An Introduction to Managerial Decision Making

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...

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...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.