Decision making assignment

Why is investing relevant to managerial decision making?

· As with all Decision Making, biases and boundedness compromise outcomes

· So many managerial decisions comprise investing something

· Money, time, energy, resources, reputation, emotion, hopes…what else?

· Perceptual and cognitive errors are unavoidable for humans

· Observation insight improvement

· Course objective: to develop comfort with reasoning through complex decisions, yourself and in teams/organizations

· But NOT so you can better exploit others’ compromised DM!

Investment decisions – studied in Behavioral Finance

· Focus on “Prescriptive” or “Descriptive”?

· Reveals how biases affect both individuals and markets

· Individuals/teams/units will be our focus

· Yours, as well as your customers, suppliers, partners, etc.

· Point out analogies where “investment” is in other than $ terms

Main causes of poor investment decisions

· Overconfidence in own knowledge, beliefs, predictions

· “Active trading is hazardous to your wealth”. Men usually worse.

· How do brokerages reconcile the conflicts of interest?

· Optimism about choices made

· Relates to availability heuristics, confirmation bias, and regret avoidance

· Encouraged by financial media – why?

· Denying randomness (or regression to the mean)

· The past usually predicts the future, but not the way most people believe

· Anchoring, status quo, and procrastination

· Tendency toward status quo, consistency, omission, or inaction

· Poor framing and misuse of reference points

· Complexicating gains/losses; not treating sunk costs as irrelevant

· Prospect theory: risk aversion with gains, risk seeking with losses

Active trading

· Traders, like everyone, are likely to regress to the mean

· The mean is losing money, since the bank/casino always get its cut

· Many jumped into the role based on vivid data

· Skewed by availability and affect heuristics

· Most neglected the other side of each transaction

· Other party is likely better equipped than you

· Every transaction has at least two sides, winners and losers

Steps to better decision-making in investing

· Recognize impossibility of outsmarting the market

· Keynes’ analogy of higher-order thinking

· Relates to the “pick a number between 0 and 100” game

· No perfect solution because human nature determines the outcome

· Determine goals and plans, then act on and stick with them

· Balance “shoulds” and “wants” (listen to the angel, mostly)

· Deploy your heuristics in useful ways

· Make long-term plans without near-term emotions

· Develop formulas (plans and policies) objectively

· Then stick to them!

· Extensions to non-monetary investments

· Most of these concepts apply to investments of other resources

· Time, energy, reputation, careers, emotion, hopes, what else?

· Analogies, examples?

Apply the concepts of irrational investment decisions (Above in Blue) to decisions in your life...

Questions:

· In your non-monetary investments (time, energy, attention, careers, hopes, dreams, etc.) what limits your rationality? To what effect?

· Insightfully apply chapter 8’s suggestions for overcoming irrationality to various non-monetary investment decisions you’re facing. Conclude “Therefore,…”

· Include Q# in the subject header and then answer, Introspection and insightfulness are more important than spelling or grammar.