Session 5

Business
Insights
Through Data
 Steps in data-driven decision making

FORMULATING THE UNDERSTANDING DATA CHOOSING RELEVANT DEVELOPING AND

PROBLEM ANALYTICAL TECHNIQUES PRESENTING
RECOMMENDATIONS

2
 Presenting with
logic and reasoning
 A simplified explanation of the two main
approaches to reasoning
1.Deductive reasoning
• Approach that demonstrates that a Theory/ Explanations/
particular conclusion logically flows from Logic/ Assumptions
the premise
• Building blocks are necessary and
sufficient conditions. Typical forms are ‘if
A then B’ and ‘if not A then not B’
• Examples
• All giraffes have long necks. This is a
giraffe therefore it has a long neck.
• In this market, we expect customers are Data/ observations/
price sensitive. We can deduce that by phenomena to support
reducing price we would get more theory
customers.
 A simplified explanation of the two main
approaches to reasoning
2. Inductive reasoning
• Approach that presents possible reasons Theory/ Explanations/
for a conclusion Logic/ Assumptions

• All reasons have degrees of uncertainty

that can be improved (e.g. better
sampling)
• Examples
• We have observed 10 swans, all of which
were white. We can assume that ‘perhaps’
all swans are white.
• At a healthcare provider, we have
Data/ observations/
observed a fall in customer satisfaction as
the number of customers increased. phenomena
‘Perhaps’ this is because of increased
waiting time.
Avoiding logical
fallacies
What are logical fallacies
• These are simply faulty arguments
• What is an argument?
• Quarrel? Clearly not
• Must have 2 essential elements: Premise and conclusion
• The conclusion should flow from the premise or assumptions
• Some types of words are used in arguments
• E.g: Hence, therefore, since, after all
• Often arguments can be fallacious i.e. faulty
The most common fallacies are …
• Hasty Generalization: Making assumptions about a whole group or range of
cases based on a sample that is inadequate. “You are the second person
who told me this course is hard – so this course must be hard”
• Appeal to Authority: Add strength to arguments by referring to respected
sources or authorities and explaining their positions on the issues.
“According to the Prof Abacus, the famous neuroscientist, six hours of sleep
is adequate for human beings”
• Appeal to Pity: Appeal to pity takes place when an arguer tries to get
people to accept a conclusion by making them feel sorry for someone. “It's
wrong to tax corporations--think of all the money they give to charity, and
of the costs they already pay to run their businesses!”

Some examples adapted from UNC Writing Centre

• Red Herring: Partway through an argument, the arguer goes off on a
tangent, raising a side issue that distracts the audience from what's really
at stake. Often, the arguer never returns to the original issue. “The gig
economy is a race to the bottom for salaries. The government has
responsibilities. But the government has made tremendous progress in e-
governance.”
• False Dichotomy: In false dichotomy, the arguer sets up the situation so it
looks like there are only two choices. The arguer then eliminates one of the
choices, so it seems that we are left with only one option: the one the
arguer wanted us to pick in the first place. “Either we accept this offer or
we just pack up and leave. Which one do you want?”
• Post hoc (false cause): This fallacy gets its name from the Latin phrase "post
hoc, ergo propter hoc," which translates as "after this, therefore because of
this. “We changed the organization structure and we landed twelve new
clients. The new organization structure must have made the difference.”

Some examples adapted from UNC Writing Centre

• Begging the Question: A complicated fallacy, an argument that begs the
question asks the reader to simply accept the conclusion without providing
real evidence. "Active euthanasia is morally acceptable. It is a decent,
ethical thing to help another human being escape suffering through death.“
• Equivocation: Equivocation is sliding between two or more different
meanings of a single word or phrase that is important to the argument.
"Giving money to charity is the right thing to do. So charities have a right to
our money.“
• Slippery Slope: The arguer claims that a sort of chain reaction, usually
ending in some dire consequence, will take place, but there's really not
enough evidence for that assumption. "Animal experimentation reduces
our respect for life. If we don't respect life, we are likely to be more and
more tolerant of violent acts like war and murder. Soon our society will
become a battlefield in which everyone constantly fears for their lives. It
will be the end of civilization. To prevent this terrible consequence, we
should make animal experimentation illegal right now."

Some examples adapted from UNC Writing Centre

Can you name this Fallacy?
1) It is ridiculous to have spent thousands of dollars to rescue those
two whales trapped in the Arctic ice. Why look at all the people
trapped in jobs they don’t like.

RED HERRING
Can you name this Fallacy?
2) I know three redheads who have terrible tempers, and since Annabel
has red hair, I’ll bet she has a terrible temper too.

HASTY GENERALIZATION
Can you name this Fallacy?
3) Look, you are going to have to make up your mind. Either you decide
that your career is important for you, or you go for this holiday and
forget your career.

FALSE DICHOTOMY (Dilemma)

Can you name this Fallacy?
4) I'm positive that my work will meet your requirements. I really need
the job since my grandmother is sick.

APPEAL TO PITY
Understanding conditional probability to
avoid fallacies
• Bayes’ Theorem: Probability of an event happening based on the
knowledge of conditions that might be related to the event
• The simplest case:

• Enables us to learn from prior experience – data

• Also enables us to avoid logical fallacies
You are looking for investments for you firm
and are considering these options
• Multiple investors. Tapping multiple investors can be difficult, but it can lead to a
resilient capital base. If that happens there is a very high likelihood (about 90%)
that a venture can achieve its growth goals.
• Single strategic investor. Focusing on one single strategic investor often leads to a
resilient capital base, but there is a modest likelihood that will translate into the
venture achieving its growth goals (about 40%).
• Merger. Merging with another company usually leads to a more resilient capital
base, but there is a low likelihood that will translate into venture growth goals
(30%).

• Note: We found that of the 1000 firms with a multi-investor strategy, 100 gained
a resilient capital base. Of the 200 firms following a single-strategic investor
strategy, 80 gained a resilient capital base. Of the 300 firms following a merger
strategy, 240 gained a resilient capital base.
Understanding your sample is essential to
avoid logical fallacies
• 6 out of the 10 richest people are college dropouts
• Does that mean there is a relationship between dropping out of college and
becoming rich?
• I sent a survey to my Facebook network of 5,000 friends to
understand ‘What kind of services do young people use at their retail
bank’
• Does this capture a representative sample?
• I asked my professor for feedback on my business idea and he said it
was excellent!
• Does that mean my idea is truly excellent?
Managing biases
What are heuristics and cognitive biases?
• Heuristics: A cognitive shortcut allowing for quick decision making
• Cognitive bias: A situation where mental heuristics can introduce
predictable distortions in our thinking that influences our judgement
• Can we become bias free?
• No, we should however be aware of our biases and reduce them
• There are hundreds of biases
• Just see the list on Wikipedia
• We will consider some of the most relevant biases in business
Broadly there are four types of heuristics
• The affect heuristics: The tendency to use the strength of positive or
negative emotions as a decision making shortcut

You are in a hospital suffering from a rare disease that is fatal is

untreated. You have a choice between 2 treatments. Based on trails
involving 20,000 patients for each treatment which one would you take
• Treatment A resulted in the deaths of 4,900 people
• Treatment B is 70% effective in saving lives
Broadly there are four types of heuristics
• The availability heuristics: The tendency to be disproportionally
influenced by whatever most vividly comes to mind in making
decisions
“I read about thefts in the neighborhood, we should get a new security
system”

• Recency bias: The tendency to over-estimate the significance of more

recent things because they come more easily and vividly to mind.
• Anchoring bias: The tendency to focus on the first piece of
information. “The opening bid in negotiations sets the tone”

Have you been in a negotiation?

• Representativeness heuristics: The tendency to be influenced by the

plausibility of a story or characterization at the expense of underlying
questions of its probability
You meet a shy masters student. Is the student more likely to be
majoring in (a) Business (b) Mathematics

Consider ‘stereotypes’ ‘social biases’ as well

Loss aversion and Prospect theory
• Loss aversion: The observation that losses are more painful than
equivalent gains and that people thus tend to be biased towards loss
avoidance when making decisions
• Prospect theory: An observation based theory describing how people
choose between different degrees of known risk and between
potential gains.
• Pay an insurance premium of $20 against a 1% chance of damage/loss of your
$1,000 sunglasses for replacement
• Don’t pay the insurance and accept the 1% chance of damage/loss of your
$1,000 sunglasses knowing that you cannot afford to replace it.
The most relevant cognitive biases
• Confirmation bias: People are more likely to accept information that
confirms their opinion. Can manifest in different ways:
(a) biased search for information, where someone favors evidence that is
supportive regardless of its validity. “We should go and ask him, he will
support our idea”
(b) biased interpretation of evidence according to whether it agrees or
disagrees with existing hypotheses held “This should not be happening, we
must have made a mistake in our data collection”
(c) biased memory when someone selectively recalls information that
reinforces his or her expectations “I don’t think he intended to criticize
because he talked about the benefits for a long time”
• Hindsight bias: The tendency to see past events as following a pattern even
when none exist. “I knew it all along that he was going to quit”
• False consensus effect: The tendency to over estimate how must
people agree with you. “I think I have a great chance of winning the
election, my policies have got tremendous support”
• Halo effect: When one characteristic overshadows other
characteristics. “We should look beyond his charming personality and
consider his capabilities to deliver this technically challenging project”
• Optimisms bias: The tendency of being (over) optimistic about your
own chances. “This is the winning lottery ticket”
• Dunning-Kruger effect: The tendency of people with little or no ability
in an area to greatly over estimate their ability, resulting in
unwarranted confidence
• Overconfidence effect: The tendency of experts in one field to over
estimate their ability in another field
Understanding
rhetoric
Getting to grips with rhetoric
• We are always communicating
• Objective: Facts that exist independently of any individual perspective and
that remain true no matter what any individual happens to believe
• Moral: Human sense of what is right and what is wrong
• Intuition: The way in which we understand or decide things unconsciously,
based on instinct, emotion, and experience rather than through a process of
conscious reasoning
• Opinion: A viewpoint that is not conclusive
• Rhetoric is the art of persuasion often including techniques other
than reasoning
Building blocks of rhetoric
• Ethos: Establishing trustworthiness of the source
• Logos: The chain of ideas (logic) contained in the act of persuasion
• Pathos: The emotional appeal
• Kairos: The moment of opportunity at which persuasion is likely to
work
Common rhetorical devices
• Rhetorical question: A question that is not meant literally and that
does not require an answer. “Do you really need me to spell it out?”
• Jargon: Phrases that are only known to an expert, often used to
confuse non-experts “Banking phrases: CDO Collateral Debt
Obligations”
• Buzzwords: Fashionable words “Disruption”
• Smokescreen: A process of verbal concealment “legal text in terms of
use/ agreement”
• Euphemism: Deliberately replacing a negative word with something
that sounds more neutral. “Being economical with the truth”
 Slides are an aid to communicate ideas and information

Keep your slides simple
One or at most two messages in a
slide
Less data, more knowledge
One or at most two colours
Keep your messages clear Language matters
Title matters Try not to read directly from the
A picture speaks a thousand words slides
(Pictures and Figures) Highlight the most important
messages

Design to reduce cognitive load Connect to the next slide

Good to have a flow
 Steps in data-driven decision making

FORMULATING THE UNDERSTANDING DATA CHOOSING RELEVANT DEVELOPING AND

PROBLEM ANALYTICAL TECHNIQUES PRESENTING
RECOMMENDATIONS

31