rims behavioral ds 5 2011 ppt3 · 1. read the following excerpt at normal speed. donʼt skim or...

Behavioral Decision Science Improving Strategic Decision Making: Behavioral

Decision Science and Risk Management

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Carl Spetzler CEO, Strategic Decisions Group Program Director, Stanford Strategic Decision and Risk Management

RIMS 2011 Vancouver, BC, Canada

May 4, 2011

© 2011 by Stanford Strategic Decision and Risk Management. All rights reserved. Used with permission.

______ __ _____ _________ _________ Welcome to RIMS 2011 Annual Conference & Exhibition

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Horizontal Lines

We have distortions in our judgment and beliefs that form the basis of our decisions.

1. Read the following excerpt at normal speed. Don’t skim or skip.

A newspaper is better than a magazine. A seashore is a better place than the street. At first it is better to run than to walk. You may have to try it several times. It takes some skill, but it is easy to learn. Even young children can enjoy it. Once successful, complications are minimal. Birds seldom get too close. Rain, however, soaks in very fast. Too many people doing the same thing can also cause problems. One needs lots of room. If there are no complications, it can be very peaceful. A rock will serve as an anchor. If things break loose from it, however, you will not get a second chance.

2. Take a moment and ask yourself how you feel about the paragraph. Is the paragraph comprehensible or meaningless?

3. Now consider a single word. KITE 4. Reread the paragraph and notice the discomfort shifting to a pleasant sense that everything fits. It works and has meaning.

5. Reread the paragraph again and see if you can regain the lack of understanding.

Source: On Being Certain: Believing You Are Right When You’re Not. Robert Burton, MD.


Uncertainty

Capacity

Association Protection of Mindset

Simplification Habits & Personality

Social Influences Relative Comparison

We organize the beau3ful complexity of our minds into six categories.


Uncertainty

Capacity



Social Influences

Central to all of the mechanisms is the way the mind works.

Relative Comparison

The feeling of knowing is separate from the knowledge.

–  The feeling of knowing is a primary feeling like anger and fear. It is universal.

–  It isn’t just our cool heads that are our source of probability statements as a subjec3ve “degree of belief”.

–  Knowing has its roots in the limbic system – the seat of emo3ons.

– We can have a strong feeling of cer3tude that can’t be reasoned away, but that is totally misplaced.

–  No wonder our sense of the likelihood of an accident rises significantly upon seeing one.

–  Remember the collec3ve sense of risk aIer 9/11?

Source: On Being Certain: Believing You Are Right When You’re Not. Robert Burton, MD

Memory Effects: Where were you when the challenger blew up?

– Within one day of the accident, a psychologist, Ulric Neisser, asked a class of 106 students to write down exactly where they were, what they’d been doing, and how they felt.

–  Two and a half years later they were again interviewed. –  Less than 10% had all the details correct. More than half had significant errors. And, 25% had strikingly different accounts.

–  Yet, before seeing their original wri3ng, most presumed that their memories were correct.

–  One student commented: “That's my handwri3ng, but that’s not what happened.”

Source: On Being Certain: Believing You Are Right When You’re Not. Robert Burton, MD

Deliberative Brain Cool Slow

New – 150,000 yrs old

Intuitive Brain Hot (Emotional)

Fast Powerful for Pattern

Recognition 6 Million yrs old

The brain processes decisions in two significantly different ways.


Significant

Automatic

Strategic

So, we use two very different mental processes in our decision-‐making.

Deliberative Brain Cool

Slow New – 150,000 yrs

old

“Intuitive Brain” Hot (Emotional)

Fast Powerful for

Pattern Recognition 6 Million Years Old


Preven3ons and improvements depend on the nature of the decision.

Significant

Automatic

Strategic


When it comes to decision making, our amazing brains are: 1.   Delibera3ve plus Emo3onal/Social

2.   Filled with our “mindset” – and a sense of knowing

3.   Limited -‐-‐ 5 (plus or minus 2), therefore

Hierarchical and Rela3onal Memory Store “abstracts” and fill in during recall

4.   Slow sequen3al processors with massive parallel processing

Rela3ve – primarily compare (… to what?) Lazy – avoid effort and simplify

5.   Opera3ng consciously and

unconsciously

6.   Plas3c – repair themselves, adjust, and grow


Uncertainty

Capacity



Social Influences Relative Comparison

We organize the beau3ful complexity of our minds into six categories.

© 2010 Strategic Decisions Group International LLC. Decision Science Concept Map —

Problem 1:

Imagine that the US is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are as follows:

•  If Program A is adopted, 200 people will be saved.

•  If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.

Which of the two programs would you favor?

Source: Tversky & Kahneman, The Framing of Decisions and the Psychology of Choice, Science, Vol 211, 30 Jan 1981


Problem 1: [N=152]


•  If Program A is adopted, 200 people will be saved. [72%]

•  If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. [28%]




Problem 2:


•  If Program C is adopted, 400 people will die.

•  If Program D is adopted, there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.




Problem 2: [N=155]


•  If Program C is adopted, 400 people will die. [22%]

•  If Program D is adopted, there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die. [78%]




Framing the same problem in two different ways can significantly affect people’s choices.

Program A or C:

Program B or D:

200 people alive 400 people dead



p=1/3

p=2/3

Problem 1 Problem 2

[72%]

[28%]

[22%]

[78%]

p=1


U.S. cigarette production

What is your probability that U.S. cigarette production in 2007 was greater than 40 billion cigarettes? 2007 was greater than 4 Trillion cigarettes?

%

What is your best estimate of U.S. cigarette production in 2007?

Actual Answer is 468.3 Billion Source USDA 2007

This an example of anchoring on irrelevant information.


Donald is a quiet man with a retiring personality. Is he more likely to be … 1 a librarian, or 2 a salesman Circle one.

The bias that comes from attending to specific information while ignoring the base rate is called representativeness.

More and more books about Behavioral Decision Science are being published.

(1997) Why People Believe Weird Things (Shermer) (1998) Phantoms in the Brain (Ramachandran and Blakeslee) (1998) Sources of Power (Klein)

(2000) The Tipping Point (Gladwell) (2001) Seven Sins of Memory (Schacter)

(2005) Blink (Gladwell) (2006) A Mind of Its Own (Fine) (2006) In Search of Memory (Kandel) (2006) Stumbling on Happiness (Gilbert)

(2007) Blind Spots (Van Hecke) (2007) Mistakes Were Made (But Not by Me) (Tavris and Aronson)

(2008) Blunder (Shore) (2008) Nudge (Thaler and Sunstein) (2008) On Being Certain (Burton) (2008) Predictably Irrational (Ariely) (2008) Sway (Brafman and Brafman)

(2009) Bozo Sapiens (Kaplan and Kaplan) (2009) How We Decide (Lehrer) (2009) Management Rewired (Jacobs) (2009) Scientific American Day in the Life of Your Brain (Scientific American and Horstman) (2009) The New Executive Brain (Goldberg)

(2009) Why We Make Mistakes (Hallinan) (2009) Think Twice (Mauboussin) (2009) The Power of Intuition (Gary Klein)

(2008) True Enough (Farhad Manjoo)

(2010) Priceless (Poundstone)


Decision Science consists of four major fields of study…

Prescriptive Based on Norms of DT

Descriptive

Multi-Party Decision Maker

Single Decision Maker

Normative


The seminal figures have tended to focus on different quadrants and served different uses of the field.



Descriptive (compared to norms)

Singular Decision Maker

Ron Howard

Howard Raiffa

Simon & March

Kahneman & Tversky

Insight for Marketing Science + Political Science + Behavioral Law + Behavioral Economics + Behavioral Finance

Negotiation, Collaboration, Competition

Individuals and decision bodies

Support for Deciders – Families, Corporations, Government, & Non-Profit

Normative




Descriptive (compared to norms)

Singular Decision Maker

Ron Howard

Howard Raiffa

Simon & March

Kahneman & Tversky

Insight for Marketing Science + Political Science + Behavioral Law + Behavioral Economics + Behavioral Finance

Negotiation, Collaboration, Competition

Individuals and decision bodies

Support for Deciders – Families, Corporations, Government, & Non-Profit

Normative

Decision professionals build on the behavioral decision sciences for prescriptive purposes.

Thank you for your aYen3on AS PART OF RIMS GREEN INITIATIVES, THERE ARE NO PRINTED HANDOUTS. VISIT WWW.RIMS.ORG/2011HANDOUTS TO DOWNLOAD AVAILABLE HANDOUTS. PRINTING ON DEMAND STATIONS ARE AVAILABLE IN LEVEL 1 LOBBY OF THE VANCOUVER CONVENTION CENTRE, AS WELL AS IN RIMS CYBER STATIONS LOCATED IN BOOTHS #227 AND #1931 IN THE EXHIBIT HALL.

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To learn more, consider the Stanford Strategic Decision and Risk Management Program Course. Available on-‐line and on campus: Behavioral Challenges in Decision Making http://strategicdecisions.stanford.edu

We see CVX as the clear leader in ODQ.

Evidence of ODQ Culture

Decision Makers

Decision Staff

Content Experts and

Implementers

Decision Processes and

Tools

“In our DNA” GK

Trained Certified

George Kirkland video

400 Trained and embedded

Knowledgeable Participants

Effective and advantaged

?

Since Chevron has DA in its DNA, it’s obvious to ask: What is the shareholder return?

http://www.youtube.com/chevron#p/u/12/JRCxZA6ay3M

For 5 years, Chevron has outpaced its peers.

Source: Yahoo 4-25-2011

If Chevron had performed like Shell & ConocoPhillips it would have been worth $73B (38%)less.

How much is due to making better bets? How much is due to better execution? How much is due to luck? How much is due to Chevron Values?

Chevron $216B CVX

XOM COP Shell

BP

100 Chevron Decision Professionals judged the performance difference to be due to:

Better Decisions

The Chevron* Way

Execution +

Luck

Clearly BP made some bad decisions.

Source: Yahoo 4-25-2011

If BP had not had major decision failures and had performed like Shell and ConocoPhillips. It would be worth $130B more.

If it had performed like Chevron, it would be worth 276 billion more. Nearly triple its current value.

CVX

XOM COP Shell

BP BP $146B

rims behavioral ds 5 2011 ppt3 · 1. read the following excerpt at normal speed. donʼt skim or...

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