Decision Making

ISMT 101
 Business implications
• Why do people Mgmt
make bad decisions?

Organizational use
• How do people Major IS (1) (1) Digital EB
make decisions? Economy (7)
• How can IT help Decision
- DSS Making (8)
- Data warehouse
- Data mining

Technology components People

HW SW Network Internet DB
(2) (3) (5) (6) (4)
 Decision Making Today
• Biz decisions are increasingly difficult to make
– Globalization
• Face very diversified environments (political, economic,
cultural…)
– The speed of commerce
• Need to respond to the changing environment quickly
– The increasing number of business choices available
• E.g., B2B data exchange platform:
paper-based systems  private EDI  industry-wide EDI 
national EDI  Web-based EDI  Internet
 Decision Making Today
Rich Data …
– The use of multiple channels to communicate
with consumers
(e.g., email, call center, field interview, mail…)
– The explosion of computers’ processing
power and data storage capabilities
(Recall Moore’s law)
 Decision Making Today

… But Poor Information

• Very few firms analyze their transaction data
– Grocery chain CIOs admit to analyzing 2% of
the data
– U.S Midwest grocery chain throws away
transaction data after storing data for a
number of years.
 Why people make bad decisions
• Limited human cognition
– Our mental ability to comprehend and understand
something is limited
– E.g. studies show people can keep track of 5-9
items at a time
 Why people make bad decisions
• Limited human perception
– Tend to think of only a narrow range of possible
solutions
– E.g. IT management decisions should be made based
on MGMT, ACT, ECON, SCM…
 Why people make bad decisions
• Human bias
– Tend to make responses based on stereotypes,
memory, and current position
– E.g., “take big companies as major rivals”

• In 80’s, Apple was targeting the giant IBM as the major rival
• Microsoft was a 100-employee small company
• Application SW companies develop SW based on Microsoft’s OS
• Microsoft was one of the major reasons for Apple’s failure in the
PC market.
 Smart people, bad decision
• Mini Case: Iridium
 Iridium
• Global telephone service via low-earth-orbiting
(LEO) satellites
• First envisioned in 1985 by a Motorola engineer
– After his wife complained she couldn’t reach clients via
her cell phone.
• Idea
– 66 LEO satellites cover the entire area of the earth
• Total project cost: $5 billion
• Strong management team
– CEO Ed Staiano led Motorola
– His division at Motorola accounted for 40% of total
sales of $27 billion
 Up and Down
• The peak in 1998
– Star at wall street, stock price tripled in one year
– Over 1,000 patents
• The Drop in 1999
– Customers
• April: 10,000, only 5% of projected number
– CEO resigned
– Filed for bankruptcy in Aug
– One of the 20 largest bankruptcies in US history
 Mistakes Smart People Make
• 11 years passed through the development period,
the world has changed

• Cellular phone establishment dramatically reduced

the target market’s need for Iridium’s service

• Investment in R&D was appropriate, the follow-on

investment was NOT
Mistakes Smart People Make

“We’re a classic MBA case study in

how not to introduce a product. First we
created a marvelous technological
achievement. Then we asked how to
make money on it.”

-- Iridium Interim CEO

John A. Richardson,
August 1999
 Mistakes Smart People Make
• Chose to not cope with changes
• Misread the competition
• Ignored vital information, and kept investing
• Brilliantly fulfilled the wrong vision

Implication for us: Need better decision

making!
The Decision-Making Process
• Nobel Prize Winner Herbert Simon’s
model of the decision-making process

2. Intelligence
3. Design
4. Choice
 Intelligence Phase
• To detect a problem by scanning the
environment.
• To determine if decision-maker can solve
the problem.
– Within scope of influence
• E.g., THE 1997-98 ASIAN FINANCIAL CRISIS vs.
Your supplier raises price
• To gather more information to achieve
deeper understanding of the problem.
 Design Phase
• To develop a model of the problem
– Determine type of model
– Verify model
• To develop and analyze potential solutions
 Choice Phase
• Select the solution and implement
– Do more detailed analysis of the selected
solutions
– Verify initial conditions to ensure none of the
problem’s major factors has changed
• Recall the Iridium case
– Analyze proposed solution against real-world
constraints
 A mini case
• Promoting m-commerce
(m-commerce – using of mobile devices
to exchange information)
• Intelligence
– Problem: m-commerce is developing slow
• Design
– Model: communication reach, richness, and costs
• Choice
– The government’s choice: adopt 3G
– The vendors’ choice: wait, or do m-commerce with lower
requirement on richness (e.g., securities, sell tickets…)
 How IT help decision making
• Decision support systems (DSS) are one tool
– Definition: A computer-based system that
supports and improves human decision making
– Function: Help process huge amounts of data,
and analyze complex problems
• Data warehouse – store large amounts of historical
data
• Data mining – extract patterns from data
Decision Support Systems
• Major components
– Data management system
• DBMS is useful
– Model management system
• Typically mathematical in nature
– User interface
• Data visualization is the key
Data Visualization Examples
Data Visualization Examples
Data Visualization Examples
 Data Mgmt for Decision Making
• Data warehouse — Database that is
– Subject-oriented – data organized around subjects
• DB in student account office and registrar’s office is
function-oriented
• In a data warehouse, data are organized around
students
– Integrated – contains ALL data about the subject
• Integrate data of different formats
(e.g., 2004-03-23, 03-23-2004, 04/Mar/23…)
• Integrate different database models
(e.g., relational, network, table)
 Data Mgmt for Decision Making
• Data warehouse — Database that is
– Time-variant – database contains a time component,
that is, historical data
• Transactional databases are accurate at a given time
• Data warehouse contains data over multiple time periods
• e.g. a student data warehouse would contain data on what
students were registered in which classes for every term
covered by the data warehouse
– NOT a transactional database
• E.g., milk price in a transactional database is always the
newest (i.e., only one price at a time)
 Modeling Tools and Techniques
• Simulation
– Computerized model of the problem
– Used to examine proposed solutions and their impacts
• Sensitivity analysis
– Determine how changes in one part of the model
influence other parts of the model
• What-if analysis
– Manipulate independent variables to see what would
happen in the dependent variable
• Goal-seeking analysis
– Work backward from desired outcome (dependent var)
Sensitivity analysis
 Data Mining
• Process of applying analytical and statistical
methods to data to find patterns

Examples of patterns
– Credit card issuers:
• Given a database of 10M names, which persons are
the least likely to default on their credit cards?
• Which types of transactions are likely to be fraud?
– Retailers:
• Which of my customers are likely to be the most loyal,
and which are most likely to switch to competitors?
 Data mining mini case
• Price and product differentiation
– Which market segment is cash cow?
– E.g., airline tickets – economy, business and first class
– 80/20 rule (80% of profits come from 20% of customers)
(at Harrah’s 82/26)
 Applications
Any area where large amounts of historic data, if
understood better, can help shape future decisions.

• Banking: loan/credit card approval

– predict good customers based on old customers
• Customer relationship management:
– identify those who are likely to leave for a competitor.
• Targeted marketing:
– identify likely responders to promotions
• Fraud detection: telecommunications, financial transactions
– from an online stream of event identify fraudulent events
 Applications (continued)
• Medicine, analyze patient disease history:
– find relationship between diseases
• Pharmaceutical:
– identify relationships between new drugs, disease
outcome, effectiveness of treatments
• Web site/store design and promotion:
– find relationships of visitor to pages and modify layout
 Data mining: basic operations
• Descriptive:
– Association
• E.g., Buy a diaper, less likely buy a beer
• E.g., Buy a beer, more likely buy a wine
– Clustering
• E.g., Customers’ complaints
– Voice (talk to the store manager)
– Private (decide not to shop again, and talk to friends)
– Third party (complain to consumer agency/association)
 Data mining: basic operations
• Predictive:
– Classification
• E.g., Predict complaint types using
consumer characteristics (gender,
zipcode, purchasing history…)
– Collaborative Filtering
• Given database of existing users’ preference,
predict preference of new users
– e.g., predict what new movies you will like
– e.g., predict what books/CDs a person may want to buy
Collaborative Filtering Examples
- “spam filtering” on Google
Collaborative Filtering Examples
- “You may also like…” on Amazon
Collaborative Filtering Examples
- “Rate this seller …” on eBay
 Data Warehousing provides the
enterprise with memory

DSS

Data Mining provides the

enterprise with intelligence
 Take-away
• Why do people make bad decisions
A: cognition, perception, bias

• How do people make decisions

A: intelligence  design  choice

• How can IT help

A: DSS (data warehouse, data mining)