1. 1 Tools for Decision Making Gordon Haff Cloud Product Strategy Red Hat 3 May 2014

2. 2 About Me Red Hat Cloud Product Strategy Twitter: @ghaff Google+: Gordon Haff Email: ghaff@redhat.com Blog: http://bitmason.blogspot.com Flickr: http://www.flickr.com/photos/bitmason/ Formerly: Illuminata (industry analyst), Data General (minicomputers/Unix/NUMA/etc.), shareware developer 3. 3 Some Decision-Making Tools and Approaches Data vs. models Complex models vs. heuristics Data-driven vs. hunches Individual vs. group Crowd wisdom Behavioral decision theory 4. 4 The Wisdom of Crowds 5. 5 The average competitor was probably as well fitted for a just estimate of the dressed weight of an ox, as an average voter is of judging the merits of most political issues on which he votes. Francis Galton 6. 6 The Crowds Result? Within one pound 7. 7 An Oscar Contest Example: Consensus* vs. Experts *read consensus as modal group choice for each decision Best picture Best actress Phil Eve Sue Tom Harry Eve Tom Harry Phil Sue 8. 8 Oscar contest: Consensus vs. Winners by Year 9. 9 Is Averaging Experts Better? Best > 20 year contestant: 28.5 (vs. 30.5) Best 5 year contestant: (31 (vs. 33 during same period) 10. 10 When do wise crowds work? Diversity of opinion Information Independence Decentralization Aggregation 11. 11 Decreasing Advantage = Decreasing Independence? 12. 12 Nate Silver: Aggregating Models 13. 13 Prediction Markets are an Implementation Regulatory hurdles when real money involved Have been experimented with for internal use by companies such as Google Ultimately, observing that aggregating many models/ decisions may trump individual expertise may be most important lesson 14. 14 Why are Individual Decisions Flawed? Youre stupid You lack data You lack domain expertise You lack time Youre being influenced by persistent and common biases and therefore making non-optimal decisions 15. 15 Behavioral Decision Theory Humans vs. homo economicus 1979: Kahneman and Tversky: Prospect theory: An Analysis of Decision Under Risk Choice architectures Anchors Frames Sunk costs Probabilities Availability bias 16. 16 Organ Donation Rates in Europe Whats different between the gold and blue countries? 17. 17 Choice Architectures are Unavoidable At best, people depend on simplifying rules Can nudge in positive directions while maintaining freedom to decide differently But is a very powerful tool o Default savings o Automatic renewals o Default options in software, etc. 18. 18 The Offered Choices Matter Caveat: Choice need not create complexity 19. 19 20. 20 Source: Wikimedia 21. 21 Anchoring: We Dont Adjust Enough Bias can appear even when you know the anchor is random Leads to incrementalist approach (e.g. in policy-making) Common in negotiations Also related to setting confidence limits on forecasts and other predictions too narrowly 22. 22 Choose between: o A sure gain of $240 o 25% chance to win $1,000 and a 75% chance to gain nothing 23. 23 Choose between: o A sure loss of $750 o 75% chance to lose $1000 and a 25% chance to lose nothing 24. 24 Framing Risk aversion Risk seeking in losses Discounts vs. surcharges More broadly: o 25% meat vs. 25% fat o Pro-choice o Survey language 25. 25 Sunk costs The basketball game is still on in spite of the blizzard. Do you still go? You won the ticket from the local radio station You bought the ticket for $10 You bought the ticket for $100 26. 26 Sunk Costs Sunk cost avoidance is pervasively seen in experiments Possibility that spending more money may make the whole thing worthwhile consistent with prospect theory Also cognitive dissonance With respect to using sunk costs, foot-in-the-door, bait- and-switch, low-ball, skin-in-the-game are related Can make it sensible to focus on variable costs (temporarily) Always a fallacy? 27. 27 People Suck at Statistics (aka Gamblers Fallcy) We havent had much snow for the past three years. The big one is due! Buy any model of Acme snowblower by September 30 and take 20 percent off. Be ready for the coming blizzard! 28. 28 Availability Bias Which is more common cause of death (US)? o Fires? o Parkinsons Disease? Which is more common cause of death (US)? o Road accidents? o Flu and pneumonia? Overreact to new or familiar information 29. 29 Summary Groups can be powerful but composition and organization matter o Wisdom of crowds vs. group-think o Governance and culture also matter for joint and community undertakings (e.g. open source) Individual decision making subject to many biases o Be aware! 30. 30 QUESTIONS & LEARN MORE MY INFO Twitter: @ghaff Google+: Gordon Haff Email: ghaff@redhat.com Blog: http://bitmason.blogspot.com