Dm Final Exam

Topics: Risk, Decision theory, Decision making Pages: 6 (1999 words) Published: September 11, 2013
Managerial Decision Making - Final Exam

I pledge my honor that I have not violated the Honor Code during this examination. ________________________________________________________________________________________ You are concerned that your organization does not take enough risk. Using the principles covered in class, come up with a strategy for inducing more risk-taking. The strategy should not be something like: “increase the incentives for risk taking.” Instead, it should be inspired by psychology, reflecting some of the reasons why individuals in organizations might not naturally take as much risk as they should. Of course, you should be mindful of the costs (organizational, economic, or psychological) of introducing a new process.

In most organizations, performance is measured in outcome. If it is not so good, then it is seen as a mistake vs. an investment in learning. As we know from the prospect theory, the pain from loss is greater than the happiness from gain. This compounded by anticipated regret makes people more cautious and emotionally coerces them to stick to the status quo. A strategy to motivate more risk taking, needs to consider the emotional aspect of risk while balancing it with the growth of the organization. This can be achieved by

This new method starts by recalibrating performance reviews to include process employed prior to implementation. Questions such as “What and how was data collect? What assumptions were used to come to conclusion? What uncertainty were ignored?” will be part of this evaluation. Involving both Manager and employee in these discussion ensures that risks were considered and losses, if any, anticipated.

Secondly, there needs to be a method of systematically breaking the project into smaller components, each with its own goals. Goals change how people take risks. Loss aversion from not meeting the goal leads to better performance. People experience more satisfaction the closer they are to the goals and therefore, setting ambitious but judiciously achievable goals with employees can encourage risk-taking. Hence a structure that tolerates higher risks but confines it to only that component, allows the employee to experiment and experience risk but at the same time protects the organization for substantial financial cost or reputational loss.

Secondly, there should be a meticulous recording keeping of everything that went right or failed in each component. Giving employees regular feedback, as opposed to a review every 6 months, permits them to take immediate actions, and rectify or adjust, if needed. While this can serves a caution for those who are too conservative in taking risk and fell short, it can also be a springboard for the new risk-takers who have been successful. Keeping diary of the insights that created the process, the learning points and the adjustments made, will create a habit of constantly recalibrating and will thus allow employees to take risk in a systematic way.

Finally, framing plays a big part on how the organizations views the risk. What is the lost opportunity cost for not taking the risk? Also, is it really a risk? Getting outside references and independent analysis can change perspective on risk. Learning organizations that want to continuously progress and innovate, interpret risk as an “investment” in training and developing its employees. Research has shown that framing something as a gain vs. a loss can persuade risk-averse people to take risk. Paraphrasing risk as prospect and as an exercise in learning could induce a greater risk appetite. Additionally, performance can be framed as a comparison with other achievements, and not just goals.

Future potential losses can be eliminated or reduced if the organization as a whole is proactive and encourages employees to push the boundaries instead of staying in the status because that is safe and risk free. One way to do so is to brain storm future threats and decide...
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