Theory & Practice in Decision Making
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This is a study of the relationship of theory and practice in decision making for business and other management situations. Making decisions is the essential features of a manager's or executive's work, and on the correctness or otherwise of the decisions often hangs not only the professional fate of the decision maker, but the fate of the enterprise as well. How are these decisions made? How should they be made? These are some of the basic questions we will attempt to answer below. A decision, essentially, consists of a judgement followed by a choice. A body of models in probability and decision theory show how decisions "should" be made in terms of maximizing the mathematical probability of a favorable outcome (or minimizing the probability of an unfavorable outcome, or both. But in practice, these rules can seldom be followed; instead, decision makers rely on simpler models or "heuristics" in making real world decisions. These heuristics are in turn subject to certain persistent distorting patterns our greater comfort with the familiar, our own self confidence, our pseudo mathematical sense of "rightness." Problems of dissonance, alternatives, volition, and risks all play a part in decision making. A distinguishing feature of successful executive decision makers is found to be their tolerance of ambiguity, ability to function without clear models of possible outcomes, and lack of self delusions. The world is run by people who make decisions. By convention we
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lihood or size of a favorable outcome (including avoidance of unfavorable outcomes. Where some mathematical possibility exists for computing the odds, a large set of statistical rules have been developed for the evaluation of odds and payoff in probabilistic cases, showing the "rational" action in any probabilistic situation (Hogarth, 1987: 12 35). Human beings do not behave "rationally," however, as is indicated by the existence of the gambling industry. State lotteries are a classic case (Yates, 1990: 228 29). Since the lottery keeps a portion of the total take (for schools, etc.), the amount returned in prizes must in the long run be less than the amount taken in tickets. If you play long enough, you always lose.* (*This is true only of pure games of chance, such as lotteries and slot machines. Other gambling games, such as poker and horse racing, involve elements of knowledge and skill for the individual player. Professional players can and do make a living by winning these games, consistently making better betting decisions than the other players at the table or track. The decision making processes of professional gamblers would make an interesting subject of study.)
Even if humans did behave "rationally" in probab
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Approximate Word count = 2791
Approximate Pages = 11 (250 words per page)
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