Professor Forman

Good Decision vs. Good Outcome

There is a real difference between a good decision and a good outcome and recognizing this is important when contemplating a decision.

A ‘good’ or rational decision is a choice of an alternative that best achieves your or your organization’s objectives. In the absence of uncertainty, a good decision will result in a good, or ‘best’ outcome. However, most decisions we make are made under conditions of uncertainty and a ‘good’ decision can, sometimes, result in a bad outcome and a bad decision can, sometimes result in a good income.

In order to make a ‘good decision’, trade-offs between benefits, costs, uncertain benefits (opportunities) and uncertain costs (risks) need to be considered. This is something that cannot be done well intuitively (or what Kahnerman calls Type I thinking in his book Thinking Fast and Slow.)

For example, if you are told that the total cost of a bat and ball is $1.10 and that the bat costs $1 more than the ball, what would your estimate be of the cost of the ball? The majority of people when asked this question come up with the wrong answer.

A simple example of a bad decision with a good outcome would be to bet even money on rolling doubles with a pair of dice and then rolling doubles.

A not so simple example would be to bet what is a large amount, like your house, on a single flip of a coin with a payoff of $1million and then winning the bet. Was the risk worth the gamble? What is more important to you, the long term risk vs. opportunity or the short term risk of losing your house?

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