Posted: December 17th, 2014

MGT 422 M4C-Evaluating Decision Alternatives and Assessing Risk

MGT 422 M4C-Evaluating Decision Alternatives and Assessing Risk

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BACKGROUND MATERIAL:
Cohen, W.D. (2009). Funky math helped BofA close Merrill deal. Fortune Magazine. http://money.cnn.com/2009/11/23/news/companies/bofa_merrill.fortune/index.htm

Evaluating Decision Alternatives and Assessing Risk
Please be sure to thoroughly review the required background materials before undertaking the ASSIGNMENT

Assignment

In the fourth quarter of 2008, executives at Bank of America made a decision not to release information to shareholders about losses in connection with Merrill Lynch.

This decision resulted in accusations of violation of securities laws and eventual Congressional Hearings. Read the following account of the events leading up to that decision and prepare a 2-page paper that addresses the following:

1.Analyze the executive’s behavior in terms of one or more of the decision biases discussed in the background materials for this module
.
2.How could conducting an assessment of consequences, risk, and feasibility have affected their decision?

Or would it have made no difference at all?

Defend your answer.

MORE BACKGROUND MATERIAL

Decision Bias

Even when the process of generating alternatives has been painstaking, the decision-making process can run off the rails if decision bias is allowed to creep in during evaluation. These fall into the general categories of overconfidence, loss aversion, self-serving bias, and hindsight bias.

Overconfidence bias occurs when the decision maker overestimates the accuracy of forecasts or data used to evaluate alternatives. This can lead to escalation of commitment where leaders miss opportunities or continue to follow a losing course of action because of “sunk costs”—continuing to throw good money and resources after bad. Overconfidence can also lead leaders to ignore “base rates” and fail to take into account prior conditions. View the following video for some spectacular examples of leader overconfidence:

Parayre, R. (2008). Decision Making Biases: Examples of overconfidence. Decision Strategies International. http://www.kewego.com/video/iLyROoafY6hs.html

Loss aversion refers to the human tendency to choose to avoid a loss over take a chance on a gain. In an interesting study that analyzed the behavior of professional golfers, two Wharton professors describe the business lessons learned when CEO’s favor alternatives that avoid a loss in the short term over longer term gains.

A self-serving bias refers to the tendency to claim responsibility for successes, but not for failures. It also describes a tendency to interpret ambiguous information in such a way that it is serves the decision makers interests. Here is a thumbnail explanation for why leaders display this bias:

Hindsight bias describes the propensity to view past events as having been predictable, when in fact there is no way the event could have been predicted. See why historical facts are needed to insure sound decisions.

Hindsight Bias (2009). http://www.viddler.com/v/7c4789a0

The trouble with these biases is that they are almost always unconscious and it is virtually impossible to see them happening in the heat of the decision process. The best defense against decision errors caused by biases is a systematic method for determining the consequences, risks, and feasibility of different alternatives.

Assessing Consequences

When evaluating choices between options, consider the implications of each choice.

Six Thinking Hats is a technique that compels the leader to look at possible choices trough different interpretative lenses. Many of us have a dominant decision style, and the six hats guides us through thinking about a possible alternative from a data-driven, intuitive, cynical, positive, creative, and process control point of view or decision style. To learn how to use this technique, read:

Six Thinking Hats: Looking at a decision from all points of view. (2011) MindTools. http://www.mindtools.com/pages/article/newTED_07.htm

Assessing Risk

Many, if not most, decisions come with some degree of uncertainty. We can think of risk as the probability that something will go wrong. Understanding the degree of risk involved with a given alternative is critical to mitigating it. Risk analysis is difficult and for complex decisions, many companies rely on outside consultants who have developed sophisticated risk analysis software. Still, it is helpful to understand what goes into these risk assessments.

Risk Analysis: The reading by Robert Harris titled “Introduction to Decision Making” that you read in Module 2 had a thorough section on risk that probably didn’t make a lot of sense to you at the time. Go back and re-read this section now:

Harris, R. (2008). Introduction to decision making. VirtualSalt. http://www.virtualsalt.com/crebook5.htm

Assessing Feasibility

Before selecting any solution, it is critical to appraise proposed solutions for feasibility. That is, CAN the solution be implemented? Is it practical? Will it make a difference? To answer these questions, leaders must look at whether or not the resources exist to implement the solution, if the solution matches the desired objectives identified while establishing the constructive environment for the decision (Module 2), and if the solution is likely to provide long term results. These tools can be helpful in making these assessments:

Starbursting Technique: This is a tool similar to brainstorming, only the objective is to raise questions of feasibility that may have been overlooked during evaluation of alternatives.

Starbursting: Understanding new ideas by brainstorming questions. (2009). Mindtools: Essential skills for an excellent career. http://www.mindtools.com/pages/article/newCT_91.htm

PMI technique: This stands for “plus/minus/interesting” and helps decision makers evaluate whether or not a selected option is likely to make an appreciable difference if implemented.

PMI Matrix. (n.d.) Creative Industries Research Institute. http://www.ciri.org.nz/downloads/PMI.pdf

Cost-Benefit Analysis: A quantitative tool that assesses financial feasibility. This form of analysis can be quite involved, but here is a concise explanation of what is involved:

Cost-Benefit Analysis. (2009) Value Based Management. http://www.valuebasedmanagement.net/methods_cost-benefit_analysis.html

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