Risk and Decision Making - Greater Union Cinema Ltd - Case Study Example

Running Head: RISK AND DECISION MAKING Risk and Decision Making Insert Name Institution Introduction Greater Union Cinema Ltd came into being around 1910. This was because James West came up with West's Pictures. But within three years, Greater Union had merged with film distributors which were in existence. Around 1920s, the company grew further; developing a link with Carroll & Coyle, Greater Union maintains the brand even today. Amalgamated Holdings limited got control from the Rank Organization at around 1984, and even now runs Greater Union. Today, Greater Union displays movies locally and worldwide on 457 screens. It does this independently or in conjunction with companies like Village Roadshow. Greater Union puts focus on original and vibrant venue plan and merchandising to boost the movie experiences. Moreover, it offers viewing options like Gold Class, movie marathons and Drive in screenings (White & Summers, 1987). Risk and Decision Making At Greater Union Cinema, employees assigned to deal with risk management report all the on-goings to the company board. This means that they report both upwards and downwards to the several decision-makers found in the company. This is aimed at creating an environment where the errors which have been isolated and slight decision frames do not end up affecting decision making. Often, risk is viewed as a bad thing and the downsides at Greater Union are even insured. Nevertheless, the risks sometimes end up producing positive outcomes. For example, risk aversion of the employees at Greater Union or the natural inclination in maintaining status quo is a major issue. Eventually, this often leads to failure to reflect on the decisions that promote growth or stagnation at Greater Union corporate. Greater Union Cinema grows and survives from trying risks that are premeditated. However, all these decisions are all susceptible to many biases that have been identified with time. The biases include representativeness heuristic, mental accounting, hindsight bias and base-rate ignorance (Kahneman, Slovic, & Tverskys, 1982). Bias One bias found is that Greater Union Cinema tends to generalize from a relatively small amount of a particular data. For example, incase a manager at Greater Union has had above-average years successively, the employees usually assume that the manager is above average. Apparently, this conclusion does not at all trail from such a tiny quantity of data. Another bias identified is availability. This is whereby people conclude judging probabilities, base being how existing examples are to them. For example, incase a certain movie at Greater Union did not attract viewers, and the people who designed it are not that popular, the management end up overstating the risk. Also the continuous repetition of certain news in the media, may lead to the company overstating a certain risk. News like the current economic crisis may cause the management to overstate the crisis risk at Greater Union Cinema. Decision Making Under Uncertainty This absolutely applies at Greater Unions Cinema. This is because Greater Unions Cinema has insurance for all properties that are valuable. The rationale is pretty obvious. This is because even if there is a small probability of loosing or having the insured thing damaged, the loss that would eventually occur would be great. Greater Unions Cinema would rather pay the average amounts of money for a loss that is somehow certain than end up loosing a sum that is extremely large but with a probability that seems very small. But this reveals some other side, if the company buys the insurance, is it still logic for insurance to sell? If the company by buying the insurance comes out as risk-averse, what of the insurance who do the selling? Where the insurance is concerned, clearly Bernoulli's hypothesis does not hold, but for Greater Unions Cinema, it holds (Glen, 2005). An expected utility where a gamble is involved takes this form: u(g) = p1u(a1) + p2u(a2) + ... + pnu(an) (Glen, 2005). Where u(ai), is the Bernoulli utility function and where utility function over outcome. From the formulation of Bernoulli, this was a logarithmic function that happens to be firmly concave. Hence the expected utility from the person who is making the decision happens to be less compared to the value that is being expected. This supposition was made because most people happen to be risk averse. This is because preference is given to an outcome that is more certain to the one less definite. This assumption does not really look reasonable but from the Greater Union Cinema’s illustration, it is applicable. Different Risk Attitudes At Greater Union Cinema, the management’s attitude toward risk fairly affects decision making. This theory explains some of regular choices employees end up making at Greater Union Cinema. These choices at times end up contradicting the strictly rational model. For example, Greater Union Cinema installed Vista's base cinema software to further improve their customer services. It risked relatively large amount of money, to invest in the software. This particular choice illustrates a behavior that is risk-loving as economists suggest. The basis is the form of their particular utility functions from Bernoulli. This can be illustrated using straightforward gamble that is based on tossing a coin. If the coin lands head the gamble makes a payment of $10, and $20 incase the coin lands tails. The value that is expected from the gamble: (0.5 * 10) + (0.5 * 20) = $15 (Glen, 2005). Therefore it is understandable that Greater Union Cinema risked large amount of money on installing the software. Risk-Averse Incase the value expected from the gamble happens to be higher than the utility that the gamble expects, people or the company concerned is assumed to be risk-averse. An example dates back in September 2008, where Greater Union Cinema upgraded lightening that existed and energy efficiency at Castle Hill. This was to ensure that performance wasn’t compromised. Hence it became possible to adjust light level and light quality went uncompromised. Therefore, the value that came from the upgrading was higher than the utility. This is illustrated in Bernoulli's idea. A behavior that is risk-averse gets captured by utility function akin to a function that is logarithmic. According to the gamble illustrated above, a person who is risk-averse and utility function’s form was u(w) = log(w), w happens to be the outcome. The utility that is expected over the gamble is: 0.5 * log(10) + 0.5 * log(20) = 1.15. However, the expected value’s utility of the gamble comes out as log(15) =1.176. (Dwyer, 2000) Risk-loving This is whereby the utility of a person of the value expected from the gamble happens to be less when compared to the utility expected from the gamble parse. This clearly captures the behavior of Greater Union’s management. From this definition, incase Greater Union truly loves risk; it should be willing to risk all the assets it has on one dice’s roll. However from my assessment, Greater Union Cinema is not risk-loving. A function that is convex is the one that illustrates a behavior that is risk-loving. From the gamble above, a person or company that loves risk the expected utility over the gamble would have been: 0.5 * 102 + 0.5 * 202 = 250 but on the other side, the expected value’s utility of gamble is 152 = 225. (Dwyer, 2000) Risk-Neutral For example, at Greater Union Cinema food from outside was banned. Movie viewers were disappointed. Basically, this would have reduced the number of customers because many were not happy with the move. But Greater Union Cinema reasoned that if customers continued bringing food from outside, this would be total loss. Greater Union Cinema risked because the value expected from the gamble was estimated to be equivalent to the utility that was expected form gambling. Apparently Greater Union Cinema frequently illustrates a risk -neutral manner when it is investing. Risky comes out clearly with Bernoulli’s function that happens to be linear. From the gambling illustrated above, a person who is neutral when it comes to risk and the utility function was u(w) = 2w,the utility that would be expected over the gamble would be (0.5 * 2 * 10) + (0.5 * 2 * 20) = 30. Alternatively, the utility of value that is being expected from the gamble is 2 * 15 = 30. (Dwyer, 2000) Judgmental heuristic These are the methods or to be more specific principles through which Greater Union Cinema’s management formulates assessments of certain probabilities to make them simpler. At Greater Union Cinema, heuristics are frequently very useful though seldom, they end causing some few systematic errors. Heuristic commonly practiced at Greater Union include representativeness heuristic. Here, any event planned to occur is judged to be probable to the scope that it represents the fundamental features of company activities or the processes used in generation. Mostly the heuristic help a lot when making decisions which require inductive reasoning ( White & Summers, 1987) For example incase Greater Union Cinema wants to know the likelihood of a certain movie becoming successful in the market, it considers the degree to which that specific movie represents those movies that would attract viewers. However, these heuristics analytically lead Greater Union into making judgments that are poor, in certain circumstances. This is because in some situations, the manner in which a service is represented leads the management of the company into making a decision that is purely not sensitive to past probabilities involved. Also the way in which a service gets represented makes the management ignore the general rules illustrated in probability calculus. Moreover, the way in which the service makes the management to be insensitive to the obvious fact that samples that are small represent less compared to larger samples. Still, the way in which a certain service gets represented may make the management to conceive wrongly the result of chance. The fact that the way in which a certain service is represented may make the management not to be sensitive to the fact that in situations where random events or services huddle around a mean or average, unexpected proceedings will be followed by events or services that are more ordinary (regression to the mean). The management at Greater Union tends to assume that instances that are extreme at that moment represent future instances.   The Availability Heuristic This heuristic is particularly helpful when it comes to making decisions that involve inductive thinking at Greater Union Cinema. This is because normally occurrences classes that are large get recalled better and faster compared to instances found in groups that are small (Summer & Smith, 2004). For example, on 20 June 2009, EVENT Cinemas started at Castle Hill's. This replaced a 6 screen complex that was old. It featured "Gold Class" and had a bar and five auditoriums. This was the first worldwide and had digital projectors which were new and reclining chairs that were electronic. Obviously, this is the latest technology in digital cinema. Hence when important decisions are being made, such event maybe used as a reference. The same criteria that was used, during such an event gets followed. However, this heuristic can also land Greater Union Cinema into making some poor judgments. This is because such event may be judged more possibly than it actually is. And most important, certain information that is available might be biased because the management might be having exposure that is limited in some events or because some of the events tend to be more noticeable, graphic, or still some people involved in decision making might be having information that is stored in a particular fashion. Adjustment and Anchoring Being conservative when adjusting what we believe light of new information is sometimes recommended. This is a regular practice at Greater Union’s management. For example when it comes to reinstating a movie that has been banned, a lot of consultation is done. For example, Combination film took time to be reinstated. Hence it was after assurances that security would be added that the movie was reinstated. Moreover, the operational manager Robert Flynn advised the staff to avoid violence. A belief that has been well established for a long time is not dismissed, until the decision makers have very concrete evidence in opposition to it. A reliable method gets being altered only when it meets noteworthy breakdown. Like when suspending the screen, it was not an abrupt thing, it was suspended because violence was being experienced, and the film was thought to contribute. Lastly, the same decision-makers at Greater Union anchor to the original method used to solve some problems when a notable change in the methods is recommendable (Levin, 2006). Recommendations Greater Unions can do many things independent, including deciding on weighty decisions. However it should make sure it utilizes and is conversant with Cinema Code of Conduct. It should also utilize all rights under Trade Practices Act, mainly relating to conduct provisions, negotiations that are collective and provisions covering restrictive practices under Part IV of the Act. Moreover, Greater Unions should meet all obligations and should utilize the protections provided by TPA. This will help Greater Unions in making decisions that are wise, having business practices which are sound, compete well and still maintain profitability. Conclusion Despite some decisions involving high risk, Greater Unions ventures into new things. From the assessment, perceptions involving risks differ because some types of biases that are cognitive make the management to tell a lesser risk. The findings show that the company started not because the management acknowledged the high risk involved, but because it perceived the risks involved weren’t there. However, the false impression of having control leads to decrease in risk perception. Biases may be allied with some failures in the company. In such a case, it was concluded that processes increasing the probability of starting a company, may be the same that decrease the performance within the company (Woodward-Kron, 1997). Biases can be reduced by taking helpful advice or practicing decision makings in form of a group. A good example is dialectical inquiry. However, biases help early in decision making. This is because they lower perception of risk and this is helpful in generating the commitment needed for the company to succeed. Nevertheless, the company ought to institute processes that increase learning because the company can adjust to emerging realities and evade any harm caused by primary misperceptions. Similarly, the company needs sufficient protection nets in case biases lead them to meet unforeseen difficulties. The probable positive and negative effects are arising from biases and perceiving low levels of risk suggest the significance of doing more exploring in the area. References Dwyer, J. (2000). The Business Handbook.4th Edition. NSW: Pearson Press. Glen, K. (2005). Risk evaluation and making Decision in Business and Industry: A Practical Guide - Second Edition (Hardcover). New York: Chapman & Hall/CRC Kahneman, D., Slovic, P. & Tversky, A. (1982). Judgment Under Uncertainty: Heuristics and Biases. New York: Cambridge University Press Levin, M. (2006). Composite Systems Decisions, New York: Springer. Summer, J. & Smith, B. (2004). Communication skill Handbook. Milton, Queensland: John Willey & Sons Australia Ltd. White, J. & Summers, R. (1987). Homogeneous Commercial Code. New York: Wadsworth Woodward-Kron, R. (1997). Writing In Commerce Revised Edition. 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