material fr bio med engineers 02

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Principles of Management by N.P.K...-2.1-

Principles of Management

UNIT II Planning

Planning in organizations andpublic policy is both the organizational process of

creating and maintaining a plan; and the psychological process of thinking about the

activities required to create a desired goal on some scale. As such, it is a fundamentalproperty of intelligent behavior. This thought process is essential to the creation and

refinement of a plan, or integration of it with other plans, that is, it combines forecasting of

developments with the preparation of scenarios of how to react to them.

The term is also used to describe the formal procedures used in such an endeavor,such as the creation of documents diagrams, or meetings to discuss the important issues to

be addressed, the objectives to be met, and the strategy to be followed. Beyond this,

planning has a different meaning depending on the political or economic context in whichit is used.

Two attitudes to planning need to be held in tension: on the one hand we need to be

prepared for what may lie ahead, which may mean contingencies and flexible processes.On the other hand, our future is shaped by consequences of our own planning and actions.

Overview

Planning is a process for accomplishing purpose. It is blue print of business growthand a road map of development. It helps in deciding objectives both in quantitative and

qualitative terms. It is setting of goals on the basis of objectives and keeping in view the

resources.

What should a plan be?

A plan should be a realistic view of the expectations. Depending upon the activities,

a plan can be long range, intermediate range or short range. It is the framework within

which it must operate. For management seeking external support, the plan is the most

important document and key to growth. Preparation of a comprehensive plan will notguarantee success, but lack of a sound plan will almost certainly ensure failure.

Importance of the planning Process

A plan can play a vital role in helping to avoid mistakes or recognize hidden

opportunities. Preparing a satisfactory plan of the organization is essential. The planningprocess enables management to understand more clearly what they want to achieve, and

how and when they can do it.

A well-prepared business plan demonstrates that the managers know the business

and that they have thought through its development in terms of products, management,finances, and most importantly, markets and competition.

Planning helps in forecasting the future, makes the future visible to some extent. It

bridges between where we are and where we want to go. Planning is looking ahead.

By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
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1. Primacy of Planning

Planning preceds all other managerial functions. Although all the functions

intermesh in practice as a system of action, planing is unique in that it establishes the

objectives necessary for all group effort.

2. To offset Uncertanity and ChangeThere is continuous change in the environment and the organization has to

work in accelerating change. Planning does not stop changes in the environment

but gears the organization to take suitable actions so that it is sucessful in

achievingit objectives

3. To focus Attention on Objectves

Planning focuses on organization onjectives ad direction of action for achieving

thes objectives

4. To help in Coordination

Though all managerial functions leads to coordination in the organization, realbeginning is made at the level of planning stage.

5.To help in Control

Control involves the measurement of acomplishment of events against plans and

the correction of deviations to assure the achievements of objectives as set by te

plans.

6.To increase Organizational Effectiveness

The concept of effectiveness is that the organization is able to achieve its

objectives within the given resources. Planning states the objectives of the

organization in the context of given resources.

It is also necessary to plan due to following reasons

To achieve Objectives

To cope with uncertanity and change

To facilitate control

To helpin coordination

To increase organizational effectiveness

To guide decision Making

Nature of Planning

It is a primary function It is a dynamic Process

It is based on Objectives ad Policies

It is a selective Process

Pervasive in Nature

An intellectual Process

It is direct towards efficiency

It focuses with future activities



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It is Flexible

It is based on Facts

Purpose of Plan

Just as no two organizations are alike, so also their plans. It is therefore important

to prepare a plan keeping in view the necessities of the enterprise. A plan is an important

aspect of business. It serves the following three critical functions:

Helps management to clarify, focus, and research their business's or project's

development and prospects.

Provides a considered and logical framework within which a business can

develop and pursue business strategies over the next three to five years.

Offers a benchmark against which actual performance can be measured and

reviewed.

SHAPE \* MERGEFORMAT



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Steps involved in Planning


Establishing a Sequence of Activites

Developing Planning Premises

Establishment of Objectives

Identification of Opportunities

Identification of Alternatives

Evaluation of Alternatives

Selecting an Alternative

Formulating Dervative Plans


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Types of plans or planning

The are, Architectural planning, Business plan, Comprehensive planning,

Enterprise Architecture Planning, Event Planning and Production, Family planning,Financial planning, Infrastructure planning, Land use planning, Life planning, Marketingplan,Network resource planning,Strategic planning, and Urban planning

Advantages of Planning

Helps in acheving objective

Better Utilization of resources

Economy in Operation

Reduces Uncertanity and Risk

Improves competitive Strength

Effective control

Coordination

Encourages Motivation

Guides in decision making

Provides decentralization

Limitations of Planning

Lackof accurate Information

Time and cost

Inflexibiltiy

Delay during Emergency Periods

False sense of Security

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Improves Efficency

Anticipation of Crisis



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Objectives

The objectives are general parts of the planning process. They are the end-results

towards which all business activities are directed. They are needed in every aspect whereperformance and result directly and vitally affect the survival and success of the firm. In

other words, the objective of the firm justifies its existence. According to Robert C.

Appley, "Objectives are goals; they are aims which management and administration wishthe organization to achieve." In other words, goals, aims and purposes are also used tosignify objectives. Newman and Summerstated, "For managerial purposes, it is useful to

think of objectives as the results we want to achieve. Objective covers firm's long-range

plans specific departmental goals and short-term individual assignment also."

Features of Objectives

Each organization or group of individuals has some objectives

Objectives may be broad or they maybe specifically mentioned.

Objecitves may be clearly defined or these may not be clear and have to be interpreted

by the behaviour of orgainzational members, particularlly those at top level Objectives have hierarchy. At the top level, it may be broad organiational purpose

which can be broken into specific objectives at te departmental level.

Organizational objectives have socail sanction, that is they ae created within the socialnorms.

An organizationa may have multiple objectives.

Organizational objectives can be changed, old objectives maybe replaced by new ones.

Role of Objectives

1. Defining an Organization

2. Directions for Decision Making

3. Performance Standards

4. Basis for Decntralization

5. Integrating Organization, Group and Individual.

Characteristics of Objectives

Objectives have a Hierarchy

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Objectives form a Network

Multiplicity of Objectives

Objectives have a Time Span

Objectives may be Tngible or Intangible

Objectives have a social Sanction since organiations are socal units .

Guidelines for Objectives


3. Overall Objecives of th

Organization (long-range,

Strategic)

2. Mission

1. Socio-Economic Purpose

4. More Specific and Overall

Objectives

(e.g.Key Result Areas)

5. Division Objectives

6. Department and Unit Objectives

7. Individual Objectives

PerformancePersonal Development Obbjectuives

LowLevel

MiddleLevel

Manage-

ment

Top Level

Management

Board Of

Directors


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1. Objectives must be clearly specified

2. Objectives must be set taking into account the various factors affecting their

acheivement

3. Objectives should be consistent with organiational mission

4. Objectives should be rational and realistic rather than idealistic.

5. Objectives should be achievable. But must provide challenge to those responsible

for achievement.

6. It should yeild specific result when achieved

7. Objectives should be consistent over theperiod oftime

8. Objectives should be periodically reviewed

9. Objectives should start with the word to and by followed by an action verb.

10. It should be desireable for those responsible for achievement

Advantages of Objectives

The following are some of the major function and contribution of objectives:

Unified Planning

Defining an Organization

Direction

Individual Motivation

Basisiof Decentralization

Basis of Control

Coordination

SMART

SMART / SMARTERis a mnemonic used inproject management at the project

objective setting stage. It is a way of evaluating the objectives or goals for an individual

project. The term is also in common usage in performance management, whereby goals andtargets set for employees must fulfill the criteria.

The first known uses of the term occur in the November 1981 issue of Management

Review by George Doran, Arthur Miller, and James Cunningham.

In recent years the terms 'SMART' (see below) and, less commonly, 'DUMB'(doable, understandable, manageable & beneficial) have been used beyond the original

context ofproject management.

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Terms behind the letters

There is no clear consensus about precisely what the five + two keywords mean, or even

what they are in any given situation. Typically accepted values are:

LetterMajor

TermMinor Terms

S Specific Significant,Stretching, Simple

M Measurable Meaningful, Motivational, Manageable

A Attainable Appropriate, Achievable, Agreed,

Assignable,

Actionable,

Action-oriented,Ambitious

R RelevantRealistic, Results/Results-focused/Results-oriented, Resourced,

Rewarding

T Time-boundTime-oriented, Time framed, Timed, Time-based, Timeboxed, Timely,Time-Specific, Timetabled, Time limited, Trackable, Tangible

E Evaluate Excitable, Ethical

R Reevaluate Rewarded, Reassess, Revisit, Recorded

Choosing certain combinations of these labels can cause duplication; such asselecting Attainable and Realistic; or can cause significant overlapping as in combining

Measurable and Results; Appropriate and Relevant etc. Agreed is often used in

management situations where buy-in from stakeholders is desirable (eg appraisalsituations).

Management by objectives


S.

S.M.

M.

A.

A.RR..TT..

SpecificSpecific

MeasurableMeasurable

AttainableAttainable

RealisticRealistic

TimelyTimely


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Management by Objectives (MBO) is a process of agreeing upon objectives

within an organization so that management and employees agree to the objectives and

understand what they are in the organization.The term "management by objectives" was first popularized by Peter Druckerin his

1954 book 'The Practice of Management'.

The essence of MBO is participative goal setting, choosing course of actions anddecision making. An important part of the MBO is the measurement and the comparison of

the employees actual performance with the standards set. Ideally, when employees

themselves have been involved with the goal setting and the choosing the course of actionto be followed by them, they are more likely to fulfill their responsibilities.

Processof MBO

MBO is a system for achieving organizational objectives, enhancement of

employee commitment and participation.

Organizational Purpose and Objectives

Areas

ordinate GoalsResources with Objectives

Features and Advantages

Unique features and advantage of the MBO process

The principle behind Management by Objectives (MBO) is to create empoweredemployees who have clarity of the roles and responsibilities expected from them,

understand their objectives to be achieved and thus help in the achievement of

organizational as well as personal goals.Some of the important features and advantages of MBO are:

1. Clarity of goals

2. Clarity in Organizational actions

3. Personnel satisfaction4. Basis of Organizational Change

5. Motivation Involving employees in the whole process of goal setting and

increasing employee empowerment increases employee job satisfaction andcommitment.

6. Better communication and Coordination Frequent reviews and interactions

between superiors and subordinates helps to maintain harmonious relationships

within the enterprise and also solve many problems faced during the period.well to be supposed if yet this management by objectives has certain advantages as well

as disadvantages, it is a virtual technique for effective management and it takes around 5

years to get mbo yielding results.

Domains and levels

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Objectives can be set in all domains of activities (production, services, sales, R&D,

human resources, finance, information systems etc.). Some objectives are collective, for a

whole department or the whole company, others can be individualized.

Practice

Objectives need quantifying and monitoring. Reliable management informationsystems are needed to establish relevant objectives and monitor their "reach ratio" in an

objective way. Pay incentives (bonuses) are often linked to results in reaching the

objectives

Limitations

There are several limitations to the assumptive base underlying the impact of managingby objectives, including:

1. Time and Cost

2. Fuilure to teach MBO

3. Problems in Objecive Setting4. Emphasis on Short term Goals

5. Inlexibility6. It over-emphasizes the setting of goals over the working of a plan as a driver of

outcomes.

7. It underemphasizes the importance of the environment or context in which the goalsare set. That context includes everything from the availability and quality of

resources, to relative buy-in by leadership and stake-holders. As an example of the

influence of management buy-in as a contextual influencer, in a 1991

comprehensive review of thirty years of research on the impact of Management byObjectives, Robert Rodgers and John Hunter concluded that companies whose

CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in

productivity. Companies with CEOs who showed low commitment only saw a 6%gain in productivity.

8. Companies evaluated their employees by comparing them with the "ideal"

employee. Trait appraisal only looks at what employees should be, not at what theyshould do.

9. It did not address the importance of successfully responding to obstacles and

constraints as essential to reaching a goal. The model didnt adequately cope with

the obstacles of:a. Defects in resources, planning and methodology,

b. The increasing burden of managing the information organization challenge,

c. The impact of a rapidly changing environment, which could alter thelandscape enough to make yesterdays goals and action plans irrelevant to

the present.

When this approach is not properly set, agreed and managed by organizations, inself-centered thinking employees, it may trigger an unethical behavior of distorting the

system of results and financial figures to falsely achieve targets that were set in a short-

term, narrow, bottom-line fashion.

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The use of MBO needs to be carefully aligned with the culture of the organization.

While MBO is not as fashionable as it was before the 'empowerment' fad, it still has its

place in management today. The key difference is that rather than 'set' objectives from acascade process, objectives are discussed and agreed, based upon a more strategic picture

being available to employees. Engagement of employees in the objective setting process is

seen as a strategic advantage by manyA saying around MBO and CSF's -- "What gets measured gets done"- is perhaps the

most famous aphorism of performance measurement; therefore, to avoid potential problems

SMART and SMARTER objectives need to be agreed upon in the true sense rather thanset.

Arguments Against

MBO has its detractors, notably among them W. Edwards Deming, who argued thata lack of understanding of systems commonly results in the misapplication of objectives.

Point 7 of Deming's 14 Points encourages managers to abandon objectives in

favour of leadership because he felt that a leader with an understanding of systems was

more likely to guide workers to an appropriate solution than the incentive of an objective.Deming also pointed out that Drucker warned managers that a systemic view was required

and felt that Drucker's warning went largely unheeded by the practitioners of MBO.

Goal management in organizations

Organizationally, goal management consists of the process of recognizing orinferring goals of individual team-members, abandoning no longer relevant goals,

identifying and resolving conflicts among goals, and prioritizing goals consistently for

optimal team-collaboration and effective operations.For any successful commercial system, it means derivingprofits by making the best

quality ofgoods or the best quality ofservices available to the end-user (customer) at the

best possible cost. Goal management includes: Assessment and dissolution of non-rational blocks to success Time management

Frequent reconsideration (consistency checks)

Feasibility checks

Adjusting milestones and main-goal targets

Morten Lind and J.Rasmussen distinguish three fundamental categories of goalsrelated to technological system management:

1. Production goal

2. Safety goal

3. Economy goalAn organizational goal-management solution ensures that individual employee

goals and objectives align with the vision and strategic goals of the entire organization.

Goal-management provides organizations with a mechanism to effectively communicatecorporate goals and strategic objectives to each person across the entire organization. The

key consists of having it all emanate from a pivotal sourceand providing each person with

a clear, consistent organizational-goal message. With goal-management, every employeeunderstands how their efforts contribute to an enterprise's success.

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An example of goal types in business management:

Consumer goals: this refers to supplying a product or service that the

market/consumer wants

Product goals: this refers to supplying a product outstanding compared to other

productsperhaps due to the likes of quality, design, reliability and novelty Operational goals: this refers to running the organization in such a way as to

make the best use of management skills, technology and resources

Secondary goals: this refers to goals which an organization does not regard aspriorities

The Process of MBO

MBO is a process that consists of the following steps:

Setting Preliminary Objectives

Fixing Key Result Areas

Setting Subordinates Objectives

Recycling ObjecivesMatching Resource with Objectives

Periodic Performance Reviews

Apprisal

Benefits of MBO

Improvement of Managing

Clarification of OrganizationPersonal Satisfaction

Team Work

Development of Effective Control

Fast decision

Weakness of MBO

Failure to teach philosophies of MBO

Failure to give Guidelines for good Goal SettingDifficulty in setting Goals

Emphasis on Short term goals

Danger of Inflexibility

TimeConsuming

Strategies

Strategy is defined as the determination of long term objectives of an organization.

Types of Strategy



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Strategies are broadly classified into two types

Grand Strategy

Global Strategy

Grand strategy

It is the action plan by which a firm intends to achieve it long term goals. GrandStrategy can be classified into three types:

Stability Strategy

If the organiationis stable and the organization is doing well, then it is better to make nochange in the organization.

Growth Strategy

Growth strategies involves forecasting and analysis of many factors that affect expansion

like resources availabilty and market availabiltyRetrenchment Strategy

Retrenchment Strategy means reduction in producs, servies and personnel. This strategy is

many times useful of tough competion, scarcity of resources.

Global strategyGlobal Strategy is classified into Globalization strategy, Multi Domestic stratgey and

Transactional strategy.

Strategic planning

Strategic planning is an organization's process of defining its strategy, or

direction, and making decisions on allocating its resources to pursue this strategy, includingits capital and people. Various business analysis techniques can be used in strategic

planning, including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats ),

PEST analysis (Political, Economic, Social, and Technological), STEER analysis (Socio-

cultural, Technological, Economic, Ecological, and Regulatory factors), and EPISTEL(Environment, Political, Informatic, Social, Technological, Economic and Legal).

Strategic planning is the formal consideration of an organization's future course. All

strategic planning deals with at least one of three key questions:1. "What do we do?"

2. "For whom do we do it?"

3. "How do we excel?"In business strategic planning, the third question is better phrased "How can we

beat or avoid competition?". (Bradford and Duncan, page 1). In many organizations, this is

viewed as a process for determining where an organization is going over the next year or

more -typically 3 to 5 years, although some extend their vision to 20 years. In order todetermine where it is going, the organization needs to know exactly where it stands, then

determine where it wants to go and how it will get there. The resulting document is called

the "strategic plan." It is also true that strategic planning may be a tool for effectivelyplotting the direction of a company; however, strategic planning itself cannot foretell

exactly how the market will evolve and what issues will surface in the coming days in

order to plan your organizational strategy. Therefore, strategic innovation and tinkeringwith the 'strategic plan' have to be a cornerstone strategy for an organization to survive the

turbulent business climate.

Strategic Planning Process

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Strategic planning process consists of the following stages:

Step1: Develop Mission and Objectives

Mission is the organizations purpose and fundamental reason forexistence. Before formulating the strategy, the organization has to develop clear mission

and objectives

Step 2: Diagnise Internal and external EnvironmentIn this diagnosis. The external environment is scanned for technological

development and changes in market condition.

Step 3: Situation AnalysisInclude SWOT. The information required fopr conduting situational analysis ca n

be derived from a variety of sources such as government reports, journals. Customers,

suppliers, consultants and association meetings.

Step 4: Develop alternative StrategiesDevelop Alternative strategies considering external and internal environment,

diversification, joint ventures strategic alliance, globalization, retrenchment and liquidation

are some of the possible alternative strategies

Step 5: Formulate StrategiesThis step can further be categorised into three stages

(1) Formulate Corporate Level Strategy

(2) Formulate Business Level Strategy

(3) Formulate Fuctional Level Strategy

Step 6: Implementing StrategyStrategy implementaion is the process of translation of strategies and policies into

action through the development of programmes, budgets and procedures.

[Strategy may be implemented by Middle Level and Lower Level Management]

Mission, vision and values

Mission:

Defines the fundamental purpose of an organization or an enterprise, succinctly

describing why it exists and what it does to achieve its Vision. The mission could be eitherfor the long term or the short term. A corporate mission can last for many years, or for the

life of the organization or may change as the organization develops. It is not an objective

with a timeline, but rather the overall goal that is accomplished as organizational goals andobjectives are achieved.

Vision:

Defines the desired or intended future state of an organization or enterprise in terms

of its fundamental objective and/or strategic direction. Vision is a long term view,sometimes describing how the organization would like the world in which it operates to be.

For example a charity working with the poor might have a vision statement which read "A

world without poverty"It is sometimes used to set out a 'picture' of the organization in the future. A vision

statement provides inspiration, the basis for all the organization's planning. It could answer

the question: "Where do we want to go?"

Values:

Beliefs that are shared among thestakeholdersof an organization. Values drive an

organization's culture and priorities.

Strategy:

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Strategy narrowly defined, means "the art of the general" (from Greek stratcgos). A

combination of the ends (goals) for which the firm is striving and the means (policies)by

which it is seeking to get there.

Mission statements and vision statements

Organizations sometimes summarize goals and objectives into a mission statement

and/or a vision statement Others begin with a vision and mission and use them toformulate goals and objectives.

While the existence of a shared mission is extremely useful, many strategy

specialists question the requirement for a written mission statement. However, there aremany models of strategic planning that start with mission statements, so it is useful to

examine them here.

A Mission statement tells you the fundamental purpose of the organization. Itdefines the customer and the critical processes. It informs you of the desired level

of performance.

A Vision statementoutlines what the organization wants to be, or how it wants the

world in which it operates to be. It concentrates on the future. It is a source ofinspiration. It provides clear decision-making criteria.

An advantage of having a statement is that it creates value for those who get

exposed to the statement, and those prospects are managers, employees and sometimes

even customers. Statements create a sense of direction and opportunity. They both are anessential part of the strategy-making process.

Many people mistake vision statement for mission statement, and sometimes one is

simply used as a longer term version of the other. The Vision should describe why it is

important to achieve the Mission. A Vision statement defines the purpose or broader goal

for being in existence or in the business and can remain the same for decades if craftedwell. A Mission statement is more specific to what the enterprise can achieve itself. Vision

should describe what will be achieved in the wider sphere if the organization and others are

successful in achieving their individual missions.

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A mission statement can resemble a vision statement in a few companies, but that

can be a grave mistake. It can confuse people. The mission statement can galvanize the

people to achieve defined objectives, even if they are stretch objectives, provided it can beelucidated in SMART (Specific, Measurable, Achievable, Relevant and Time-bound)

terms. A mission statement provides a path to realize the vision in line with its values.

These statements have a direct bearing on the bottom line and success of the organization.Which comes first? The mission statement or the vision statement? That depends. If

you have a new start up business, new program or plan to re engineer your current services,

then the vision will guide the mission statement and the rest of the strategic plan. If youhave an established business where the mission is established, then many times, the

mission guides the vision statement and the rest of the strategic plan. Either way, you need

to know your fundamental purpose - the mission, your current situation in terms of internal

resources and capabilities (strengths and/or weaknesses) and external conditions(opportunities and/or threats), and where you want to go - the vision for the future. It's

important that you keep the end or desired result in sight from the start..

Features of an effective vision statement include:

Clarity and lack of ambiguity Vivid and clear picture

Description of a bright future

Memorable and engaging wording

Realistic aspirations

Alignment with organizational values and cultureTo become really effective, an organizational vision statement must (the theory

states) become assimilated into the organization's culture. Leaders have the responsibility

of communicating the vision regularly, creating narratives that illustrate the vision, acting

as role-models by embodying the vision, creating short-term objectives compatible with thevision, and encouraging others to craft their own personal vision compatible with the

organization's overall vision. In addition, mission statements need to be subjected to an

internal assessment and an external assessment. The internal assessment should focus onhow members inside the organization interpret their mission statement. The external

assessment which includes all of the businesses stakeholders is valuable since it

offers a different perspective. These discrepancies between these two assessments can giveinsight on the organization's mission statement effectiveness.

Another approach to defining Vision and Mission is to pose two questions. Firstly,

"What aspirations does the organization have for the world in which it operates and has

some influence over?", and following on from this, "What can (and /or does) theorganization do or contribute to fulfill those aspirations?". The succinct answer to the first

question provides the basis of the Vision Statement. The answer to the second question

determines the Mission Statement.

Methodologies

There are many approaches to strategic planning but typically a three-step process may

be used:

Situation - evaluate the current situation and how it came about.

Target - define goals and/or objectives (sometimes called ideal state)

Path - map a possible route to the goals/objectives

One alternative approach is calledDraw-See-Think

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Draw - what is the ideal image or the desired end state?

See - what is today's situation? What is the gap from ideal and why?

Think - what specific actions must be taken to close the gap between today'ssituation and the ideal state?

Plan - what resources are required to execute the activities?

An alternative to theDraw-See-Thinkapproach is called See-Think-Draw See - what is today's situation?

Think- define goals/objectives

Draw - map a route to achieving the goals/objectivesIn other terms strategic planning can be as follows:

Vision - Define the vision and set a mission statement with hierarchy of goals and

objectives

SWOT- Analysis conducted according to the desired goals Formulate - Formulate actions and processes to be taken to attain these goals

Implement - Implementation of the agreed upon processes

Control - Monitor and get feedback from implemented processes to fully control

the operation

Situational analysis

When developing strategies, analysis of the organization and its environment as it isat the moment and how it may develop in the future, is important. The analysis has to be

executed at an internal level as well as an external level to identify all opportunities andthreats of the external environment as well as the strengths and weaknesses of the

organizations.

There are several factors to assess in the external situation analysis:1. Markets (customers)

2. Competition

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3. Technology

4. Supplier markets

5. Labor markets6. The economy

7. The regulatory environment

It is rare to find all seven of these factors having critical importance. It is alsouncommon to find that the first two - markets and competition - are not of critical

importance. (Bradford "External Situation - What to Consider")

Analysis of the external environment normally focuses on the customer.Management should be visionary in formulating customer strategy, and should do so by

thinking about market environment shifts, how these could impact customer sets, and

whether those customer sets are the ones the company wishes to serve.

Analysis of the competitive environment is also performed, many times based onthe framework suggested by Michael Porter.

Goals, objectives and targets

Strategic planning is a very important business activity. It is also important in the

public sector areas such as education. It is practiced widely informally and formally.Strategic planning and decision processes should end with objectives and a roadmap of

ways to achieve those objectives.Most strategic plans address high level initiatives and over-arching goals, but dont

get articulated (translated) into day-to-day projects and tasks that will be required to

achieve the plan. Terminology or word choice, as well as the level a plan is written, areboth examples of easy ways to fail at translating your strategic plan in a way that makes

sense and is executable to others. Often, plans are filled with conceptual terms which dont

tie into day-to-day realities for the staff expected to carry out the plan.

The following terms have been used in strategic planning: desired end states, plans,policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail

to achieve clarity. The most common of these concepts are specific, time bound statements

of intended future results and general and continuing statements of intended future results,which most models refer to as either goals or objectives (sometimes interchangeably).

One model of organizing objectives uses hierarchies. The items listed above may be

organized in a hierarchy of means and ends and numbered as follows: Top Rank Objective(TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in

a lower rank answers to the question "How?" and the objective in a higher rank answers to

the question "Why?" The exception is the Top Rank Objective (TRO): there is no answer to

the "Why?" question. That is how the TRO is defined.People typically have several goals at the same time. "Goal congruency" refers to

how well the goals combine with each other. Does goal A appear compatible with goal B?

Do they fit together to form a unified strategy? "Goal hierarchy" consists of the nesting ofone or more goals within other goal(s).

One approach recommends having short-term goals, medium-term goals, and long-

term goals. In this model, one can expect to attain short-term goals fairly easily: they standjust slightly above one's reach. At the other extreme, long-term goals appear very difficult,

almost impossible to attain. Strategic management jargon sometimes refers to "Big Hairy

Audacious Goals" (BHAGs) in this context. Using one goal as a stepping-stone to the next

involves goal sequencing. A person or group starts by attaining the easy short-term goals,

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then steps up to the medium-term, then to the long-term goals. Goal sequencing can create

a "goal stairway". In an organizational setting, the organization may co-ordinate goals so

that they do not conflict with each other. The goals of one part of the organization shouldmesh compatibly with those of other parts of the organization.

Policy

Policy is the statement or general understanding which provides guidelies in decsionmaking

Features

A policy provides guidelines to the membrs of the organization for deciding a course ofaction and thus restricts their freedom of action.

Policy limits an area with in which a decision is to be made and assures that the decisions

contribute to the objective

Policies are generally expressed in qualitative conditional or general way.Policy formulation is a function of all managers in the organization because some form of

guidelines for future course of ation is required at every level

Characteristics

Relationship to orgainzational objectivesPlanned formulation

Fair aountof ClarityConsistency

The Policy in each area are connected with other area so the inconsistent area will affect

other areas and leadto inefficencyBalanced

A Sound policy maintains balance between stability and flexibilty

Written

A written policy is easier to communicate through the organizational manualsCommunication

A Sound Policy should be communicated to the persons concerned.

Formulation of Strategies and Policies

Corporate Mission and Objectives

Organizational Mission and objectives are the starting point of strategy and policy

formulation

Environmental Analysis

Corporate Analysis

SWOT analysis

Identification of Alternatives

Choice of stratgey and Policy

Choice of deciding the acceptable alternative among the several others

Implementation

Institutionalisation of Strategy

Putting the strategy into opertion

Setting Proper Organizational Climate

Developin Appropriate Operating Plans

In budgeting more resources will be alloted on those factors which are critical to the sucess

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Developing Appropriate Orgainzation Structure

According to the nees of strategy

Periodic Review of Strategy

To find out whether the given strategy is relavant

Planning PremisesIt involves various assumptions on which plans are formulated

Types of Planning Premises

External Premises

To identify opportunites or threats

Environmental changesCustomer Preferences

Internal Premises

Not only external but onstead factors are also considered for the plan formulation. i.e.,organization stucture and Mnaagement System

Strength - Strategic Advantage

Weakness - Limitationsand ConstraintsTangible Premises

Tangible premises can be expressed in quantitative terms like monetary unit, unit of

products, labour hours , etc..

Intangible Premises

Intangible premises are of qualitative nature and cannot be translated into quantitiy

Controllable Premises

Those which can be controlled by organiations actions policies

Uncontrollable Premises

They are controlled by external Environment Policy of the Govt., rate of Economic

Growth

Forecasting

Forecasting is the process of making statements about events whose actualoutcomes (typically) have not yet been observed. A commonplace example might be

estimation of the expected value for some variable of interest at some specified future date.

Prediction is a similar, but more general term. Both might refer to formal statistical

methods employing time series, cross-sectional orlongitudinal data, or alternatively to lessformal judgemental methods. Usage can differ between areas of application: for example in

hydrology, the terms "forecast" and "forecasting" are sometimes reserved for estimates of

values at certain specific future times, while the term "prediction" is used for more generalestimates, such as the number of times floods will occur over a long period.

Risk and uncertainty are central to forecasting and prediction; it is generallyconsidered good practice to indicate the degree of uncertainty attaching to forecasts.Forecasting is used in the practice of Customer Demand Planning in every day business

forecasting for manufacturing companies. The discipline of demand planning, also

sometimes referred to as supply chain forecasting, embraces both statistical forecasting and

a consensus process. An important, albeit often ignored aspect of forecasting, is therelationship it holds withplanning.

Features

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Relates to future Events

Defines the probability of happening of future events

Analysing Past and Present events which are relevant

Use of various statistical tools and techniques

Importance of Forecasting Promotion of Organization

Key to Planning

Co-ordination and control

o The managers know their weakness

Success in Organization

o Risk in Minimum

Forecasting can be described as predicting what the future willlook like, whereasplanning predicts what the future should look like. There is no single right forecasting

method to use. Selection of a method should be based on your objectives and your

conditions (data etc.). A good place to find a method, is by visiting a selection tree. An

example of a selection tress can be found here Categories of forecasting methods

Historical Analogy Method

Forecast in regards to a particular phenomenon is based on some

analogous(comparable) condtions elsewhere in the past.

Survey Method

Field Surveys can be conducted to gather information on the intentions of the

concerned people

Opinion Poll

Opinion poll is conducted to assess the opinion of the kowledgeable persons

and experts in the field whoes views carry a lot of weightage.

Business Barometers

In physical science, a barometer is used to measure the atmospheric pressure.

In the same way, index numbers are used to measure the state to measure the state od

economy between two or more periods.

Regression Analysis

Is meant to dosclose the relative movements of two or more interrelated series

Input - Output Analysis

A forecast of output is based on the given input if relationship between input

and outputis known

Time series methods

Time series methods use historical data as the basis of estimating future outcomes.

Rolling forecast is a projection into the future based on past performances,routinely updated on a regular schedule to incorporate data.[1]

Moving average

weighted moving average

Exponential smoothing

Extrapolation

Linear prediction

Trend estimation

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Growth curve

Topics

Causal / econometric methods

Some forecasting methods use the assumption that it is possible to identify the

underlying factors that might influence the variable that is being forecast. For example,

sales of umbrellas might be associated with weather conditions. If the causes are

understood, projections of the influencing variables can be made and used in the forecast.

Regression analysis using linear regression ornon-linear regression

Autoregressive moving average (ARMA)

Autoregressive integrated moving average (ARIMA)

e.g. Box-Jenkins Econometrics

Judgmental methods

Judgmental forecasting methods incorporate intuitive judgements, opinions and

subjective probability estimates.

Composite forecasts

Surveys

Delphi method

Scenario building

Technology forecasting

Forecast by analogy

Artificial intelligence methods

Artificial neural networks

Support vector machines

Forecasting accuracy

The forecast error is the difference between the actual value and the forecast value

for the corresponding period.

where E is the forecast error at period t, Y is the actual value at period t, and F is

the forecast for period t.

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Measures of aggregate error:

Mean Absolute Error (MAE)

Mean Absolute Percentage Error(MAPE)

Percent Mean Absolute Deviation (PMAD)

Mean squared error(MSE)

Root Mean squared error (RMSE)

Forecast skill (SS)

Please note that business forecasters and practitioners sometimes use differentterminology in the industry. They refer to the PMAD as the MAPE, although they compute

this volume weighted MAPE. For more information see Calculating Demand Forecast

Accuracy

Applications of forecasting

Forecasting has application in many situations:

Supply chain management - Forecasting can be used in Supply Chain Management

to make sure that the right product is at the right place at the right time. Accurate

forecasting will help retailers reduce excess inventory and therefore increase profit

margin. Accurate forecasting will also help them meet consumer demand. Weather forecasting, Flood forecasting and Meteorology

Transport planning and Transportation forecasting

Economic forecasting

Technology forecasting

Earthquake prediction

Land use forecasting

Product forecasting

Player and team performance in sports

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Telecommunications forecasting

Political Forecasting

Sales Forecasting

Strategic foresight

Strategic foresight is a fairly recent attempt to differentiate "futurology" from

"futures studies". It arises from the premise that: The future is not predictable;

The future is not predetermined; and

Future outcomes can be influenced by our choices in the present (Amara(1981)).

Strategic foresight can also be practiced at three different levels:

1. Pragmatic foresight - "Carrying out tomorrows' business better" (Hamel &

Prahalad, 2004);2. Progressive foresight - "Going beyond conventional thinking and practices and

reformulating processes, products, and services using quite different

assumptions"(Slaughter (2004) p .217);

3. Civilisational foresight - "Seeks to understand the aspects of the next civilisation -the one that lies beyond the current impasse, the prevailing hegemony of

techno/industrial/capitalist interests"(ibid.).Two approaches to futures studies that are especially focussed at those last two

levels of strategic foresight are Critical futures and Integral futures.

Strategic Foresight Group defines foresight as a combination of forecasting withinsight. While forecasting requires methodologies, generated by computers or otherwise,

insight requires deep understanding of the subject concerned. Foresight is developed by

applying forecasting methodology to the insight. Strategic Foresight relates to foresight of

strategic issues. Thus, strategic foresight can be developed by scientific study. It is notabout intuition or guess work. The difference between strategic foresight and futurology is

that strategic foresight provides alternative scenarios for the future. Futurology attempts to

provide a definitive picture of the future.

Quotes

Strategic Foresight is the ability to create and maintain a high-quality, coherent

and functional forward view, and to use the insights arising in usefulorganisational ways. For example to detect adverse conditions, guide policy, shape

strategy, and to explore new markets, products and services. It represents a fusion

of futures methods with those of strategic management(Slaughter (1999), p.287).

Take hold of your future or the future will take hold of you (Patrick DixonFuturewisepubl 2005)

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Decision making

Decision making can be regarded as an outcome of mental processes (cognitive

process) leading to the selection of a course of action among several alternatives. Every

decision making process produces a final choice. The output can be an action or an opinionof choice.

Overview

Human performance in decision making terms has been the subject of active

research from several perspectives. From a psychological perspective, it is necessary toexamine individual decisions in the context of a set of needs, preferences an individual has

and values they seek. From a cognitive perspective, the decision making process must be

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regarded as a continuous process integrated in the interaction with the environment. From a

normative perspective, the analysis of individual decisions is concerned with the logic of

decision making and rationality and the invariant choice it leads to.Yet, at another level, it might be regarded as a problem solving activity which is

terminated when a satisfactory solution is found. Therefore, decision making is a reasoning

or emotional process which can be rational or irrational, can be based on explicitassumptions ortacit assumptions.

Logical decision making is an important part of all science-based professions,

where specialists apply theirknowledge in a given area to making informed decisions. Forexample, medical decision making often involves making a diagnosis and selecting an

appropriate treatment.

Some research using naturalistic methods shows, however, that in situations with

higher time pressure, higher stakes, or increased ambiguities, experts use intuitive decisionmaking rather than structured approaches, following a recognition primed decision

approach to fit a set of indicators into the expert's experience and immediately arrive at a

satisfactory course of action without weighing alternatives.

Recent robust decision efforts have formally integrated uncertainty into the decisionmaking process. However, Decision Analysis, recognized and included uncertainties with a

structured and rationally justifiable method of decision making since its conception in1964.

Fig Represents - Rational Decision Making

Problem Analysis vs. Decision Making

It's important to differentiate between problem analysis and decision making. The

concepts are completely separate of one another. Problem analysis must be done first, thenthe information gathered in that process may be used towards decision making.

Problem Analysis

Analyze performance, what should the results be against what they actually are

Problems are merely deviations from performance standards

Problem must be precisely identified and described

Problems are caused by some change from a distinctive feature

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Something can always be used to distinguish between what has and hasn't been

effected by a cause

Causes to problems can be deducted from relevant changes found in analyzing theproblem

Most likely cause to a problem is the one that exactly explains all the facts

Decision Making

Objectives must first be established

Objectives must be classified and placed in order of importance

Alternative actions must be developed

The alternative must be evaluated against all the objectives

The alternative that is able to achieve all the objectives is the tentative decision

The tentative decision is evaluated for more possible consequences

The decisive actions are taken, and additional actions are taken to prevent any

adverse consequences from becoming problems and starting both systems (problem

analysis and decision making) all over again

Everyday techniques

Some of the decision making techniques people use in everyday life include:

Listing the advantages and disadvantages of each option, popularized by Plato and

Benjamin Franklin

Choosing the alternative with the highest probability-weighted utility for each

alternative (seeDecision Analysis)

satisficing: Accepting the first option that seems like it might achieve the desiredresult

Acquiesce to a person in authority or an "expert",just following orders

flipism: Flipping a coin, cutting a deck of playing cards, and other random orcoincidence methods

Prayer, tarot cards, astrology,augurs, revelation, or other forms ofdivination

http://en.wikipedia.org/wiki/Platohttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Utilityhttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Satisficinghttp://en.wikipedia.org/wiki/Experthttp://en.wikipedia.org/wiki/Just_following_ordershttp://en.wikipedia.org/wiki/Flipismhttp://en.wikipedia.org/wiki/Prayerhttp://en.wikipedia.org/wiki/Tarothttp://en.wikipedia.org/wiki/Astrologyhttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Revelationhttp://en.wikipedia.org/wiki/Divinationhttp://en.wikipedia.org/wiki/Platohttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Utilityhttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Satisficinghttp://en.wikipedia.org/wiki/Experthttp://en.wikipedia.org/wiki/Just_following_ordershttp://en.wikipedia.org/wiki/Flipismhttp://en.wikipedia.org/wiki/Prayerhttp://en.wikipedia.org/wiki/Tarothttp://en.wikipedia.org/wiki/Astrologyhttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Revelationhttp://en.wikipedia.org/wiki/Divination


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Cognitive and personal biases

Biases can creep into our decision making processes. Many different people have

made a decision about the same question (e.g. "Should I have a doctor look at this troublingbreast cancer symptom I've discovered?" "Why did I ignore the evidence that the project

was going over budget?") and then craft potential cognitive interventions aimed at

improving decision making outcomes.Below is a list of some of the more commonly debated cognitive biases.

Selective search forevidence (a.k.a. Confirmation bias in psychology) (Scott Plous,

1993) We tend to be willing to gather facts that support certain conclusions butdisregard other facts that support different conclusions. Individuals who are highly

defensive in this manner show significantly greater left prefrontal cortex activity as

measured by EEG than do less defensive individuals.

Premature termination of search for evidence We tend to accept the firstalternative that looks like it might work.

Inertia Unwillingness to change thought patterns that we have used in the past in

the face of new circumstances.

Selective perception We actively screen-out information that we do not think isimportant. (See prejudice.) In one demonstration of this effect, discounting of

arguments with which one disagrees (by judging them as untrue or irrelevant) wasdecreased by selective activation of right prefrontal cortex.

Wishful thinking oroptimism bias We tend to want to see things in a positive

light and this can distort our perception and thinking.

Choice-supportive bias occurs when we distort our memories of chosen and

rejected options to make the chosen options seem more attractive.

Recency We tend to place more attention on more recent information and either

ignore or forget more distant information. (See semantic priming.) The oppositeeffect in the first set of data or other information is termed Primacy effect (Plous,

1993).

Repetition bias A willingness to believe what we have been told most often andby the greatest number of different of sources.

Anchoring and adjustment Decisions are unduly influenced by initial information

that shapes our view of subsequent information.

Group thinkPeer pressure to conform to the opinions held by the group.

Source credibility bias We reject something if we have a bias against the person,

organization, or group to which the person belongs: We are inclined to accept a

statement by someone we like. (See prejudice.)

Incremental decision making and escalating commitment We look at a decision as

a small step in a process and this tends to perpetuate a series of similar decisions.

This can be contrasted with zero-based decision making. (See slippery slope.)

Attribution asymmetry We tend to attribute our success to our abilities and

talents, but we attribute our failures to bad luck and external factors. We attribute

other's success to good luck, and their failures to their mistakes.

Role fulfillment (Self Fulfilling Prophecy) We conform to the decision making

expectations that others have of someone in our position.

Underestimating uncertainty and the illusion of control We tend to underestimate

future uncertainty because we tend to believe we have more control over events

http://en.wikipedia.org/wiki/Biashttp://en.wikipedia.org/wiki/List_of_cognitive_biaseshttp://en.wikipedia.org/wiki/Evidencehttp://en.wikipedia.org/wiki/Confirmation_biashttp://en.wikipedia.org/wiki/Scott_Ploushttp://en.wikipedia.org/wiki/Cognitive_inertiahttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Wishful_thinkinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Choice-supportive_biashttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Primacy_effecthttp://en.wikipedia.org/wiki/Anchoring_and_adjustmenthttp://en.wikipedia.org/wiki/Group_thinkhttp://en.wikipedia.org/wiki/Peer_pressurehttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Slippery_slopehttp://en.wikipedia.org/wiki/Attribution_theoryhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Biashttp://en.wikipedia.org/wiki/List_of_cognitive_biaseshttp://en.wikipedia.org/wiki/Evidencehttp://en.wikipedia.org/wiki/Confirmation_biashttp://en.wikipedia.org/wiki/Scott_Ploushttp://en.wikipedia.org/wiki/Cognitive_inertiahttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Wishful_thinkinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Choice-supportive_biashttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Primacy_effecthttp://en.wikipedia.org/wiki/Anchoring_and_adjustmenthttp://en.wikipedia.org/wiki/Group_thinkhttp://en.wikipedia.org/wiki/Peer_pressurehttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Slippery_slopehttp://en.wikipedia.org/wiki/Attribution_theoryhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Uncertainty


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than we really do. We believe we have control to minimize potential problems in

our decisions.

Decision theory

Normative and descriptive decision theory

Most of decision theory is normative orprescriptive, i.e., it is concerned with

identifying the best decision to take, assuming an ideal decision maker who is fullyinformed, able to compute with perfect accuracy, and fully rational. The practical

application of this prescriptive approach (how people actually make decisions) is called

decision analysis, and aimed at finding tools, methodologies and software to help peoplemake better decisions. The most systematic and comprehensive software tools developed in

this way are called decision support systems.

Since people usually do not behave in ways consistent with axiomatic rules, oftentheir own, leading to violations of optimality, there is a related area of study, called a

positive ordescriptive discipline, attempting to describe what people will actually do. Since

the normative, optimal decision often creates hypotheses for testing against actualbehaviour, the two fields are closely linked. Furthermore it is possible to relax the

assumptions of perfect information, rationality and so forth in various ways, and produce a

series of different prescriptions or predictions about behaviour, allowing for further tests of

the kind of decision-making that occurs in practice.

What kinds of decisions need a theory?

Choice under uncertainty

This area represents the heart of decision theory. The procedure now referred to as

expected value was known from the 17th century. Blaise Pascal invoked it in his famous

wager (see below), which is contained in his Penses, published in 1670. The idea ofexpected value is that, when faced with a number of actions, each of which could give rise

to more than one possible outcome with different probabilities, the rational procedure is to

identify all possible outcomes, determine their values (positive or negative) and the

http://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Decision_analysishttp://en.wikipedia.org/wiki/Decision_support_systemhttp://en.wikipedia.org/wiki/Axiomatichttp://en.wikipedia.org/wiki/Positivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Expected_valuehttp://en.wikipedia.org/wiki/Blaise_Pascalhttp://en.wikipedia.org/wiki/Pens%C3%A9eshttp://en.wikipedia.org/wiki/Pens%C3%A9eshttp://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Decision_analysishttp://en.wikipedia.org/wiki/Decision_support_systemhttp://en.wikipedia.org/wiki/Axiomatichttp://en.wikipedia.org/wiki/Positivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Expected_valuehttp://en.wikipedia.org/wiki/Blaise_Pascalhttp://en.wikipedia.org/wiki/Pens%C3%A9es


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probabilities that will result from each course of action, and multiply the two to give an

expected value.

The action to be chosen should be the one that gives rise to the highest totalexpected value. In 1738, Daniel Bernoulli published an influential paper entitled

Exposition of a New Theory on the Measurement of Risk, in which he uses the St.

Petersburg paradox to show that expected value theory must be normatively wrong. He alsogives an example in which a Dutch merchant is trying to decide whether to insure a cargo

being sent from Amsterdam to St Petersburg in winter, when it is known that there is a 5%

chance that the ship and cargo will be lost. In his solution, he defines a utility function andcomputes expected utility rather than expected financial value.

In the 20th century, interest was reignited by Abraham Wald's 1939 paper pointing

out that the two central concerns of orthodox statistical theory at that time, namely

statistical hypothesis testing and statistical estimation theory, could both be regarded asparticular special cases of the more general decision problem. This paper introduced much

of the mental landscape of modern decision theory, including loss functions, risk functions,

admissible decision rules, a priori distributions, Bayes decision rules, and minimax

decision rules. The phrase "decision theory" itself was first used in 1950 by E. L. Lehmann.The rise ofsubjective probability theory, from the work ofFrank Ramsey, Bruno de

Finetti, Leonard Savage and others, extended the scope of expected utility theory tosituations where only subjective probabilities are available. At this time it was generally

assumed in economics that people behave as rational agents and thus expected utility

theory also provided a theory of actual human decision-making behaviour under risk. Thework ofMaurice Allais and Daniel Ellsberg showed that this was clearly not so.

Theprospect theory ofDaniel Kahneman and Amos Tversky placed behavioural

economics on a more evidence-based footing. It emphasized that in actual human (as

opposed to normatively correct) decision-making "losses loom larger than gains", peopleare more focused on changes in their utility states than the states themselves and estimation

of subjective probabilities is severely biased by anchoring.

Castagnoli and LiCalzi (1996), Bordley and LiCalzi (2000) recently showed thatmaximizing expected utility is mathematically equivalent to maximizing the probability

that the uncertain consequences of a decision are preferable to an uncertain benchmark

(e.g., the probability that a mutual fund strategy outperforms the S&P 500 or that a firmoutperforms the uncertain future performance of a major competitor.). This reinterpretation

relates to psychological work suggesting that individuals have fuzzy aspiration levels

(Lopes & Oden), which may vary from choice context to choice context. Hence it shifts the

focus from utility to the individual's uncertain reference point.Pascal's Wageris a classic example of a choice under uncertainty. The uncertainty,

according to Pascal, is whether or not God exists. Belief or non-belief in God is the choice

to be made. However, the reward for belief in God if God actually does exist is infinite.Therefore, however small the probability of God's existence, the expected value of belief

exceeds that of non-belief, so it is better to believe in God. (There are several criticisms of

the argument.)

http://en.wikipedia.org/wiki/Daniel_Bernoullihttp://en.wikipedia.org/wiki/St._Petersburg_paradoxhttp://en.wikipedia.org/wiki/St._Petersburg_paradoxhttp://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Amsterdamhttp://en.wikipedia.org/wiki/St_Petersburghttp://en.wikipedia.org/wiki/Utility_functionhttp://en.wikipedia.org/wiki/Expected_utilityhttp://en.wikipedia.org/wiki/Abraham_Waldhttp://en.wikipedia.org/wiki/Orthodox_statisticshttp://en.wikipedia.org/wiki/Statistical_hypothesis_testinghttp://en.wikipedia.org/wiki/Estimation_theoryhttp://en.wikipedia.org/wiki/Loss_functionhttp://en.wikipedia.org/wiki/Risk_functionhttp://en.wikipedia.org/wiki/Admissible_decision_rulehttp://en.wikipedia.org/wiki/Prior_probabilityhttp://en.wikipedia.org/wiki/Admissible_decision_rule#Bayes_ruleshttp://en.wikipedia.org/wiki/Minimaxhttp://en.wikipedia.org/wiki/E._L._Lehmannhttp://en.wikipedia.org/wiki/Subjective_probabilityhttp://en.wikipedia.org/wiki/Frank_P._Ramseyhttp://en.wikipedia.org/wiki/Bruno_de_Finettihttp://en.wikipedia.org/wiki/Bruno_de_Finettihttp://en.wikipedia.org/wiki/L._J._Savagehttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Expected_utilityhttp://en.wikipedia.org/wiki/Maurice_Allaishttp://en.wikipedia.org/wiki/Daniel_Ellsberghttp://en.wikipedia.org/wiki/Prospect_theoryhttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Behavioural_economicshttp://en.wikipedia.org/wiki/Behavioural

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