A HOLISTIC APPROACH TO DECISION-MAKING Dr. Errol Wirasinghe – www.XpertUS.com

1. Decision-Making….Going beyond… • Commonsense, Experience, Judgment, Intuition, Gut-feel, etc… • A HOLISTIC APPROACH TO DECISION-MAKING • Dr. Errol Wirasinghe – www.XpertUS.com 1

2. What do we mean..? The Three Phases Implementing Problem Solving Decision Making 2

3. DECISION MAKINGIS NOT PROBLEM SOLVING • Decision-making is unique to the person • [Human Judgment] • Problem Solving is unique to the problem • [Domain Expert] Some of our work has shown that problem solvers are not the best decision-makers… 3

4. WHAT IS A GOOD DECISION? Questions: • Do you know anyone…. who intentionally makes a “bad” decision; one that makes him/her unhappy? From his point of view (at the time he makes the decision)… • Can we then agree that at the time we make decisions, we all make “good” decisions? Then why do we see so many fiascos? 4

5. Is Decisions-Making Complicated. ? You & your spouse have retired, and are planning on moving to a more appropriate location in the USA. How would you go about deciding on a place to live? 5

6. Complicated Decisions? 6

7. Procurement Decision? Detergents for Dry Cleaners… Your company may be facing a similar problem… 7

8. Information Overload & Choice Overload Buying acamera…! Thanks to the Internet, now it is possible to be extremely well informed, and yet be completely wrong at the same time…!” 8

9. Executive’s Dilemma Information Overload Supplies Sales Manpower Currency Fluctu’ns Budgets Market Satu. Share prices Utilities Your competition will challenge you with better decisions! Inventory Geopolitical Future pricing Distribution Competitor mergers Transport Regulatory issues Cash flow 9

10. Decisions? Multi-criteria decisions? Single criterion decisions? 10

11. RESEARCH & LITERATURE ON….. DECISION-MAKING SIT AT TWO EXTREMES • Mathematicians….: • Artificial Intelligence, Neural Networks, Fuzzy Logic, Robotics, etc. • Neurobiologists and Behavioral Scientist focusing on the brain and human behavior. Unfortunately, these are beyond the reach of industry professionals We help bridge this divide! We help people make better decisions! 11

12. Because of a process called “CHANGE” WHY WE MAKE DECISIONS…? • Change happens! or • We initiate change..! • Even a decisionnot to respond, is driven by our desire to be happy, or self-preservation, seeking a positive outcome… • We respond to change because we want to be happy…! 12

13. Simply happens! or • We initiate change..! CHANGE CAUSES Definitions CONFLICTS.. Interests & Values Emotions/Feelings PROB-OPPS.. Environment Roles & Styles SOLUTIONS Time Perception Knowledge DECISIONS 13

14. Thus we see.. the relationship… Change, Decisions.. and Happiness.. “It is not the strongest of the species that survive, or the most intelligent, but the one most responsive to change.” Charles Darwin…. 14

15. Psychologists & Behav. Economists Studying Human Behavior related to decision making 15

16. 1. THE PARADOX OF CHOICE Video: 1C - Paradox of Choice (5.24), Barry Schwartz The western dogma is that more choices and greater freedom leads to greater happiness! – is it really true?? ** 16

17. 3. VISUAL ILLUSIONS OUR EYES DECEIVE US Video: 3A - Illusions - Table and Cube Illusion (2.47), Dan Ariely Our judgments are inherently tied to the environment. ** 17

18. Would you like to touch this animal? Perception 18

19. Would you like to change your mind? Perception 19

20. PERCEPTION! • Only 14.2% of white US males are over 6.0’ tall. • Yet, 58.7% of CEOs of Fortune 500 companies are white, male and 6.0’ tall! New York Plastic Surgeon Darrick Antell looked at the jaw line of CEOs • vs. 40% for the general population… About 90% of the Top CEO’s had a “prominent” chin • CONCLUSION • When it comes to decision-making, perception still reigns 20

21. Why is a $12.00 stock a “good buy” for one person, and a “sell” for another..? Good/Bad…? DOCTORS RELYING ON NUMBERS All decisions are driven by qualitative interpretations of quantitative data….! 21

22. 4. COGNITIVE ILLUSIONS Video: 4A - Cognitive Illusions - Default Option (5.29); Dan Ariely Video: 4B - Cognitive Illusions – Forced; Comparisons (4.41), Dan Ariely When we have too many options – and we cannot decide – …. we settle for the default option. ** 22

23. Decision Making – Natural Pitfalls! Informed decisions? Tendency to avoid complexity Comparisons Shifting comparisons Ghost offerings Default options Perceptions Priming www.XpertUS.com/hb.html 23

24. Are we ready? Show of hands please… Do you believe you might be making sub-optimal decisions? 24

25. A HOLISTIC APPROACH TO DECISION-MAKING PART 2 FUNDAMENTALS 25

26. The Decision Making Process Objective Candidates Options or likely solutions Criteria Factors that influence the decision Process The Decision… 26

27. Let us start with the ….. OBJECTIVE: THE VIETNAM WAR Subsequently a new objective.. To provide training in “Killing Skills…” Six months later… The Army revealed that 100% of the soldiers had fired at the enemy. Do you see the value of a well-defined objective? The Army did a great job training our soldiers to have superb “marksmanship” skills [Objective].. Yet, surveys revealed that only 25% of soldiers actually fired at the enemy...! 27

28. DEPARTMENT OF AGRICULTUREEVER-INCREASING POPULATION HEAVY DEMAND FOR MORE FOOD LOSS OF AGRICULTURAL LAND 28

29. MISLEADING OBJECTIVES! OBJECTIVE Set out to develop a high-yield plant… After 18 months and several million $$ they developed a super plant..! • Sadly this plant needed more space… • They went after the wrong objective. • … to increase the YEILD PER PLANT! • The objective should have been.. • Increase the YEILD PER ACRE! • Walgreens … profit per customer.. • Eckerd… profit per store.. Do you see the value of a well-defined objective…? 29

30. CRITERIAVital element in any decision-making operation Selecting the most relevant criteria Determining the significance of each criterion (Too many criteria can be counter-productive) 30

31. CRITERIA Step – 2 Euro vs. US $ What factors caused high oil prices… Oil Price $/bbl 31

32. Ranking Techniques Common techniques used to prioritize or rank a set of candidates [based on feelings]… : • Distribution, • Scaling, • Decision Trees, • Matrix, • Pairwise comparison.. • Bayesian Models • Monte Carlo Techniques • Fuzzy Logic • Expert Systems • Neural Networks • Artificial Intelligence; etc. 32

33. SINGLE CRITERION DECISION-MAKING (Decision Tree Technique) 33

34. A government committee is considering the economic benefits of a program of preventative flu vaccinations. Option 1: Vaccinate the entire population at a cost of $7.0M. The vaccination is assumed to be 100% successful, with no additional treatment costs. Option 2: One alternative open to the committee is to institute an "early-warning" monitoring scheme (costing $3M) which will enable it to detect an outbreak of flu early and hence institute a rush vaccination program (costing $10M because of the need to vaccinate quickly before the outbreak spreads). Again assume a 100% success with the rush vaccination. Option 3: If vaccinations are not introduced then the estimated cost to the government if flu strikes in the next year is $7M with probability 0.1, $10M with probability 0.3 and $15m with probability 0.6. Assuming the probability of flu striking in the next year is 0.75, what recommendations should the committee make to the government if their objective is to maximize expected monetary value (EMV)? Example 1:Vaccination WHO studies indicate that there is a 75% likelihood of a Flu striking next year! A government committee is considering three (3) options to manage the situation. Option 1: (Vaccinate entire population) Cost of $7.0M. Program is assumed to be 100% successful, with no additional treatment costs. Option 2: (Monitoring early-warning) Spend $3.0M to detect an outbreak; Then institute a rush vaccination program before the outbreak spreads (costing $10M). Assume a 100% success. Option 3: (Do not vaccinate) Cost if flu strikes: $7M (Prob. 10%), $10M (30%) and $15M (60%). 34

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36. Example 2:Bid Submission Disney World… tender for 200,000 special shirts. Your company is trying to decide whether to bid… Cost of visit: $10,000. >>> Accept/Reject: 50/50 .. • If qualified >> Cost of preparing bid: $5,000 • Labor, Material & Shipping : $127,000… • Possible bid prices: • $155,000 (90% chance of winning) • $170,000 (75% chance of winning) • $190,000 (35% chance of winning) • What should you do? 36

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38. Example 3:Insurance Decision A Company has to decide if they should insure their warehouse (valued at $300,000), against vandalism... Crime statistics: Probability of any damage is 10% • [There is a 90% chance – no damage at all…] • Insurance Quotes: • Policy from Company “A”: Annual cost $2,000; • ….would pay 90% of loss, after a $20,000 deductible. • Policy from Company “B”: Annual cost of $1,800; • ….would pay 80% of loss, without a deductible…. • What should he do? • Insure with one of the companies, or not insure at all? 41

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40. MULTI-CRITERIA DECISION-MAKING [Pairwise Technique] 43

41. 48 x 35 + 32 x 20 + 20 x 25 = 28.20.. 4. Matrix Method But my brother owns a Mitsubishi dealership..! Ex: The Fleet Manager of a car rental company buying cars Candidates 44

42. Matrix Method [Biased] Helping family! Forced… Let us look at a better method! 45

43. THE SEVEN-STEP APPROACH… [MULTI-CRITERIA DECISION-MAKING] Clearly define your objective… Identify all relevant criteria… Conduct criteria segregation… Identify all available candidates/options.. Gather information (Judgment table)… Assign weights to obligatory criteria… Rank candidates… AHP AHP AHP AHP = Analytic Hierarchy Process 46

44. “AHP” ANALYTIC HIERARCHY PROCESS • What is AHP? • Is AHP reliable? • Who is using AHP? 47

45. WikipediaWorldwide Applications of AHP • Site selection • Sub-contractor selection [bid evaluation/procurement] • Recruiting Univ. Faculty [Univ. of Pennsylvania] • Manage US Watersheds • Closure of US military bases (2005) • Study of overall software quality [Microsoft] • Offshore manufacturing plants [Univ. of Cambridge] • Railroad projects in Korea • Risks of cross-country pipelines [Soc. of Civil Eng.] • Agro industry [Archer Daniels Midlands] • Seismic evaluations [Shell Oil Co.] • Reducing impact of global climate change [FondacioneEniEnrico Matter] AHP conference where 19 countries participated… 48

46. THE “AHP” PAIRWISE TECHNIQUE Imagine you are at an Airport Lounge • Note: • This research was initially conducted at Cornell University. • The pictures themselves are from prior public beauty pageants. 49

47. Ladies… DIFFICULTY OF GROUP COMPARISON Distribute 100 points among these ladies to reflect their beauty! Difficult? Probably not! 50

48. Ladies… DIFFICULTY OF GROUP COMPARISON Distribute 100 points among these ladies to reflect their beauty! A bit more difficult? 51

49. Distribute 100 points among these ladies to reflect their beauty. Requires much more attention? 52

50. BACK TO THE PAIR Would you say that a “pair” was the easiest to handle? Would you agree… that as the number of contestants increased, it became increasingly more difficult to make a reliable judgment? 53