Class 4 (Risky Decision Making)
PART A
Read: Amos Tversky and Daniel Kahneman (1981). “The Framing of Decisions and the Psychology of Choice,” Science 211, 453-458. This article is available in your package and also here: http://links.jstor.org/sici?sici=0036-8075%2819810130%293%3A211%3A4481%3C453%3ATFODAT%3E2.0.CO%3B2-3 (You need to have a University IP or be using the proxy server or VPN to have access.)
Richard H. Thaler (1999). “Mental accounting matters.” Journal of Behavioral Decision Making 12, 183-206. This article is available in your package and also here: http://dx.doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F (You need to have a University IP or be using the proxy server or VPN to have access.)
The two readings discuss how the framing of decision problems influences the choices we make, as well as how individuals (and firms on individuals) use mental accounting to influence their choices and happiness. Read the Tversky and Kahneman article first. Then read the Thaler piece.
Preparation Questions:
1. What is loss aversion? In what ways are outcomes “short” of the reference point qualitatively different from outcomes “past” the reference point? What other reference points can you think of besides the status quo?
2. Why do segregation and aggregation (of gains or losses) lead an individual to perceive a situation (or a product) differently and hence behave differently? Can you think of any other implications besides those discussed in the Thaler reading?
PART B
Read: Jon Krakauer (1996), "Into Thin Air", Outside Magazine. Available at: http://www.outsidemag.com/magazine/0996/9609feev.html
William M. Carley (1998). "Swissair 111 Crash Spurs Debate on Following Cockpit Procedure", Wall Street Journal, December 16, 1998. Available in your course package.
Many of you are familiar with the 1996 Everest disaster that claimed the lives of several people including experienced climbers and expedition leaders Rob Hall (of Adventure Consultants) and Scott Fischer (of Mountain Madness). I strongly recommend that you read the book if you have not. I strongly recommend that you read the book if you have not. This disaster illustrates how certain pressures lead to decision errors for individuals and organizations.
Prep Note (Group Assignment):
The assignment is online. Please complete the survey here. Please submit one per group. The survey should be submitted by 8:30 on Friday morning.
http://gsbsurvey.uchicago.edu/surveys/george.wu/wuxp4.html
The questions are repeated here for your convenience.
Question 1. Clearly the two expedition leaders, Scott Fischer and Rob Hall, had multiple objectives and used very different approaches in pursuing those objectives. Rate the effectiveness of each leader's management philosophy in pursuit of his objectives:
-Scott Fischer (1 ("Not at all effective") to 5 ("moderately effective") to 9 ("very effective")
-Rob Hall (1 ("Not at all effective") to 5 ("moderately effective") to 9 ("very effective")
Question 2. Provide three reasons for your rating of Scott Fischer.
Question 3. Provide three reasons for your rating of Rob Hall.
Question 4. The leaders of a commercial expedition organizing an Everest attempt in May 2010 has hired you as consultant. They are seeking advice on how they can minimize the probability of disaster while maximizing the probability of summiting. Please provide three recommendations for his expedition. These recommendations should be SPECIFIC, CONCRETE, and REALISTIC. (Be concise. Limit responses to the space shown.)
Additional Preparation Questions (to be discussed in class; not to hand in):
1. Why are the climbers up there? Consider the motivation and incentives facing each participant. What are the implications for potential decisions biases and corrective measures?
2. What are the defining characteristics of the decision-making environment on Mt. Everest? Setting aside the extreme physiological conditions, what are the biggest challenges for good decision making?
3. Describe the decision process used by Hall and Fischer. What mistakes did the guides or members of the climbing teams make during the climb to the summit? Why were these mistakes made? How do these mistakes relate to concepts we have discussed in the course?
4. If you were advising a friend interested in organizing an expedition to the top of Everest (or some other large but potentially dangerous mountain), what advice would you give him or her based on the concepts of this course?
Follow-up Reading (Optional)
- Dirk Olin (2003). "Crash Course: Prospect Theory", New York Times (June 8). This article is available here:http://query.nytimes.com/gst/fullpage.html?res=950DE0DD1130F93BA35755C0A9659C8B63
- Roger Lowenstein (2001). "Exuberance is rational", New York Times Magazine (February 11). This article is available here: http://query.nytimes.com/gst/fullpage.html?res=9406E1DC113EF932A25751C0A9679C8B63&sec=&spon=&pagewanted=print
- Richard Larrick, George Wu, and Chip Heath (1999). "Raising the Bar on Goals", GSB Chicago. Available at: http://www.chicagogsb.edu/magazine/spring99/goals.html