OB CH 10: Decision Making

System 2 Thinking

calculated, slower, deliberate, conscious, effortful, explicit, and logical Usually our system 1 thinking does suffice but not always

Endowment Effect

def: hypothesis that people ascribe more value to things merely because they own them, even when there is no cause for attachment, or even if the item was only obtained minutes ago (people willingness to accept compensation for a mug (after ownership) was about 2x as high as their willingness to pay for it) willing to pay 325$ for a ticket but if youre selling 2000$

summary

• There are different views and models of decision making. • Usually our System 1 Thinking will suffice, but not always! • We are bounded in our rationality which causes us to suffice. • Our decision making is almost always biased. This doesn't mean it is wrong, it just means that we are not thinking completely clearly and objectively. • Organizations must find ways to manage knowledge and make decisions. • Work on improving your decision making

hindsight bias

knowledge of an outcome influences our beliefs about the probability that we could have predicted the outcome earlier -9/11 attacks -or saying what you woulda done in a game instead

Simons Normative Model

-Decision making limited by bounded rationality (decision makers are bounded or restricted by a variety of constraints when making decisions) -Bounded rationality causes managers to satisfice (choosing a solution that meets some minimum "good enough" qualification) rather than optimize

The garbage can model

-Holds that decision-making results from complex interaction between independent streams of events (problems, solutions, participants, and choice opportunities) -Assumes decision - making doesnt follow an orderly series of steps

Prospect Theory/ Framing

-People make decisions based on the potential value of losses and gains, rather than the final outcome -Losses loom LARGER then gains, inconsistent with the basic tenants of utility theory different ways to word how someone is getting laid off, check again page 32 in decision making (??????)

What might cause bounded rationality?

-Personal characteristics (limited mental capacity, personality , and time constraints) -Internal resources (organization human and social capital, financial resources, technology, and internal processes and systems) -External Resources ( things not under control by organization such as employment levels and government policy)

3 benefits following rational process

-The quality of the decision may be enhanced because it follows logically, from all available knowledge and expertise -The reasoning behind a decision is transparent and available to scrutiny -If made public, the process discourages the decider from action on suspect considerations such as personal advancement or avoiding bureaucratic embarrassment

Seven EBDM Implementation Principles

-treat organization as unfinished prototype -no bragging just facts -see urself and organization as outsiders do -not just for senior executives -youll still need to sell it (evidence w out marketing may not get approved) -If all else fails, slow the spread of bad practice by delaying (can have negative career implications) -What happens when people fail? dont shoot the messengers, forgive and remember

Guidelines in deciding whether or not groups should be involved in decision making

1) If additional info would inc the quality of the decision, people with needed info should be involved 2) acceptance is important, those needing to accept and commit to the decision should be involved 3) If people can be developed through the decision making process, those who can benefit may need to be involved

Four Practical Implications

1) Model is more pronounced in industries with long timelines, complex decisions, as well as risk and uncertainty (pharmac. innovation) 2) Decisions made by oversight or presence of salient opportunity 3) Political motives frequently guide decision making process 4) Important problems more likely to be solved then unimportant ones

Group-Aided Decision Making

Adv: -Greater pool of knowledge -Different perspectives -Greater Comprehension -Increased Acceptance -Training ground Dis: -Social Pressure -Domination by a vocal few -Logrolling -Goal Displacement -Group think

biases in decision making

Availability Representativeness Anchoring Overconfidence Prospect Theory Mental Accounting Endowment Effect Hindsight Bias Escalation of commitment

Availability Heuristic

Decision-maker's tendency to base decisions on information that is readily available in memory. Information is more readily available when it -Recently Occured -Is highly salient (shark attach) -Evokes strong emotions (9/11 plane crash)

Evidence Based Decision Making

Def: Process of conscientiously using the best available data and evidence when making managerial decisions Benefit : helps managers face hard facts and avoid personal biases when making decisions Downside: Can be very time intensive

Stage 3

Evaluate alternatives and select a solution 1) Is it ethical ? 2) Is it feasible 3) Will it remove the causes and solve the problem?

Stage 2

Generate alternative solutions Key blunders : -Rushing to judgement -Selecting Readily available ideas or solutions -Makign pool allocation of resources to study alternative solutions

Stage 1

Identify the problem or opportunity Problem : Exists when an actual situation and a desired situation differ Opportunity : Represents a situation in which there are possibilities to do things that lead to results that exceed goals and expectation

Decision Making

Identifying and choosing solutions that lead to a desired end result

Stage 4

Implement and evaluate the solution chosen If gap doesnt close, one of the following must be true 1) the problem was incorrectly identified (return to stage 1 ) 2) Solution was inappropriate (return to stage 2)

Non Rational Models

Non Rational models attempt to explain how decisions are actually made -Decision making is uncertain -Decision makers dont possess complete information -It is difficult for managers to make optimal decisisions

System 1 Thinking

Intuitive, fast, automatic, effortless, implicit and emotional

The rational Process

Key Assumptions -Managers optimize : solve problems by producing the best possible solution / when making decisions -Managers are completely objective (vs biased or partial ) -Managers possess complete information to make a decision In truth : The rational model almost never exists in a real world situation

Mental accounting

Lost ticket to movie that you paid for, would you buy another for 10$? or lost 10$ bill you were going to buy movie ticket with? differences varry

Affect

Negative Affect : can produce a narrowing of attention and failure to search for new alternatives Positive affect : promotes variety seeking and creativity -In short term, people feel greater regret about action than inaction, but in the long term, people feel greater regret about inaction than action

Individual Differences

Risk and Affect

Rational models work best in the following

Simple context: stable, clear cause and effect relationships so best answers can be agreed upon Complicated context: clear relationship between cause and effect but some people may not see it, more than one solution may be effective - rational model (but investigation of all options must be present) Complex (too many unknowns) and chaotic environments (fast changing patterns of cause and effect) less suited for the rational model

Risk

Situation involving exposure to danger -Everyone defines risk differently and is willing to take on different amounts of risk

Steps in EBDM

Step 1 : Identify problem or opportunity Step 2: Gather internal evidence or data a/b the problem and eval: relevance and validity Step 3 : Father external evidence a/b prob from published research Step 4: Gather views from stakeholders affected by decision and consider ethical implications Step 5: Integrate and critically appraise all data and then make decisions

Overconfidence

Tendency to be over confident about estimates or forecasts We are more overconfident when asked to respond to question of mod-hard diffic then to easy (knowledge decreases, but they do not correspondingly decrease their level of confidence)

Judgement

The cognitive aspects of the decision making process

Escalation of Commitment

The tendency to stick to an ineffective course of action when it is unlikely that the bad situation can be revers (war time that soldiers whove already died dont die in vain) -Set minimum targets for performance and compare performance against targets -Regularly rotate managers throughout project -Encourage decision-makers to become less ego-involved -make decision makers aware of the cost of persistence

Representativeness heuristic

When making a judgment about an individual, object, or event, people tent to look for traits an individual may have that correspond with previously formed stereotype (someone short slim and loves poetry, a professor or truck driver)

anchoring

occurs when decision makers are influenced by the first information received about a decision, even if it is irrelevant. This happens b/c initial information impressions, data, feedback, or stereotypes anchor our subsequent judgement or decisions