Individual Decision Making

Session 6

The Link Between Perceptions and Individual Decision Making

Perception of the

decision maker

Outcomes

ProblemA perceived discrepancy between the current state of affairs and a desired state.DecisionsChoices made from among alternatives developed from data perceived as relevant which lead to a desired state of affairs.

Decision Making Models

Rational Decision Making Model Bounded Rationality Model

Intuitive Model

Rational Decision Making Model

Describes how individuals should behave in order to maximize some outcome.

Steps -1. Define the problem 2. Identify the decision criteria3. Allocate weights to the criteria4. Develop the alternatives5. Evaluate the alternatives6. Select the best alternatives

Assumptions

Problem clarityKnown optionsClear preferencesConstant preferencesNo time or cost constraintsMaximum payoff

Methods to identify problem

Historical Cues

Planning

Other people’s perception

How Are Decisions Actually Made in Organizations

Bounded RationalityIndividuals make decisions by constructing simplified models that extract the essential features from problems without capturing all their complexity.

How Are Decisions Actually Made in Organizations (cont’d)

How/Why problems are identified Visibility over importance of problem

Attention-catching, high profile problems Desire to “solve problems”

Self-interest (if problem concerns decision maker)Alternative Development

Satisficing: seeking the first alternative that solves problem.

Engaging in incremental rather than unique problem solving through successive limited comparison of alternatives to the current alternative in effect.

Intuitive Model

Intuitive Decision Making An unconscious process created out of distilled

experience.Conditions Favoring Intuitive Decision Making

A high level of uncertainty exists There is little precedent to draw on Variables are less scientifically predictable “Facts” are limited Facts don’t clearly point the way Analytical data are of little use Several plausible alternative solutions exist Time is limited and pressing for the right decision

The Three Components of Creativity

CreativityThe ability to produce novel and useful ideas.Three-Component Model of CreativityProposition that individual creativity requires expertise, creative-thinking skills, and intrinsic task motivation.Source: T.M. Amabile, “Motivating Creativity in Organizations,” California Management Review, Fall 1997, p. 43.

Common Biases and Errors

Overconfidence Bias Believing too much in our own decision competencies.

Anchoring Bias Fixating on early, first received information.

Confirmation Bias Using only the facts that support our decision.

Availability Bias Using information that is most readily at hand.

Representative Bias Assessing the likelihood of an occurrence by trying to

match it with a preexisting category.

Common Biases and Errors

Escalation of Commitment Increasing commitment to a previous decision in spite

of negative information.Randomness Error

Trying to create meaning out of random events by falling prey to a false sense of control or superstitions.

Hindsight Bias Falsely believing to have accurately predicted the

outcome of an event, after that outcome is actually known.

Common Biases and Errors

Framing Bias – Tendency to consider risks about gains differently than risks pertaining to lossesEg- US is preparing for the outbreak of an unusual Asian disease that is expected to kill 600 people. Two alternative programs are proposed.

1. If Program A is adopted, 200 people will be saved.2. If Program B is adopted, 1/3 probability of 600 people

being saved and 2/3 probability that nobody will be saved. Winner’s Curse –

Winning participants in a competitive auction pay too much for the item. Some may underestimate the value and others may overestimate it. Highest bidder overestimates the most. Therefore, unless bidders undervalue, there is a good chance that winner will pay too much.

Dynamics of Decision Making

1. Improving Decision Making through Effective Knowledge Management

Knowledge Management is implementing systems and practices that increase the sharing of knowledge and information throughout an organization.

Tacit Knowledge & Explicit Knowledge affect quality of decisions.

Knowledge Sharing – Knowledge Management Software

Contd

2. General Decision Making StylesA combination of how individuals perceive and respond to information.

Styles vary along two dimensions –Value Orientation / Way of ThinkingTolerance for Ambiguity

Decision-Style Model

Source: A.J. Rowe and J.D. Boulgarides, Managerial Decision Making, (Upper Saddle River, NJ: Prentice Hall, 1992), p. 29.

Individual Constraints on Decision Makers

PersonalityConscientiousness - Achievement Striving &

DutifulSelf Esteem - Self serving bias

Gender Rumination – Reflecting at length (Over

thinking problems) Women engage more in rumination than men

Organizational Constraints on Decision Makers

Performance Evaluation Evaluation criteria influence the choice of actions.

Reward Systems Decision makers make action choices that are favored by the

organization.Formal Regulations

Organizational rules and policies limit the alternative choices of decision makers.

System-imposed Time Constraints Organizations require decisions by specific deadlines.

Historical Precedents Past decisions influence current decisions.

Ethics in Decision Making

Ethical Decision Criteria Utilitarianism

Seeking the greatest good for the greatest number. Decisions are made solely on the basis of outcomes.

Rights Respecting and protecting basic rights of individuals

such as whistleblowers. Justice

Imposing and enforcing rules fairly and impartially.

Ethics in Decision Making

Ethics and National Culture There are no global ethical standards. The ethical principles of global organizations that

reflect and respect local cultural norms are necessary for high standards and consistent practices.

Ways to Improve Decision Making

1. Analyze the situation and adjust your decision making style to fit the situation.

2. Be aware of biases and try to limit their impact.3. Combine rational analysis with intuition to

increase decision-making effectiveness.4. Don’t assume that your specific decision style is

appropriate to every situation.5. Enhance personal creativity by looking for novel

solutions or seeing problems in new ways, and using analogies.

Toward Reducing Bias and Errors

Focus on goals. Clear goals make decision making easier and help to

eliminate options inconsistent with your interests.Look for information that disconfirms beliefs.

Overtly considering ways we could be wrong challenges our tendencies to think we’re smarter than we actually are.

Don’t try to create meaning out of random events. Don’t attempt to create meaning out of coincidence.

Increase your options. The number and diversity of alternatives generated

increases the chance of finding an outstanding one.

Source: S.P. Robbins, Decide & Conquer: Making Winning Decisions and Taking Control of Your Life (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2004), pp. 164–68.

Group Decision Making

Group Involvement in Decision Making

Advantages and Disadvantages of Group Decision Making

Group Problem Solving Techniques

G

Group Involvement in Decision Making

Creating an environment of participationMinority Dissent – members comfort of

disagreement with other members Developing a clear understanding of the decision

situation Developing a clear understanding of the

requirements for an effective choice Thoroughly and accurately assessing the positive

and negative qualities of alternative solutions

Advantages of Group Decision Making

Greater pool of knowledge Different Perspectives Greater Comprehension Increased Acceptance Training Ground

Disadvantages

Social PressureDomination by a Vocal Few Logrolling Goal Displacement Groupthink

Group Problem Solving Techniques

BrainstormingNominal Group Technique Delphi TechniqueComputer Aided Decision Making