Why we make bad decisions and how to understand the universe for decision making

1. Why
do
we
make
bad
decisions?
Prof.
Samuel
Sejjaaka,
PhD
Abacus
Business
School

2. How
to
make
be@er
decisions…

3. Want
to
be
a
farmer:
what
should
you
plant?

4. InformaEon
• Many
Emes
we
have
the
wrong
informaEon
• Many
Emes
we
do
not
know
how
to
get
the
right
informaEon
• We
are
also
not
in
a
posiEon
to
know
if
those
giving
us
the
informaEon
are
experts
about
the
subject
• #DILEMMA:
A
KIND
OF
MORAL
HAZARD!

5. Moral
Hazard
as
Context
• Moral
Hazard
– Making
a
decision
on
the
basis
of
imperfect
informaEon
– Making
a
decision
because
you
are
not
responsible
for
the
consequences
• Adverse
SelecEon
– Making
the
wrong
choice
because
of
informaEon
asymmetry

6. Poor
Understanding
of
Risk
• How
many
Emes
have
you
seen
an
interview
with
a
lo@ery
loser?
• What
is
the
probability
of
winning
the
lo@ery?
• Bernouli,
1738
Expected
Value
=
Odds
of
gain
x
Value
of
gain
• Gaming
and
Be_ng
Tax
is
also
known
as
the
Stupidity
tax!

7. …risk
vs.
return?
• Why
are
we
poor
at
esEmaEng
the
expected
value
of
our
potenEal
gain?
• Why
do
we
have
a
poor
view
of
opportunity
cost?
– Poor
comparisons
– Fear!

8. Making
poor/wrong
comparisons(1)
• Would
you
take
Ugx
50,000/=
today
or
Ugx
60,000/=
in
a
months
Eme?
45
50
55
60
1-­‐Feb
1-­‐Mar
Series1

9. Making
poor/wrong
comparisons(2)
• Would
you
take
Ugx
1,200,000/=
in
twelve
months
Eme
or
Ugx
1,300,000/=
in
thirteen
months
Eme?
1,150
1,200
1,250
1,300
Jan-­‐16
Feb-­‐16
Series1

10. Making
the
wrong
comparisons
(3)
• #COMPARISON
CHANGES
THE
VALUE
OF
THINGS!
• #SHIFTING
COMPARISONS
OVER
TIME
LEADS
TO
WRONG
DECISIONS
• Would
you
pay
$100
for
this?

11. Fear
is
a
hazard!
(1)

12. Fear
is
a
Hazard!
(2)
• Tendency
to
freeze
• Tendency
to
hurry
when
making
decision
• Tendency
to
do
nothing!
• Tendency
not
to
analyze
-­‐
denial

13. Fear
is
a
Hazard!
(3)
• Are
you
living
the
life
you
want
to
live?
• Are
you
in
the
job
you
want
to
be
in?
• Are
you
with
the
one
you
want
to
be
with
• Are
you
as
happy
as
you
could
be?

14. ImpaEence:
Meet
the
Unluckiest
Man
in
The
World…
• Ronald
Gerald
Wayne
(born
May
17,
1934)
• Co
founder
of
Apple
• Wayne
received
a
10%
stake
in
Apple
but
relinquished
his
equity
for
US$800
less
than
two
weeks
later,
on
April
12,
1976.

15. …the
Unluckiest
Man
in
The
World
• In
February
2015,
Apple's
value
exceeded
$700
billion,
making
it
the
most
valuable
U.S.
company
by
far.
Had
Wayne
kept
his
10%
stock
unEl
then,
it
would
have
been
worth
approximately
$60
billion

16. 5
Ways
to
Kill
Your
Dreams
• Believe
in
overnight
success
• Believe
someone
else
has
the
answers
for
you
• Believe
in
se@ling
when
the
business
is
growing
• Believe
the
fault
is
someone
else’s
• Believe
that
the
only
thing
that
ma@ers
are
your
goals…

17. ParEng
Shots…
• Always
make
sure
you
have
the
right
informaEon
• Understand
risk
–
risk
is
actually
a
good
thing!
• Do
not
make
meaningless
comparisons
• Be
paEent
• A
bad
decision
is
be@er
than
none
–
overcome
your
fears!

18. Abacus
Business
School,
Liaison
Office,
Serena
Conference
Centre
First
Floor,
Room
335,
Telephone:
+256
414
234
120;
Email:
info@abs.ac.ug
Website:
www.abs.ac.ug