An Introduction to Managerial Decision Making

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An Introduction to Managerial Decision Making Phar-Mor, Inc., the nation’s largest discount drugstore chain, filed for bankruptcy court protection in 1992, following discovery of one of the largest business fraud and embezzlement schemes in U.S. history. Coopers and Lybrand, Phar-Mor’s former auditors, failed to detect inventory inflation and other financial manipulations that resulted in $985 million of earnings overstatements over a three-year period. A federal jury unanimously found Coopers and Lybrand liable to a group of investors on fraud charges. The successful plaintiffs contended that Gregory Finerty, the Coopers and Lybrand partner in charge of the Phar-Mor audit, was “hungry for business because he had been passed over for additional profit-sharing in 1988 for failing to sell enough of the firm’s services” (Pittsburgh Post-Gazette, February 15, 1996). In 1989, Finerty began selling services to relatives and associates of Phar- Mor’s president and CEO (who has been sentenced to prison and fined for his part in the fraud). Critics claim Finerty may have become too close to client management to maintain the professional skepticism necessary for the conduct of an independent audit. The Phar-Mor case is just one of many in which auditors have been held accountable for certification of faulty financial statements. Investors in the Miniscribe Corporation maintained that auditors were at least partially responsible for the nowdefunct company’s falsified financial statements; at least one jury agreed, holding the auditors liable to investors for $200 million. In the wake of the U.S. savings–and– loan crisis, audit firms faced a barrage of lawsuits, paying hundreds of millions in judgments and out-of-court settlements for their involvement in the financial reporting process of savings–and–loan clients that eventually failed. The auditing partners of Coopers and Lybrand, like partners of other firms held liable for such negligence, are very bright people. In addition, I believe that they are generally very honest people. So, how could a prominent auditing firm with a reputation for intelligence and integrity have overlooked such large misstatements in Phar- Mor’s financial records? How could auditors have failed to see that so many of their savings-and-loan clients were on the brink of failure? Critics of the profession suggest... ... middle of paper ... ...fluenced by decision research has been behavioral finance. In the last decade, we have learned a great deal about the mistakes that investors commonly make. This chapter will explore these mistakes and apply the messages of the book to help readers become wiser investors. Chapter 8. This chapter outlines a framework to help the reader think about two-party negotiations. The focus is on how you can make decisions to maximize the joint gain available in a two-party decision-making situation, while simultaneously thinking about how to obtain as much of that joint gain as possible for yourself. Chapter 9. This chapter looks at the judgmental mistakes we make in negotiations. The resulting framework shows how consumers, managers, salespersons, and society as a whole can benefit simultaneously by debiasing their negotiations. Chapter 10. The final chapter evaluates five explicit strategies for improving judgment: (1) acquiring expertise, (2) debiasing, (3) taking an outside view, (4) using linear models, and (5) adjusting intuitive predictions. This chapter will teach you how to use the information in this book to create permanent improvements in your future decisions.

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