SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Hard
- In striving to make the best possible decisions, a firm’s CEO always relies on a highly analytical approach. However, the firm’s Chairman of the Board argues that in his experience, the analytical approach can only go so far. He advocates analysis as only one of several decision approaches. What is your view? Discuss and explain.
ANSWER: The virtue of the analytical approach is that it considers and analyzes the most important factors involved in a given decision. However, it is not infallible; managers may have the wrong incentives and/or pursue the wrong objectives. They might lack the necessary information to formulate a sound decision. Or they may fail to implement the decision – no matter how right it is. The key is to use the analytical approach flexibly. Different cases may require different degrees of analysis in each decision step. Certainly, the Chairman is right in insisting that there are other ways to make decisions, ranging from: company rules of thumb, invoking one’s experience, judgment and intuition, to “I’ll sleep on it”. These other means might provide useful insights and ingredients. Or to take an extreme case, sometimes, “flashes of genius” may offer decision solutions that are surprising and highly creative (and by no means irrational). For instance, a marketing plan might include radical elements constituting major changes in how a product is offered for sale. This approach is inspired, but it is also risky. It might spectacularly succeed, or just as spectacularly fail. In short, it remains the case that a sound analysis is required to articulate the logic of the decision (indeed, to convince others of its merits).
SECTION REFERENCE: Things to Come
DIFFICULTY LEVEL: Hard