine the Value of Information
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Information can be valuable in some situations; but, in other situations, getting the information may not be worth
any cost or effort because it will not change your decision. It is important to determine when information is needed
and when its value could exceed the cost and effort spent in acquiring it. Consider the information that you would
like to have for your decision problem; and, in the space below, describe that information and how it would affect
your decision. If the information is feasible to get but would not change the decision, discuss that as well. (This is
most easily done in the context of a decision tree analysis, but the question can still be posed without a full decision
tree analysis.)
In most instances making informed decisions require massive import in seeking information. However,
some information is irrelevant (based on the situation at hand). In this scenario, there are two key
variables. In the first place, we would like to understand the international standards. We noted that the
information is scarce. In an instance it was to be deployed, those standards must be known. The second
variable is the culture and values of the institutions. In some areas, the institution will only care about
their profit margins and disregard any measure that is necessary to reduce energy wastage. In an
instance where the institution is rogue, setting targets as per the international standards will be favored
against creating awareness and campaigns workshops.
Step 4: Consider Risk Versus Value Creation
Risk can create opportunities, and this means that risk should not always be avoided. (Recall Project Hawk and
Project Eagle.) In the space below, (1) discuss the risks involved in your decision problem and (2) so that you do not
fall into the trap of dismissing some alternatives as too risky without fully considering their potential upsides,
discuss ways to mitigate risks that might turn these alternatives into promising opportunities.
In most cases, any of the available options possess risks. For instance, there are many areas that have
not been considered by the international community, thus having scarce information. For the reason
mentioned above, there exists various gaps that could be utilized by rogue institutions to misuse energy.
However, this could be an opportunity. Some international standards are too low because most of them
are not sensitive to demography. Therefore, the availability of gaps should be an opportunity for the
policy makers to sneak standards that are relevant in a specific place.
One of the best solutions to using energy efficiently is equipping the institutions with the relevant
information. If an institution realizes that using energy efficiently is advantageous, they will implement
and support any effort to ensure the proper utilization of energy. However, if the measures interfere
with the company’s profit margins, there is a higher probability of failure. However, introducing
incentives would encourage more companies to embrace using energy efficiently.
Step 5: Plan for Strategic Interactions
In decision problems that involve strategic interactions with other people, the decisions you make might affect
what others do, which would, in turn, affect outcomes you would face. Determining what to do in a strategic
setting is not easy because it involves predicting how others will behave and how they might react to your choices.
If your decision problem involves any strategic interactions, carefully think through how others are likely to interact
with you. In particular, determine if any strategies you might have are dominated by other strategies and
determine if this might be true for others. Eliminating dominated strategies can give you a better sense of what a
good decision might be when there are strategic interactions. Given how unpredictable people can be in some
situations, you will not always be able to proceed with complete confidence, but ignoring strategic interactions or
making wild guesses about what others might do is not good decision making practice.
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In the space below, (1) describe how the outcomes of your decision problem will be affected by what other people
do and (2) discuss what you forecast the others will do and how you are predicting that. If your decision problem
does not involve strategic interactions, this step will not be relevant for you.
In this case, we are working with companies to ensure that energy has been used efficiently. Therefore,
strategic interactions must be incorporated, meaning that they will have an impact on the decision that
will be reached. For instance, each company has a culture and any decision must never go against the
company’s culture. Otherwise, the decision will be opposed and the chances of success will be minimal.
In some other instances, the measures would not be implemented at all, and a decision must compel
rogue institutions.
The institutions are composed of human beings (who are naturally opposed to a change). Therefore, one
would expect opposition in the initial stages. However, in instances where awareness and campaigns
were involved, there is a possibility of facing minimal competition compared to setting targets.
However, as time passes by, people will adopt and uphold the change.
Step 6: Address Tradeoffs
Many complex decision problems involve a number of factors that need to be taken into consideration. For
example, in the context of choosing among several job offers, the factors to consider might include job satisfaction
and career advancement as well as total compensation. If your decision problem involves choosing among
alternatives when several factors are important, use the approach we discussed — eliminate dominated
alternatives when possible and eliminate factors (e.g. job satisfaction) by assigning penalties (in dollar amounts) to
those alternatives that fail to deliver what the best alternative delivers.
In the space below, lay out the alternatives and factors to consider for your problem as we discussed in the course
and begin to address the tradeoffs using the principled approach. If your problem does not have multiple factors to
consider, this step will not be relevant for you.
There exist various tradeoffs that must be looked into. In a nutshell, costs, company’s culture and
reputation, and the overall outcome will be the most essential tradeoffs. In the first place, everybody
has a similar goal (ensuring that energy is used efficiently). Therefore, other tradeoffs will be considered
to decide. The costs as a result of any of the decisions must be taken into consideration. In most cases,
the option with the lowest costs makes sense and will most probably be considered. However, the value
of the decision must be considered while determining costs. We also looked at the company’s
reputation. Normally, there are disparities in a decision if the company has a good or bad reputation.
Step 7: Structure Effective Group Decision Making
If you are making your decision in a group context, consider how you can play a role in making sure that the group
works together well and information does not remain hidden. In the space below, discuss (1) how the group can
help identify alternatives that you may not have identified and (2) what specific steps you might take to ensure that
the process leads to the best decision. (If your problem will not be addressed in a group setting, imagine that you
are able to form a group to help you.)
While working as a group, there exists massive benefits. For instance, members in that group could play
a key role in giving their views on the options that are available. However, several steps need to be
taken to ensure that the group has arrived at the best answer. In the first place, it is worth ensuring that
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the group members are properly equipped with the relevant information through facilitating the sources
of the information. Secondly, it is important to create a good relationship to facilitate a healthy
discussion. Lastly, it is important to take note of everybody’s view while deciding.
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Thanks for submitting the second part of your Capstone Decision Problem. Unfortunately, your
submission does not quite demonstrate the level of effort, reflection, depth we would expect
from a final submission and most importantly, does not demonstrate understanding of
concepts learned in class and how we would apply them. You are on the edge – you have many
basics covered, but the level of effort (even the length of your responses) and the depth of your
reflection leave a doubt in me as to whether you are ready to pass this course.
Please see comments below to help guide you through your submission. Please take a look at
other participant submissions for guidance. In the submissions I am evaluating, I would suggest
taking a look at the following two:
https://docs.google.com/document/d/1i5nWDZoG821U8HsW9jrYGsc5uLqHwS6A44TDRAigWE/edit
https://docs.google.com/document/d/1nx_iuAAdpgNiDBJuGPNSS1iR48yN_NtPthr61UYMU
YE/edit
Evaluating Alternatives
For big decisions, we want to find ways to get as much insight into what the possible outcomes
are. If we were to single out one thing that makes decision making hard, it would be
uncertainty. Decision making would be so much easier if we knew with certainty the outcome
that would occur for each possible course of action. There will always be unknowns and luck,
but it is critical to deal with biases (irrational optimism, groupthink, etc.) and narrow-framing
when making important decisions. For example, pre-mortems are especially effective at dealing
with the illusion of consensus and optimism bias.
Pre-mortems and pre-celebrations help challenge key assumptions, generate multiple
hypotheses, discover unknown unknowns, track alternative future trajectories, and anticipate
the unanticipated. It allows participants to role-play in an objective way.
Well done on the pre-mortem and the insights you’ve gained. Follow-up questions:
In this context, follow-up questions to your submission:
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Did you enroll other experts in your pre-mortem analysis to ensure a diversity of
perspective? Again, here is where you want cognitive diversity in the process if possible.
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Do you have a checklist of possible biases and methods to overcome any applicable
ones (status quo bias, sunk cost bias, etc)?
Have you considered positive or negative “second- and third-order consequences”
properly (for example, increasing employee happiness has the potential to increase
health and productivity from our first “The Hidden Costs of Stressed Out Workers”
assignment)?
Decision Tree
Decision trees are excellent tools because they illustrate your thought process, enable you to
investigate possible outcomes, and create a balanced picture of the risks and rewards
associated with each option. It is a graphical representation of the path taken and the path not
taken. Using the decision tree, you can consider various courses of action with greater ease and
clarity. The interactions between present decision alternatives, uncertain events, and future
choices and their results become more visible. Whether it ends in a definite conclusion or
whether it leads to new issues for which the process needs repetition, it is an invaluable tool to
clearly track your decision-making process.
Your decision tree was hard to see in the picture, but from what I could see, I strongly
recommend you revisit it to capture the structure of your important and complex decision. You
need significantly more granularity in terms of branches, assigning values, estimating
probabilities. A proper decision tree, which hopefully goes through many iterations, is critical to
any decision making process. Once you have a more thoughtful decision tree, ask yourself:
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How are you tracking the confidence levels for probabilities and values? Are there
variables you don’t know right now? How will you track them?
Are you working with the most important success factors for your decision?
What could be positive or negative “second- and third-order consequences”?
Value of Information
Your submission here was once again high-level and cursory.
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Have you defined how you will gather all the needed information?
How will these new insights inform your decision and at which level?
If you could wave a “magic wand”, what information would simplify your decision? Write
down the most important information you are missing. We risk ignoring what we don’t
know, because we are distracted by what we do know. If it’s important enough, can you
find creative ways for better estimates?
Have you revisited a pre-mortem/pre-celebration to discover new possibilities,
“unknown unknowns”, challenge key assumptions, and accurately estimate the
probability and value of each possible outcome of a decision?
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As Lathrop’s Inventory Decision showed, more information doesn’t automatically ensure better
decisions. Often, the additional cost in time, money or focus to gather the information can
make the difference between winning and losing. Some decisions are hard to make. Knowledge
can make them easier, but it’s important to not get stuck in “paralysis by analysis”. E.g. we overvalue information that is easily obtainable, attributing unique insights value when in fact you
could find it in a quick internet search.
Risk Versus Value Creation
I think you offered some solid reflection here around risk factors. To push your thinking further:
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Are you focusing more on the probabilities of success or on expected values? Have you
done a sensitivity analysis? What situation would be a “home run”, or ‘perfect solution’?
What is the range of likely future outcomes?
What is the prevailing consensus? How does your expectation differ from the
consensus? As we learned in LEAD’s Strategic Leadership course, many times successful
non-consensus ideas return many times higher multiples to successful consensus ideas?
As we should remember, risk aversion bias can cause leaders to avoid decisions that are most
likely to maximize results. Probabilities are one thing, payouts are another. When decisions
involve uncertainties, the desired consequence may not be the one that actually results. Being
conscious of your willingness to accept risk makes your decision-making process smoother and
more effective. It will help you to choose an alternative with the right level of risk for you.
Remembering that we are adaptive and remaining agile for the fluidity of life, can help with
challenging decisions. Often, it’s not about getting it perfect from the start, but learning and
refining with the new insights. Often ‘done’ is really better than ‘perfect’, as Shery Sandberg put
it. Especially considering most decisions are reversible (to a degree).
Strategic Interactions
When making decisions in these types of situations, we need to predict the decisions that other
people will make, and we need to consider how our decisions might influence their decisions. In
practice, this generally turns out to be challenging because the strategic interactions between
us and others can be quite complicated. For example, emotions and considerations of fairness
can influence the outcomes.
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Have you properly defined all the stakeholders? You mentioned institutions, and human
beings, can you be more specific and ensure you are not missing any?
Have you listed the most relevant choices available to each stakeholder?
Have you eliminated all the dominant strategies?
Addressing Tradeoffs
To profit from the exercise, you should revisit this part. Create a matrix with all relevant
decision-making factors. Rank and quantify them and see which options might be dominated to
eliminate them and gain more clarity. Once you have this matrix, ask yourself:
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Have you assigned monetary penalties to any variables?
Have you considered working out that penalty/monetary value together with other
stakeholders?
Have you considered each variable individually and then ranked them?
Have you eliminated any dominated alternatives?
Is there anything that you need to “signal” to the other stakeholders or competitors to
ensure any decision is more likely to be successful?
In any analysis, you should carefully quantify costs and benefits, your risk tolerance, and levels
of uncertainty associated with different potential outcomes. These assumptions are subjective,
but the process of quantification is extremely valuable, as it forces you to express your
assumptions and beliefs. It makes them transparent and subject to challenge, discussion and
improvement. The value may be specified in dollars, points, or whichever scoring system makes
sense. Your task is to choose intelligently among the less-than-perfect possibilities. To do so,
you need to set priorities by openly addressing the need for tradeoffs among competing
objectives.
Group Decision Making
You have offered a few steps to approach group decision making, but they seem generic and
not as well thought through as they should be. The objective here is to come up with a well
thought through, systematic approach geared towards avoiding biases and discovering buried
information. Take a step back, look at other participant submissions, and lay out a specific
approach to group decision making. Then ask yourself:
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Is your process seen as “fair” so you will maintain buy-in by the group members
responsible for implementing the decision? What do all the stakeholders need to see
from you process to view it is fair?
What aspects/behaviors would be most valuable for the group and decision process to
be rewarded for?
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Have you ensured there is no hidden information by having group members record not
only their preferred decision but also detailed logic before any discussion?
As the Hiring Decision example showed, there are potential advantages and potential
downsides in group decision making. For effective decision-making, it’s important to have a
plan to direct and facilitate the group process so it’s carried out well. This usually requires you
to take leadership within the group, even if only to help organize and direct meetings. You
should always promote effective decision making by choosing group members, framing the
decision, and organizing the decision process. Making the “right decision” means nothing, if you
lack the needed buy-in from important stakeholders to implement the decision!
If you continue to practice these decision-making frameworks and make them habits, you will
be able to:
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Navigate today’s uncertainties with confidence
Avoid the most common traps that undermine decision making
Judge the quality of your decisions more accurately, as you’re making them
Execute on your decisions with greater buy-in and success
Improve your overall thinking by tracking your initial assumptions (decision journals, etc)
and then going back later to see where you were right or wrong, and what you can
improve for next time – To life-long learning!
Remember, “the quality of our lives = the sum of decision quality (bets) + luck.” Focus on making
1% better daily decisions with these tools. The consistent compounding of better decisions will
lead to an overwhelmingly positive change in your career and life.
Your culminating assignment in this course is the Capstone Decision Making Problem, which will help
guide your decision making for a problem that you or your organization is facing. Complete Part 1 of this
document for the assignment due at the end of Module 4, and complete Part 2 of this document for the
assignment due at the end of Module 8.
Capstone Decision Problem, Part 1
Complete Part 1 of this document for the assignment due at the end of Module 4.
Step 1: Describe Your Decision Problem
In the space below, provide a brief, but sufficiently descriptive, overview of the decision problem that will give the
background necessary for an outsider to understand the situation and to understand what makes the decision
challenging. Discuss how the problem arose (if that is important) and other important aspects of the context. In
Steps 2 and 3, you will list the objectives and alternatives that have been identified, so do not include those in this
description. Avoid using special terms in your description that would not be widely understood, or (if this cannot be
avoided) define the terms so that an outsider will be able to understand.
We are working in the Saudi Energy Efficiency Center to improve energy efficiency in key sectors,
including buildings, industry and transportation, and I am currently working as a director of the
industrial department in the center.
In this department, we focused our efforts on the sectors that consume the most energy, which are
petrochemicals, cement, iron and aluminum, and we have set appropriate frameworks, targets and
requirements that companies must achieve.
In this context, we started thinking about expanding the scope covered by us and trying to include other
medium and small industrial sectors. We faced a problem in the appropriate mechanism of dealing with
the medium and small industrial sectors, as they do not have sufficient capabilities and competencies
such as large companies, and their infrastructure is weak on the one hand. Track data and know the
places of consumption and others.
In addition, the level of awareness of the importance of energy efficiency is low in these sectors and
they are not aware of the importance of having policies to govern energy consumption in these sectors.
On the other hand, it may not be fair to leave these companies or sectors without targets on them similar to the main sectors mentioned previously – and so we thought about the appropriate mechanism
that can be put in place to improve the energy efficiency of these facilities.
Step 2: Identify the Objectives
In the space below, (1) list the objective(s) that you or your organization have, (2) list the additional objectives of
others involved in the decision, and (3) if there are multiple objectives, discuss what you perceive to be the order of
importance and how they should be prioritized.
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Improving energy efficiency is one of the most important goals we have in managing the industry, and
raising the level of awareness among individuals and small and medium enterprises is one of our most
important strategic goals.
Moreover, we are working to be fair and equitable in the mechanism of setting targets and for everyone
to be covered by targets that help them improve their energy efficiency.
Finally, we believe that the objectives and requirements must be logical and applicable, and do not
require additional burdens that may contribute to the exit of companies from the market.
Step 3: Identify the Alternatives
In the space below, list the alternatives, or decision choices, you or others have identified as potential solutions to
the decision problem.
We initially thought of following the basic methodology that we followed with the main sectors, which is
to set targets based on international standards, but unfortunately we faced several difficulties, the most
prominent of which was the lack of reliable sources of global standards for the medium and small
sectors.
Also, we have faced the problem of the diversity of production processes in it, which makes the
comparison unfair.
In addition, the medium and small sectors do not have the systems that help them to know the sources
of energy and places of waste and identify opportunities for improvement and other capabilities that
exist with major companies and do not exist with them.
Step 4: Clarify the Objectives
Careful framing of the objectives is a very important part of good decision making. It is often useful to ask if there
are higher objectives than the ones that have been laid out. For example, recall Leland Enterprises’ decision
problem where it seemed that the objective was to replace a supplier that could not deliver in a timely way, but
there was actually a higher-order objective which was to keep customers happy. Can you identify objectives that
are higher order than the ones you have listed in step 2? Are there additional goals that are implicit that should be
made explicit?
In the space below, list any new objectives you have identified or changes in the way objectives are stated after
attempting to clarify your objectives. (You may revise this list as you complete other steps and Part 2 of this
assignment.)
The ultimate goal of the center is to systematically improve energy efficiency. Hence, it can be said that
the improvement includes both reducing energy consumption in addition to increasing productivity, and
finally raising and improving awareness levels among individuals and establishments.
2
Building a sustainable energy efficiency system, regardless of the means or tools used, contributes to
preserving natural resources, limits the negative effects of climate change, and helps preserve the
environment in a sustainable manner.
Step 5: Cast a Wider Net for the Alternatives
Good decision making requires that we diligently avoid “narrow framing,” which results when we don’t make a
concerted effort to identify alternatives outside of the few that come readily to mind. Better decisions are generally
made when more than a few (e.g., two) alternatives are identified. In this step, you should attempt to identify
additional alternatives that might exist beyond the ones you listed in Step 3. Recall some ways to do this:
●
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Ask what you would do if none of the alternatives that you laid out were feasible.
Identify constraints (either ones that are explicitly given or are being implicitly assumed) and ask what you
might do if one or more of those constraints were relaxed or not imposed.
If you have multiple objectives, ask — for each of those objectives — what you would do if you were only
trying to meet that one objective.
Attempt to identify any decision problems that have been solved in the past that are similar to yours in
meaningful ways. Do the choices that were made to solve those problems suggest any new alternatives
that might be useful to consider for your decision problem?
It is not expected that all of these approaches will be useful in identifying additional alternatives, but make a
valiant effort to “think outside of the box” and see if there are choices that you may have missed. In the space
below, list any additional alternatives you identified after casting a wider net. (You may revise this list as you
complete other steps and Part 2 of this assignment.)
Considering the appropriate tools to improve energy efficiency, the application of energy management
system can be proposed as one of the solutions that can be implemented on the medium and small
facilities ISO 50001.
ISO 50001 is an international standard that allows organizations of all sizes to systematically improve
energy practices in their operations and promote more efficient energy management, a management
system that can be applied to all types of organizations from small to large in every sector, and can be
implemented either alone or integrated with systems other management.
On the other hand, awareness campaigns and workshops are one of the possible solutions to raise and
improve the energy efficiency of medium and small enterprises, but the challenge lies in the difficulty of
measuring the impact of these campaigns and the lack of clarity in the extent to which establishments
desire to join awareness campaigns and workshops.
Also, one of the solutions may be to provide rewards and incentives for facilities that initiate initiatives
that contribute to improving their energy efficiency, which will encourage other companies to follow the
same path.
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4
Capstone Decision Problem, Part 2
Complete Part 2 of this document for the assignment due at the end of module 8.
Step 1: Evaluate the Alternatives (with a Pre-Mortem and Pre-Celebration)
Consider your complete list of alternatives from Steps 3 and 5. Choose the one that you believe may be the best
alternative given what you know at this point and perform a pre-mortem on this alternative. In other words,
assume that this alternative was the ultimate choice made but that it failed dismally. Taking its failure as given, ask
what is likely to have caused it to fail. (Optional Extension: Choose an alternative that you view as less promising
and perform a pre-celebration. Assume that it was the ultimate choice and that it succeeded in a very satisfying
way. Taking its success as given, ask what is likely to have caused the good outcome.)
In the space below, (1) provide a brief description of the failure scenario(s) that you uncovered in your pre-mortem
(and the success scenarios from your pre-celebration) and (2) discuss what you learned from the pre-mortem (and
pre-celebration), including any risks that you need to address, any information you need to consider acquiring
before making the decision, and any other change(s) that might be good to make in your approach.
After looking at the available options, we realized that the most promising idea was to invoke targets as
per the international standards. At the same time, we realized that awareness campaigns and
workshops did not promise much success because it does not compel reluctant firms to follow a
regulation. However, after conducting a pre-mortem, we realized that sourcing relevant platforms with
the formulated international standards was a challenge. Therefore, it would be better if the relevant
international standards were defined and formulated before invoking the regulation. At the same time,
a pre-celebration uncovered that addressing the problem with an information point of view would help
in persuading firms to use energy efficiently. Therefore, investing heavily on campaigns and awareness
workshops would play a key role in addressing the issue.
Step 2: Create a Decision Tree
For some decision problems, it is fairly straightforward to see how a decision tree can be helpful. For example, in
many business problems, objectives are measured in profits or other outcomes that are clearly quantifiable, which
makes a decision tree approach easier. Decisions and the sequence in which they must be made may also be fairly
apparent. While the probabilities of various outcomes are rarely known with precision in any decision problem, in
many business contexts, there is some knowledge about how likely various events would be, e.g., the likelihood is
closer to 60% than it is to 30% or 90%. However, for many decision problems, it is less clear how the problem can be
readily addressed using a decision tree, and yours may be one of those. Even in cases where it is not obvious how a
decision tree can be used, it can often be worth the effort to see if some insights can be gained by using a decision
tree approach. The very process of laying out, even in crude form, the sequence of decisions one must make and the
range of outcomes possible can alert one to issues that are important or risks and opportunities that might have
been missed and need to be taken into consideration.
Make an effort to see if you can capture your decision problem — or parts of your problem — in a decision tree.
Think about the decision choices you face at the beginning and choices you may need to make later. Think about
places where chance will play a critical role. If outcomes are not measurable in money, you can still attempt to
place a numerical value on outcomes that reflects their desirability. The analysis you undertake may not give you a
clear-cut answer, but it has the potential to lead to some insights that may be helpful.
5
In the space below, (1) insert your decision tree and (2) discuss any insights you gained by creating the tree (at least
1-2 sentences).
From the decision tree, more information based on the two choices (set targets based on the
international standards and embracing awareness and campaign workshops) have been elaborated
further. Setting targets based on international standards is objective and compels companies to
incorporate such standards but there is limited information regarding the standards. Embracing
awareness and campaigns workshops, on the other hand, seeks to equip institutions with the relevant
information. However, rogue institutions will never implement measures.
Step 3: Determine the Value of Information
6
Information can be valuable in some situations; but, in other situations, getting the information may not be worth
any cost or effort because it will not change your decision. It is important to determine when information is needed
and when its value could exceed the cost and effort spent in acquiring it. Consider the information that you would
like to have for your decision problem; and, in the space below, describe that information and how it would affect
your decision. If the information is feasible to get but would not change the decision, discuss that as well. (This is
most easily done in the context of a decision tree analysis, but the question can still be posed without a full decision
tree analysis.)
In most instances making informed decisions require massive import in seeking information. However,
some information is irrelevant (based on the situation at hand). In this scenario, there are two key
variables. In the first place, we would like to understand the international standards. We noted that the
information is scarce. In an instance it was to be deployed, those standards must be known. The second
variable is the culture and values of the institutions. In some areas, the institution will only care about
their profit margins and disregard any measure that is necessary to reduce energy wastage. In an
instance where the institution is rogue, setting targets as per the international standards will be favored
against creating awareness and campaigns workshops.
Step 4: Consider Risk Versus Value Creation
Risk can create opportunities, and this means that risk should not always be avoided. (Recall Project Hawk and
Project Eagle.) In the space below, (1) discuss the risks involved in your decision problem and (2) so that you do not
fall into the trap of dismissing some alternatives as too risky without fully considering their potential upsides,
discuss ways to mitigate risks that might turn these alternatives into promising opportunities.
In most cases, any of the available options possess risks. For instance, there are many areas that have
not been considered by the international community, thus having scarce information. For the reason
mentioned above, there exists various gaps that could be utilized by rogue institutions to misuse energy.
However, this could be an opportunity. Some international standards are too low because most of them
are not sensitive to demography. Therefore, the availability of gaps should be an opportunity for the
policy makers to sneak standards that are relevant in a specific place.
One of the best solutions to using energy efficiently is equipping the institutions with the relevant
information. If an institution realizes that using energy efficiently is advantageous, they will implement
and support any effort to ensure the proper utilization of energy. However, if the measures interfere
with the company’s profit margins, there is a higher probability of failure. However, introducing
incentives would encourage more companies to embrace using energy efficiently.
Step 5: Plan for Strategic Interactions
In decision problems that involve strategic interactions with other people, the decisions you make might affect
what others do, which would, in turn, affect outcomes you would face. Determining what to do in a strategic
setting is not easy because it involves predicting how others will behave and how they might react to your choices.
If your decision problem involves any strategic interactions, carefully think through how others are likely to interact
with you. In particular, determine if any strategies you might have are dominated by other strategies and
determine if this might be true for others. Eliminating dominated strategies can give you a better sense of what a
good decision might be when there are strategic interactions. Given how unpredictable people can be in some
situations, you will not always be able to proceed with complete confidence, but ignoring strategic interactions or
making wild guesses about what others might do is not good decision making practice.
7
In the space below, (1) describe how the outcomes of your decision problem will be affected by what other people
do and (2) discuss what you forecast the others will do and how you are predicting that. If your decision problem
does not involve strategic interactions, this step will not be relevant for you.
In this case, we are working with companies to ensure that energy has been used efficiently. Therefore,
strategic interactions must be incorporated, meaning that they will have an impact on the decision that
will be reached. For instance, each company has a culture and any decision must never go against the
company’s culture. Otherwise, the decision will be opposed and the chances of success will be minimal.
In some other instances, the measures would not be implemented at all, and a decision must compel
rogue institutions.
The institutions are composed of human beings (who are naturally opposed to a change). Therefore, one
would expect opposition in the initial stages. However, in instances where awareness and campaigns
were involved, there is a possibility of facing minimal competition compared to setting targets.
However, as time passes by, people will adopt and uphold the change.
Step 6: Address Tradeoffs
Many complex decision problems involve a number of factors that need to be taken into consideration. For
example, in the context of choosing among several job offers, the factors to consider might include job satisfaction
and career advancement as well as total compensation. If your decision problem involves choosing among
alternatives when several factors are important, use the approach we discussed — eliminate dominated
alternatives when possible and eliminate factors (e.g. job satisfaction) by assigning penalties (in dollar amounts) to
those alternatives that fail to deliver what the best alternative delivers.
In the space below, lay out the alternatives and factors to consider for your problem as we discussed in the course
and begin to address the tradeoffs using the principled approach. If your problem does not have multiple factors to
consider, this step will not be relevant for you.
There exist various tradeoffs that must be looked into. In a nutshell, costs, company’s culture and
reputation, and the overall outcome will be the most essential tradeoffs. In the first place, everybody
has a similar goal (ensuring that energy is used efficiently). Therefore, other tradeoffs will be considered
to decide. The costs as a result of any of the decisions must be taken into consideration. In most cases,
the option with the lowest costs makes sense and will most probably be considered. However, the value
of the decision must be considered while determining costs. We also looked at the company’s
reputation. Normally, there are disparities in a decision if the company has a good or bad reputation.
Step 7: Structure Effective Group Decision Making
If you are making your decision in a group context, consider how you can play a role in making sure that the group
works together well and information does not remain hidden. In the space below, discuss (1) how the group can
help identify alternatives that you may not have identified and (2) what specific steps you might take to ensure that
the process leads to the best decision. (If your problem will not be addressed in a group setting, imagine that you
are able to form a group to help you.)
While working as a group, there exists massive benefits. For instance, members in that group could play
a key role in giving their views on the options that are available. However, several steps need to be
taken to ensure that the group has arrived at the best answer. In the first place, it is worth ensuring that
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the group members are properly equipped with the relevant information through facilitating the sources
of the information. Secondly, it is important to create a good relationship to facilitate a healthy
discussion. Lastly, it is important to take note of everybody’s view while deciding.
9
Professor Paul Pfleiderer
Decision Making
Addressing Tradeoffs
Choosing among options that make us better off in some dimensions and worse on
others requires us to address tradeoffs. To evaluate these options, in many cases (but
not all), we can use a methodical approach for revealing underlying preferences and
priorities in a reliable way.
Using a methodical approach to address tradeoffs may seem tedious at
first. So, you may be tempted to take shortcuts. However, a shortcut can
lead you astray and may not reveal the best choice given your preferences.
Using a methodical approach is a reliable way of making sure you make
the best choice.
How Do I Address Tradeoffs in a Methodical Way?
For big decisions where there are several alternatives to choose from and a number of
considerations that are potentially important, the following methodical approach is a reliable
way of helping you make the best decision.
1.
2.
3.
4.
5.
6.
Rank options – Consider each dimension individually and rank alternatives on the
dimension.
Eliminate dominated options – Identify and eliminate any option that is dominated
by another option in all dimensions.
Assign penalties – Assign a monetary penalty for those options that do not rank first
in the dimension.
Adjust the monetary value for each alternative – Subtract the penalty from the
monetary value of each option.
Eliminate dominated options – Look again to see if any alternatives are now
dominated and can be eliminated.
Repeat steps 3-5 until the best choice becomes clear – Repeat the process of
assigning monetary penalties, adjusting the monetary values, and eliminating
dominated options until the best choice is revealed.
© 2021 • Professor Paul Pfleiderer
1
Why Are Decision Matrices a Less Reliable Way to Make
Decisions?
The methodical approach we’ve described so far is not simple. It involves an iterative
process of looking for dominated alternatives and putting monetary value on attributes like
distance from family or cultural amenities. Many people find it challenging to put a monetary
value on considerations such as distance from family or the quality of cultural amenities and
often are uncomfortable in doing this. They are often attracted to simpler approaches, such
as a decision matrix.
The steps in using a decision matrix are much simpler. First, you determine how much
weight should be placed on each of the attributes relevant to your choices. The next step is
to rank options on each of the attributes. The final step is to calculate the weighted score for
each location using the decision weights. The best decision is determined by the weighted
score.
The problem with decision matrices is that using decision weights and simple rankings
involves making some rather arbitrary decisions and fails to account for important
information. When you take the time to assign monetary penalties, adjust monetary values,
and eliminate dominated choices, you have a much more reliable process for making
decisions.
Tactical Tips
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Although it’s tempting to use simpler methods to make decisions; the method of
ranking options, eliminating dominated strategies, assigning penalties, and
adjusting monetary values is a much more reliable methodology.
Many decisions in business and in life can be effectively addressed by the
methodical approach in this module and because this approach is rigorous in
capturing tradeoffs, it should be used whenever it can be applied.
While the methodical approach described in this course is quite powerful in many
situations, it cannot always be used when making important decisions. There are
many situations where it simply makes no sense to try to put a monetary value on
the attributes that are important decision criteria. (For example, criteria for naming a
baby are important to consider in choosing names, but they are not particularly
quantifiable in monetary or other terms..)
© 2021 • Professor Paul Pfleiderer
2
Professor Paul Pfleiderer
Decision Making
Decision Trees and Probability
Decision trees are a key tool to help you make better decisions because they allow you
to:
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Illustrate complex decision problems and compare possible alternatives.
Explicitly include major sources of uncertainty that affect outcomes.
Quantify risks and rewards, including non-monetary factors that are important to
consider in a decision.
Use sensitivity analysis to determine at what point a change in the probability of
something occurring will change your decision.
It can be daunting to consider all potential alternatives and assign
probabilities to major uncertainties. It may be tempting to rely instead on
instinct and gut feeling. However, decision trees can lead to much better
decisions, even in simple settings. They help you reveal important
considerations that you may initially miss.
How Do I Illustrate a Problem Using a Decision Tree?
The first step in using decision trees is to illustrate the problem. When you lay out the
problem, work from left to right, starting at the beginning, and ask yourself, “What
immediate decision do I face?” Use the following conventions 1.
Use squares to represent decision nodes (i.e., situations where you have control over
what happens) and draw pathways from the decision nodes to represent each of the
potential choices you could make. For each decision choice that you can, record the
costs or rewards that are directly associated with making that choice. For example, if
your decision is to hire an extra employee and you are committed to pay a certain
amount no matter what occurs in the future, register that amount.
2. Use circles to represent chance nodes (i.e., situations where you do not have control
over what happens). From each chance node, draw pathways to represent all the
major things that might happen in the chance situation. For each of these pathways
determined by chance, write down your estimate for the probability that it will occur.
Estimating these probabilities can be quite challenging. When making your
estimations, do your best to consider any data available (e.g., past behavior, surveys,
market analysis, etc.) when making your estimations. Keep in mind that you can
change your assumptions about probabilities if you get more information.
3. Starting at the extreme left with your initial decision (a decision node), work your way
to the right. As you proceed along a pathway, ask yourself what would happen next.
Determine if you would need to make a decision or if you would encounter a chance
situation where something important, but out of your control and unpredictable, will
occur that will affect the choices you have available and ultimately the outcome.
4. Continue down each pathway finding all the chance and decision nodes, estimating
probabilities, and noting costs/rewards, until you’ve reached the final outcome that
you care about. Write what the value of the outcome would be if you reached the
end of that pathway.
Example: Jennifer’s Travel Decision
Jennifer has to decide between a nonstop and a one-stop flight. She lays out her decision
tree and looks at past data about her flight. Data shows that the flight is on time 98% of the
time. If she makes her connection, the total cost to her is the cost of the ticket, $600. If she
misses her connection, the total cost is the cost of the ticket plus $5,000, or $5600. A
nonstop ticket is $1100.
What Do I Do About Non-Monetary Factors?
Factors that don’t have an obvious monetary value but impact your decisions should be
included in your decision tree. To account for the additional non-monetary considerations,
put in an approximate dollar value on those considerations and add them to the costs or
rewards associated with each pathway.
Example: Jennifer’s Travel Decision
Jennifer adds the “unpleasantness” factor of missing her connection and approximates this
with a dollar value of $10,000. In other words, she would be willing to pay an additional
$10,000 to avoid this.
© 2021 • Professor Paul Pfleiderer
2
How Do I Simplify a Decision Tree?
After you’ve illustrated the problem as a decision tree, you can now simplify the decision
tree to determine the best alternative. There is a methodical way that you can simplify a
decision tree until the decision will be crystal clear. Start at the far right side of the tree and
work backwards.
1.
When working your way backwards, replace the chance nodes with expected values.
To do this, multiply the value of each possible outcome by the probability that the
outcome will occur. Then add together the values of each of these potential
outcomes to get the expected value for a chance node.
How to calculate the expected value at a chance node
Expected Value = (probability x outcome) + (probability x outcome) + …
2. Whenever you reach a decision node, first subtract any direct costs that are incurred
by making the choice from the expected benefit of making that choice. Then, simply
replace the node with the numerical value of the net payoff of the best decision at
that node.
3. Keep working backward until you are at the beginning and you have numerical
values for the net payoffs of each of the alternatives for the initial decision. At that
point, you can easily see the best decision.
Example: Jennifer’s Travel Decision
© 2021 • Professor Paul Pfleiderer
3
The expected value of the one-stop flight is ($600 x 0.98) + ($15,600 x 0.02) = $900. The
nonstop flight is $1100. Because the expected cost of the one-stop flight is less than the
cost of the nonstop flight, Jennifer should choose the one-stop flight.
How Do I Make Assumptions about Costs, Benefits, and
Probabilities?
People often find decision trees daunting because the analysis seems to hinge on a lot of
assumptions that can be questioned. Because making these assessments is challenging,
many people try to find ways to make decisions without having to make explicit assumptions
about probabilities and the costs and benefits of various outcomes. These attempts to avoid
addressing the essence of the decision problem do not lead to good decision making since
valuable insights are often missed.
Instead, use whatever information you have available to you to make assumptions about
how your problem unfolds, the probabilities of various outcomes, and costs and benefits. For
probabilities, for example, you might use information about past behavior, market research,
or survey data. Do your best to make reasonable assumptions, knowing that once you have
your decision tree built, you can adjust your assumptions to see how they impact your
decisions.
Example: Javier’s Architectural Design Decisions
Javier wants to submit designs for an architectural project with fierce competition. He
believes his bold design has a better chance of being accepted than a conventional design.
However, he’s not sure if his bold design is feasible. He is considering whether or not he
should commission an engineering study to determine if his bold design is feasible and
worth pursuing. When he lays out his decision tree, he initially assumes that his bold design
has an 80% chance of being accepted, whereas his conventional design only has a 15%
chance. He lays out the following decision tree and determines that it is worth it to
commission the study with the assumption of an 80% chance that his bold design would be
accepted.
© 2021 • Professor Paul Pfleiderer
4
Working backward through the decision tree with the assumption of an 80% probability of
success, the expected outcome of commissioning a study turns out to be $250,000,
whereas the expected outcome of developing a conventional design is only $100,000. With
this assumption, he should commission the study.
© 2021 • Professor Paul Pfleiderer
5
Using a decision tree, Javier can easily reconsider his assumptions and look at lower
acceptance rates to see how this impacts the decision. By trying more values, Javier will
find that the probability of success needs to be at least 50% to make ordering the
engineering study a good decision. With a 50% probability of success, the expected
outcome when he commissions the study and when he does not are the same at $100,000.
© 2021 • Professor Paul Pfleiderer
6
Tactical Tips
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You can use pen & pencil, spreadsheet software, or decision tree software (such as
SilverDecisions) to build decision trees. The decision tree software makes it easier
to quickly build trees and adjust probabilities.
Consider past behavior and other data when you make assumptions about the
probability of an event occuring.
Remember that estimates of probabilities are subjective and involve judgment, so
use sensitivity analysis to see how much the decision depends on these estimates.
If the decision is quite sensitive to the estimate, you may want to spend more effort
refining that estimate.
When it is appropriate, be sure to include the choice to stop or abandon a project
when building your decision trees.
© 2021 • Professor Paul Pfleiderer
7
Decision Making
Prof. Paul Pfleiderer
Executive Education
Stanford Graduate School of Business
How to Construct a Decision Tree for Your Own Decision Problem
Evaluating a decision tree that was constructed by someone else can be somewhat challenging,
but once you know how to start at the end of the tree and work backward, it is not that
difficult to get the right solution as long as you are careful. What is much more challenging is
constructing a decision tree for an actual problem YOU face. Every decision problem has its own
characteristics and structure. Because of this there is not a one-size-fits-all approach that can
be taken off the shelf and used in every situation. When developing a decision tree for your
use, you must “customize” it in order to capture all of the important elements in the problem
you face and make sure that the tree accurately reflects how things will unfold over time.
While this might seem daunting, it is actually not that hard to construct a tree if you know the
right questions to ask.
Let’s explore what to do by looking at the decision problem faced by Sandra Bachmann. Due to
circumstances beyond her control, Sandra has had to relocate and move to a new city quite a
distance away from where she was residing before. This has meant that she had to resign from
her former job. Fortunately, she now has two job offers in hand for jobs near where she will be
living in the new city.
The most exciting is a job offer from Primrose Associates. For Sandra, this is a fairly good job. It
pays well and involves satisfying work. The problem is that Primrose must fill the job position
quickly and has given Sandra only three days to decide. If Sandra rejects the offer, the people at
Primrose will offer the position to their second choice, and that person will almost certainly
accept the offer. This means that if Sandra rejects the Primrose offer, it is gone.
The other offer is from Cemetrion Inc. This job offer is in Sandra’s view inferior to the offer at
Primrose. The pay and the benefits are not as good, and the work at Cemetrion doesn’t strike
her as interesting as what she would be doing at Primrose. The good news is that Cemetrion is
in no hurry for Sandra to decide. The company has indicated that it will hold the offer open for
at least a couple of months.
Sandra has some friends in the new city and most of them are urging her not to take any job
offer immediately but instead search some more for other and better offers. They think that
given Sandra’s skills, she will likely be able to find an even better job, one that pays more than
either Primrose or Cemetrion and one that involves much more interesting work than what she
would be doing at either of those companies. In their view if she searches for a couple of
months, there is a good chance she will find a Great job.
Sandra is 59 years old, and one other possibility she is considering is retiring early and doing
volunteer work in her new community. Retiring early is not something she planned on doing,
1
but given her new circumstances, she now views it as a possibility. She does view the Primrose
job as much better than retiring at this time. Of course, if she finds a job that is even better
than the one at Primrose, that job will definitely be preferred to early retirement as well.
However, for Sandra the choice between Cemetrion and early retirement is a close call. If the
Cemetrion job were the only alternative, she might prefer early retirement.
Sandra faces a challenging decision problem. How should she approach it? Can she use a
decision tree to help her find a solution or at least give her some insights? How would she
construct that decision tree?
To get started what Sandra must do is ask herself “What decision do I need to make right
now?” Almost every decision tree begins with a first decision that must be made along the path
of decisions. In Sandra’s case, “right now” clearly means in the next three days as that is the
amount of time that Primrose has given her to accept or reject their offer.
Sandra should write down all the possible things she might decide to do in the next three days.
Her list might look like the following:
D1.
D2.
D3.
D4.
D5.
Accept the Primrose offer and reject the Cemetrion offer.
Reject the Primrose offer and accept the Cemetrion offer.
Reject both the Primrose and Cemetrion offers and retire.
Reject both the Primrose and Cemetrion offers and start searching for a better job.
Reject the Primrose offer and start searching for a better job. (Don’t respond to
Cemetrion yet.)
We could use these five decisions to start the tree. The start of the tree would then look like
this with the square at the left representing that Sandra is at a point where she must make a
decision:
D1
D2
D3
D4
D5
This, however, would not be a good start for the tree. This tree is more complicated than
necessary. We can use some common sense to make the tree a bit simpler. Clearly Sandra will
2
not reject the Primrose offer and take the Cemetrion offer given that she strongly prefers
Primrose to Cemetrion. Putting it on the tree just makes for a cluttered tree. We can ignore D2.
Sandra also strongly prefers the Primrose offer to retiring. There is no reason to have D3. Also,
common sense will probably lead you (and Sandra) to the conclusion that the Cemetrion offer
should not be rejected right away given that Sandra has a couple of months to respond.
Keeping the offer open makes sense unless there is some substantial cost involved in keeping it
alive, which we assume is not the case. Using common sense to create a simpler tree is usually
a good idea, but you should always make sure that common sense is steering you in the right
direction. You should be wary of striking something from the tree unless it is completely
obvious you should do so. You might find that your intuition for eliminating something was in
the end misleading.
Once we eliminate the manifestly silly decisions (namely, D2, D3 and D4), we have a much
simpler tree:
Take the job at
Primrose
Associates
Reject Primrose
and Search
The next step is to consider each of the branches of the tree and ask: What happens next?
Sandra should first ask, “If I take the job at Primrose, what comes next?” The answer here is
that this is the end of the tree. Obviously Sandra will face additional decisions even if she takes
the Primrose offer. Perhaps she will be offered a promotion at Primrose and she will need to
determine whether to take this promotion. Perhaps she will not like the job as much as she
thought and will need to consider retiring early. In some ways the decision tree could go on
almost forever and be really, really complicated. We need to stop at some point and put in an
“outcome value.” This represents the expected value of Sandra ending up in this position
(employed at Primrose.) The tree becomes:
Take the job at
Primrose
Associates
Outcome Value
Reject Primrose
and Search
3
Determining the outcome value is not easy. It obviously involves some things that are easily
measured like salary and the monetary value of benefits. At the same time it also includes
things harder to put a price on like job satisfaction. Accounting for these considerations that are
not easily measured in monetary terms is more challenging, but since outcomes are going to be
compared, Sandra should make an effort to put a value on things that are important such as job
satisfaction.
Now Sandra must consider the bottom branch of the tree. She must ask “What will happen next
if I reject Primrose and search?” At this point Sandra arrives at a chance node. She does not
have control over whether her search will be successful or not. She faces uncertainty here
because she can’t predict with 100% accuracy whether a Great Job will surface and be offered
to her or not. 1 Whenever you reach a point where something important happens but it is not
something that you control and is not completely predictable, you are at a chance node, which
we represent as a circle. Sandra’s tree becomes:
Take the job at
Primrose
Associates
Outcome Value
Great job
is found
Reject Primrose
and Search
60%
40%
Search
Unsuccessful
The chance node shows that there are two outcomes of the search: a Great job is found or the
search is unsuccessful in finding a job, or at least one as good as the Cemetrion job that is still
available and the option of retiring. At this chance node Sandra must assign probabilities to
success and failure. Obviously these are not precise in a situation like this. Sandra can’t credibly
assert that she knows the probability of success is 60% and not 58%. She must try to assess as
well as she can how likely success will be based on what she knows at the time. In analyzing the
decision with the aid of her decision tree she can vary these probabilities and see how much
It is true that the success of Sandra’s search will depend in part on how hard she searches. We will assume that
she searches diligently and the probability of success is based on that. We could put in an additional decision for
Sandra relating to how hard she should search, but this will only complicate the tree and would only make sense
for Sandra to include if that was a real issue.
1
4
her decision is affected by them likelihood of success. The ability to do this is one of the
advantages of the decision tree approach.
Now after putting in the chance node for the results of the search, Sandra must again ask:
“What happens next?” If a Great job is found, it is clear that Sandra is going to accept it, given
that we have defined Great job to be one better than Cemetrion and early retirement. This
then can be considered the end of the tree and we put an outcome value there. We now have:
Outcome Value
Take the job at
Primrose
Associates
Great job
is found
Outcome Value
60%
Reject Primrose
and Search
Search
Unsuccessful
40%
Sandra must now ask: “What happens next if my search is unsuccessful?” It is clear that she
now has a decision to make. The Cemetrion offer is still outstanding, so she could accept that.
She could also choose to retire early. Let’s consider this choice her final decision in the tree.
The final tree is then:
Take the job at
Primrose
Associates
Outcome Value
Great job
is found
Reject Primrose
and Search
Outcome Value
60%
40%
Search
Unsuccessful
Take job at
Cemetrion
Outcome Value
Retire
Outcome Value
Now in the process of laying out this tree Sandra may identify additional alternatives worthy of
consideration. For example, if her search is unsuccessful, another possibility is to let the
5
Cemetrion offer expire, but continue searching, retiring only if that search is unsuccessful after,
say, six months. Adding this may be important if it is a close call at the beginning whether to
accept Primrose or search. The main point is that developing a decision tree can reveal
considerations that are important that you initially missed.
The approach described above for developing a decision tree is quite simple: start at the
beginning and ask: “What immediate decision do I face?” Then go down the various paths and
ask: “What happens next?” “Do I need to make a decision or am I at a chance node where
something important that is out of my control and unpredictable will be determined?” Work
from left to right in this way. Keep it simple by not adding things that you are absolutely sure
are not relevant such as a decision that involves Sandra choosing at the beginning to reject the
better offer and accept the worse one.
Decision trees are in many situations a very valuable tool for uncovering the structure of a
challenging decision problem and determining the best course of action. Decision trees are not
that difficult to use once one understand the basics and has a bit of practice. The rewards of
doing using them can be very large. Good luck in using a decision tree to help you make your
next big decision!
6
Professor Paul Pfleiderer
Decision Making
Incentives for Group Decision Making
Leaders should provide incentives that improve the process and enhance the quality of
group decision making. To do this, they should structure group decisions differently
depending on the stage in the decision-making process. They should also take into
consideration how decisions will be implemented.
Incentives Promoting Good Decision Making
For groups to be successful in their decision making, the incentives must be correctly set.
For example, people must be assured and must come to believe that they will be rewarded
and not punished for speaking up.
The downside of consensus
Many group decision-making processes focus on coming to a consensus where the goal is
to get buy-in from everyone in the group. However, focusing on consensus impedes good
decision making for the following reasons:
●
●
The leader of a decision-making group is implicitly discouraging disagreement and
critical thinking.
If members of the group have information that is contrary to the general consensus,
they may hesitate in raising their concerns and keep important information hidden
from the group. In other words, they may feel that they are in the uncomfortable
position of having to trade off sharing information that may help make a better
decision against personal cost they might bear in being seen as hindering the group
in coming to a consensus view.
The downside of cultural advocacy
Cultural advocacy is a decision-making process that relies on individuals to stake out a
position and become strong advocates for their views. This type of process turns group
decision making into a contest. This cultural advocacy approach generally does not promote
good decision making for the following reasons:
●
●
Group members may become more focused on winning than on making the best
decision.
Advocates for a particular alternative are less likely to reveal any information they
have that undermines their own position, and they are more likely to exaggerate or
misrepresent information supporting their position.
© 2021 • Professor Paul Pfleiderer
1
●
●
●
●
Advocates for other alternatives may not be able to identify or correct misinformation
or missing information from others.
It skews the process away from problem solving and determining the best decision,
and skews it toward persuasion and strategic positioning.
It runs the risk of making things personal, rather than what is best for the group.
In the end this process tends to create winners and losers which can be costly to the
organization’s culture in many ways.
How to incentivize good group decision making
Leaders can improve the process and enhance the quality of the group’s decision in several
ways. They can:
●
●
●
Focus on the group winning, not the success any members of the group might feel
by having a particular position validated. In other words, emphasize that the group
will get credit for making a good decision and that it will benefit everyone.
Bring together diverse expertise and perspectives, and make sure that each member
of the group is encouraged and called upon to contribute his or her own expertise.
Keep their own preferences hidden, be curious and undecided so that everyone is
encouraged to share, and make sure that what might appear to be minority views are
given substantial airtime and are fully considered.
Emphasizing consensus and promoting cultural advocacy contests have
many downsides. Instead, focus on problem solving and group success,
making sure diverse perspectives are encouraged and given equal
consideration.
Phases of Decision Making
There are two major phases involved in most decision-making problems—the widening
phase which is devoted to generating alternatives and the narrowing phase which
eliminates alternatives from consideration. Processes for these two phases should be
structured differently to be most effective.
Widening Phase
The first phase of most decision making, the widening phase, involves the group being
creative and innovative in identifying possible solutions. This phase is important because
when more alternatives are initially considered in a decision-making process, the final
decision is more likely to be a good one.
In the widening phase, it is important that group members do not criticize
ideas that come up. Everyone must be comfortable putting ideas forward.
© 2021 • Professor Paul Pfleiderer
2
Narrowing phase
Once the search for alternatives has been conducted and a wide set of choices has been
identified, the process turns to the narrowing phase. In this phase, all alternatives that have
been identified are evaluated and inferior ones are ruled out. The ultimate goal of this phase
is to identify the best alternative and the best decision.
In the narrowing phase, criticism is important and should be encouraged.
Group members must feel comfortable raising any concerns they have
about an alternative. It is important that the emphasis be on the group’s
success in selecting the best alternative.
Ensuring critical evaluation during the narrowing phase
Decision makers need to rigorously evaluate the assumptions behind a planned course of
action to avoid making bad choices. This means that during the narrowing phase, critical
thinking and criticism should be encouraged and promoted. The Devil’s Advocate and The
Red Team are two methods that attempt to ensure this kind of critical evaluation is
rigorously pursued.
●
Devil’s Advocate – One member of the group is given the “Devil’s Advocate” task to
argue against the option that is emerging as the front runner. The person playing the
devil’s advocate does not need to be as concerned about paying reputational costs
since the role was assigned.
●
The Red Team – This method is a variation of the devil’s advocate approach. It
involves creating a “red team” that is charged with finding ways to undermine or
defeat the favored proposal. The advantages of this approach are:
○ Having several individuals involved rather than just one will most likely result
in a more rigorous critique.
○ Perceived reputational costs are diminished since multiple people are
assigned the contrarian position rather than one person.
Implementing the Decision
After a decision is made, it must be implemented. Many times the same people who made
the decision are charged with implementing it. Success depends not only on making the
best decision, but also on implementing it well. Therefore, it’s important that the people who
made the decision feel good about the decision that was made whether or not they
preferred a different alternative. To ensure that people feel good about the decision, leaders
will want to be sure of the following:
●
●
The process in which all alternatives were carefully considered is perceived as fair.
There is a shared understanding about how the decision was ultimately made.
In other words, the perception of fairness is important for the successful implementation of
the decision. Fortunately, the approaches that are effective for making sure that the group
arrives at the best decision are ones that will also tend to promote the perception of fairness.
© 2021 • Professor Paul Pfleiderer
3
Tactical Tips
●
●
●
Make sure that everyone’s information and views are heard and carefully
considered.
Take steps to be sure that information does not remain buried or hidden.
Ensure that the decision-making process is perceived as fair and is clearly
understood by everyone involved.
© 2021 • Professor Paul Pfleiderer
4
Professor Paul Pfleiderer
Decision Making
Revealing Information in Group Decision
Making
The diverse perspectives of multiple knowledgeable people in group decision making
offer many potential advantages. However, these advantages are often not fully
realized because of various cognitive biases and forces that keep information hidden.
To realize as much as possible the benefits of group decision making, processes and
social norms must be in place to reduce cognitive bias and reveal hidden information.
Cognitive Biases in Groups
Cognitive biases can lead individuals to make bad decisions. When knowledgeable people
make decisions as a group, we might assume that their decisions would be better than
those made by a single person. However, this isn’t necessarily true. A large body of research
has shown that several major cognitive biases may be magnified rather than reduced in
groups. In order to get the benefits of group decision making, group deliberations and
decision-making processes must be structured in ways that promote critical thought and
encourage people to detect bias and question the general consensus.
Example: Sunk cost fallacies and escalations of commitment
Some studies have found that groups may be more prone to continue pursuing projects
long after they should be abandoned. Without the proper social structures and norms in
place, this cognitive bias may tend to be magnified rather than minimized in group
decision-making processes.
Example: Confidence bias
Often, when people interact with others, they become more confident of their views; and,
depending on the circumstances, this can lead groups to be overly confident in their
decisions. Group processes must be structured to promote critical thought in order to
prevent confidence bias from being magnified.
One potential advantage of groups is that people are generally much
better at detecting biases and errors in other people’s thinking than they
are at uncovering their own errors. To realize this potential of group
© 2021 • Professor Paul Pfleiderer
1
decision making, social norms must exist in the group that encourage
people to express challenging views and support dissent.
Buried Information
When individuals do not reveal to the group unique information they have, critically valuable
information ends up not being considered in the decision-making process.
Example: Focusing on shared information
Information is commonly buried in group decision making because of our tendency to focus
on the information that is shared by many or held in common. This undermines the valuable
process of combining the unique pieces of information that we each have. In other words,
this human tendency can get in the way of one of the primary benefits of group work and
group decision making.
Example: Order of speakers
Information can be buried in group decision making when the order in which people speak
affects the opinion of the group. There is a tendency for people to reassess their opinions
and discount some of the information they have based on what they are hearing from
others.
Example: Taking an initial vote
Taking a simple, initial vote can lead to missing details and lack of important information.
Groups may think they have consensus without realizing that their opinions and thoughts are
more nuanced and complex. This tactic can lead to bad decision making.
How to Reveal Information
An effective way of making sure that important information is revealed in the group decision
making process is for people to record, before any discussion with others takes place, the
details of what they know and how they are thinking about the information that they do
have. Getting this information out before people have their views colored by the views of
others is a very effective way of making sure that information does not remain hidden. It
does come at a cost, but a cost that is generally worth incurring when important decisions
are being made.
Tactical Tips
●
●
●
Develop social norms that encourage critical thought, promote the expression of
challenging views, and support dissent.
Focus on unique information rather than shared information.
Have people record, before any discussion takes place, details of what they know
and how they are thinking about the issues that are important for the decision
problem.
© 2021 • Professor Paul Pfleiderer
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