[MUSIC] Having looked at leadership, let's turn our attention to perhaps the most important thing that managers do, making decisions. Decision making or choice is essentially the process by which people select one or more options from a larger number of options. Every day we're all presented with lots and lots of decisions to make. What shoes shall I wear today? How should I respond to a particular email message? Should I risk crossing the road when there's a large truck approaching? And of course managers and leaders make many decisions about managing and leading. How should I deal with an employee who is consistently late? How should we reward employees who've been outstanding in the last year? Should we move our organization into a new market? Making quality decisions in the time available when there are many other demands on our mental resources is a key feature of human endeavor and success. Consider this simple decision. I tell you that I'm going to toss a coin. The coin has a picture of someone's head on one side and a picture of a horse on the other. If I toss the coin and it lands so that the head is showing, I will give you $110. But if I toss it and it lands so that the picture of the horse is showing, you will have to give me $100. If you're not familiar with dollars you can convert these figures to your own currency if you wish, it doesn't matter. So for example, the choice might be between winning 110 euros or losing 100 euros. Anyway, here is your decision. Would you'd accept this wager and be prepared to win a $110 or lose $100 on the toss of a coin? Or would you say, no thanks, I'm not interested in this wager, thank you. Well, if you are like most people you will say no, I don't want to risk losing $100 here and I don't want to take on the wager. The reason that you'll probably decide against taking on the wager is actually very interesting and it has been the focus of a great deal of research. The generally accepted explanation is that for most people, the intensity of the pleasure of winning $110 is outweighed by the intensity of the pain of losing $100. This being is that people tend to be risk averse. We don't take risk even when on balance, we can argue that it is better to do so. The interesting thing here, is that if you are only offered this one wager, you might be sensible to reject it because it might be really difficult to lose $100. Losing $100 would really hit your pocket. But in the long run, if you were offered this wager again and again, you would of course be better off to take it, because in the long run, the benefit of gaining $110 each time you win will outweigh the loss of $100 each time you lose. But the main point of introducing you to this simple wager decision is that it nicely illustrates some of the central concepts about decision making. First, decision-making is concerned with uncertainty. The reason for this, is that we can never be absolutely sure what will happen after we choose one option rather than another. The future is always uncertain. So in the case of the wager, we don't know whether the coin will land on the head or the horse. And uncertainty like this is at the heart of just about all decision-making. Now, the second thing that this simple decision about the wager illustrates is that this uncertainty that is always there when we take decisions is concerned with three things. Firstly, the options available to us. Second, the benefits and the costs of the outcomes of each option. And thirdly, the probabilities of these costs and benefits, few. That sounds a bit technical. But really, it's quite straight forward. Let's go back to our simple wager. Do you decide to take it on and accept that you may win $110 but then again, you may lose $100. Or do you decide not to go for it? Except that you're not going to gain $110 dollars, but knowing at the same time, you're also not going to lose $100. In the case of this decision, there were just two options. You take on the wager or you refuse it. All decisions are like this. They always involve options. Sometimes there are just two options. And sometimes the number of options is huge. Consider for a moment all the different things you could choose to do right now. Each one is a different option. There are simply masses of options for you to choose from. Okay, so decisions always involve options. The next thing to be aware of is that all of these options have outcomes or consequences. To take our wage example, if you choose to take the wager on, the possible outcomes are that you may win $110 or you may lose $100. But if you don't take the wager on, the outcome will be that you will need to win $110 nor lose a $100. So what about the benefits and costs of these outcomes. Well, here if the toss coin turns up a head, the outcome to you, will be a gain of $110. But if it comes up with a horse, the outcome is a cost to you of $100. Okay, well finally, what are the probabilities of these outcomes? Well, we can assume that the coin when tossed has a 50% chance of turning up a head and a 50% chance of turning up a tail. So the probabilities of the two possible outcomes if you choose to take on the wager are 50% for the head and 50% for the horse. So there we have it. When you decide whether or not to take on the wager, this is what you are doing. Firstly, dealing with uncertainty, because you don't know what side the coin will land on when it is tossed. Second, faced with two options. You're taking on the wager, or you choose not to take on the wager, it's your choice. Three, you have information about the benefits and the costs of the outcomes of the two options. Take on the wager, you might win $110, or you might lose $100, and then again not taken on the wager. Where you'll neither win $110, nor lose a $100. And you also have information about the probability of each of these outcomes. If you take on the wager, there is a 50% chance of winning and a 50% chance of losing. And if you don't, there's a near certain probability that you'll neither win $110 nor lose $100. Now when you made your choice about whether to take on the wager, I suspect that you weren't aware that you were processing all this information. You didn't consciously think there are two options here with two possible outcomes of one option, and one outcome of the other option, and particular probabilities of these outcomes in each case. The thing is that we make a huge number of decisions in our life. Lots of them every single day, and we aren't consciously focusing on all these components of decisions when we do it, we just do it. But nevertheless, these components are always there. And if we are to make good choices, it doesn't do any harm to know that they are there. [MUSIC]
