Core 10: The Change Makers' Manual



managers make bad Why do

be ways for them to improve. Dynamic decision-making tasks are those whereby taking an action today would change the pay-off of the same or other actions in the future – for example, when an internet platform adopts a push for users that seems costly in the short term but ultimately adds value to the service and firm. An alternative example would be when someone who hates exercise resolves to go for a run every morning, which eventually makes them fitter thus enjoying their exercise more. For the manager, this type of decision-making features in many aspects of corporate life, from product development and process improvement to pricing strategies. These decisions present an interesting learning challenge for managers. Because results in the future are the product of a dependent series of events, it is difficult to detect which actions are key to producing a good outcome. It is a learning challenge that managers appear to be failing at, given evidence from a wide range of studies covering activities that include supply chain management, resource management, allocation and competitive strategy. Similarly, in experiments designed to create micro-worlds that mimic real-life business situations, participants tend to make high short-term returns but low long-term profits, compared with possible returns, even with the benefit of managerial experience. To better understand why managers perform badly, we ran an online experiment that reduced the dynamic decision-making problem to a more basic form. We used a well-known decision-making task, known as the Harvard game, that involved a series of choices between two options (in this case, pressing a green or blue button 500 times). Pressing a green or a blue button

produced a numerical pay-off, with the size of the pay-off determined by the percentage of blue or green button presses over the previous 10 choices. Participants, had to figure out the best way to maximise their pay-off over the duration of the task. By varying the information given to participants, we hoped to gain some insight into how managers approach dynamic decision-making tasks, what factors prevent them from arriving at the best strategy, and how their performance could be improved.


1. When faced with a complex dynamic problem, the right choice is far from intuitive. However, the most common decision-making strategy among managers is ‘muddling through’, trying different actions for size. 2. In our research, individuals performed relatively poorly, even after receiving help to understand how their choices would affect future outcomes. They may need more than a simple explanation of the consequences to improve their dynamic decision-making. 3. Appreciating the nature of dynamic decision-making may encourage the persistence to obtain a better long-term outcome. Conversely, pressure to produce immediate results can prevent managers from exploring a range of actions and learning the best strategy.


Taking into account the information provided to

participants, the results seem to exclude several plausible explanations for poor performance.

by Jerker Denrell

“When faced with a complex dynamic problem, the most common decision-making

D uring the pandemic, – many of which are strategically vital to the performance and survival of their organisation in a particularly unpredictable environment. These are often complex decisions requiring a calculation of how actions taken today could affect the results of actions taken in the future. With difficult trade-offs to consider, the route to the best long-term outcome can be hard to find. Indeed, the evidence suggests that managers are not good at understanding and evaluating these types of situations. Fortunately, there may managers have had to make tough decisions

strategy is muddling through”

It did not, for example, appear to be due to uncertainty about the basic nature of this type of decision- making (that pay-offs depend on past actions over a particular period), nor was it a lack of the information needed to grasp the structure and dynamics of the task in hand and calculate the optimal solution. Indeed,

Warwick Business School | | Warwick Business School



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