Chapter 15: Decision Making Mgmt 310

Rely on different techniques

-Programmed = habits -Nonprogrammed = rational thought processes and heuristics -They rely on different techniques. Programmed decisions require managers to rely on habit, standard operating procedures, common expectations, and well-defined information channels. Nonprogrammed decisions require rational thought processes and heuristics and intuitive judgments. Also more susceptible to social and political influences.

Bounded rationality

-A set of boundaries or constraints that tend to complicate the rational decision-making process

•Administrative model

-Acknowledges that managers may be unable to make economically rational decisions because they lack sufficient information on which to base their decisions -The concepts of bounded rationality and satisficing are central to the administrative model

Actions can help to "de-bias" your judgments

-Acquire experience and expertise -Reduce bias in your judgment -Engage in analogical reasoning -Take an outsider's view -Implement statistical models -Understand biases in others

Models of Organizational Decision Making

-Classical model -Administrative model -Political model -Garbage can model

Nonprogrammed decisions

-Decisions that are made in response to novel, poorly defined, or unstructured situations that require managers to use their best judgments -these are made in response to novel, poorly defined, or unstructured situations. They are made under conditions of risk and uncertainty in which limited information exists. Managers need to rely on their best judgments.

Programmed decisions

-Decisions that are made in response to recurring organizational problems that require individuals to follow established rules and procedures -they have repetitive, well-defined problems with a set of pre-established alternatives. Often develop a routine procedure to deal with the problem. Programmed decisions do not usually require a manager or higher level employee to execute. They also don't need social consensus.

Engage in analogical reasoning.

-Engage in training that uses cases, simulations, and real-world experiences to solve problems and make decisions. This training should allow you to improve your ability to conceptualize situations.

Conditions that limit rationality:

-Incomplete, imperfect, or even misleading information. -Lack of experience -Limited time to make a decision. -Conflicting preferences, incentives, or goals of various organizational players.

Solomon Asch's experiment indicated that

-Individuals tend to conform to majority when they rely less on their experience and insight -Dominance of conformity can cause people to make decisions that go against their values -Asch's experiments highlighted that individuals tend to conform to the majority. -When individuals rely less on their experience and insight and more on "majority rule," conformity dominates.

Intuitive Decision Making

-Insights that are tapped through intuition and are not always fully understood by the decision maker. Sometimes referred to as "gut feel" or hunches. -Automatic responses based on past experiences

Framing

-Refers to alternative presentation of the same information that significantly alters a decision. It suggests that decision making can be affected by the degree to which individuals perceive risk or benefit. 1.Individuals treat risks concerning perceived gains (that is, saving lives) differently from risks concerning perceived losses (that is, losing lives). 2.When people make decisions regarding losses, they are risk-seeking, but when they make decisions regarding gains, they are risk-averse. 3.Research has shown that decision makers are twice as likely to avoid losses than favor gains

•Classical model

-Seeks to maximize economic or other outcomes using a rational choice process

Satisficing

-The act of choosing a solution that is good enough -Common rule of thumb: 80% accuracy -Because of these constraints managers don't do an exhaustive search and evaluation of all options. They tend to search until they find an acceptable solution. -Basically, your narrowing your options until you find a solution that is "good enough." A common rule of thumb in business is 80% accuracy

Availability heuristic

-The rule of thumb that contends that individuals assess the frequency, probability, or likely cause of an event by the degree to which instances or occurrences of that event are readily "available" in memory. •Example: a manager is more likely to be influenced by more recent events than events that happened earlier in the year during performance evaluation of subordinates •Typically, more emotional and vivid events are more memorable than unemotional or vague events. Thus they are unusually more "available" to use in decision making •Can be used more effectively by managers who have more experience •Not always a good idea to rely on availability because people frequently remember experiences differently than what actually happened.

Adjustment heuristic

-The rule of thumb that contends that individuals make estimates or choices based on a certain starting point. •Tend to give greater weight to the first information we receive about a problem or solution. The issue with this is that people tend to stick with this information even when they receive additional information that may be contrary to first piece of info •In other words, they fail to make adjustments to initial information à we tend to discount additional information that defies our initial impressions •Good reason to make a good first impression •Can help accelerate the decision making process

Representativeness heuristic

-The rule of thumb that contends that individuals tend to look for traits in another person or situation that corresponds with previously formed stereotypes. •Managers predict a person's performance based on the observed performance of a category of people to which that subordinate belongs to or if they remind them of someone else they knew before •Can be used positively to approximate performance when there is a lack information or time •But can be harmful if used to affirm stereotypes or prejudice

Rational Decision Making

-Theory of rational choice: The theory that individuals make decisions based on a rational thought process that optimizes self-interest. Includes the role of utility or payoffs in making decisions •Basis for Austrian Econ Models •Expected utility

Expected Utility

-When individuals are confronted with a choice, they try to make the best possible decision and the one that maximizes their expected utility. -Assumes that decision makers assess alternatives and determine the probable payoff associated with each choice and then select the option that maximizes their value -For most situations, managers make decisions based on a host of other influencing factors. The busier people are, the more likely they are to rely on less rational approaches to decision making. The complexity and consequences of the decision can impact how managers approach it. Some are simple and straightforward. Others are more complex, making difficult to quantify or compare to concrete alternatives.

How Managers Make Decisions

-bounded rationality -satisficing

Decision-Making Conditions

-conditions of certainty -ambiguity -conditions of risk -conditions of uncertainty

Improving Decision-Making Skills: Managing Your Biases

A common way to make better decisions, regardless of the situation, is to carefully consider several alternatives and perspectives. An important first step for managers is to be aware that they may be susceptible to biases. With this knowledge, it is important to solicit opinions of others and try to objectively review several alternatives.

Garbage can model

A model of decision making whereby, problems, solutions, participants, and choices flow throughout an organization. -A decision process is not viewed as a sequence of steps that begins with a problem and ends with a solution -Playfulness: The deliberate, temporary relaxation of rules to explore many possible alternatives -For instance, a solution may be proposed when no problem is specified or a problem may exist without a plausible solution. Decision making under this model takes on a random quality that can seem disorderly -The decision process is not viewed as a sequence of rational steps but rather that "playfulness" is encouraged in the flow of solving problems and other actions taken to spark organizational creativity and innovation.

Political model

Acknowledges that most organizational decisions involve many managers who have different goals and who have to share information to reach an agreement -Need to bargain and build coalitions with other managers to get decisions made or implemented.

Summary Lesson 4

Although individuals should strive to make rational decisions, emotions can impact the decision making process. Specific situations or contexts also play a role in decision making as they can provide cues to what is or is not socially appropriate. Individuals may choose to do what is socially expedient of exploring all alternatives

Social decisions involving norms are shaped by

Appropriateness framework: The process of making decisions based on societal norms or expectations -A number of factors, including ambiguous information, the use of heuristics and biases, emotions, and intuitive judgments, can cause individuals to deviate from the rational decision-making process.

Summary Lesson 6

Because decision making is subject to a number of influences that can enable it to depart from rationality, managers need to understand these influences. It is important to balance rational and intuitive decision making processes to ensure that alternatives and choices are evaluated in an expedient, yet complete manner. Understanding bias and ways to limit their impact contributes to a more effective decision making process.

Conditions of certainty

Conditions in which individuals have all of the information they need to make the best possible decision.

Conditions of risk:

Conditions in which individuals have information about an organization's goals, objectives, priorities, and potential courses of action, but they do not have complete information about the possible outcomes for each course of action.

Conditions of uncertainty:

Conditions in which individuals have information related to an organization's objectives and priorities, but they do not have complete information about alternative courses of action or about the possible outcomes for each one.

Summary Lesson 1

Decision making includes a process of identifying issues and choosing between alternative courses of action. The rational decision making process generally includes six steps: 1. Defining the problem or opportunity 2. Identifying the goals and objectives 3. Weighting the objectives based on the level of importance of each 4. Outlining possible courses of action 5. Rating each alternative according to the objectives and goals 6. Determining an optimal solution

Summary Lesson 3

Decisions are often influenced by a number of biases. One group of biases is called cognitive heuristics, which include availability, representativeness, and adjustment. The availability heuristic contends that an individual makes a decision based on his or her recall of similar events or situations. The representativeness heuristic denotes decisions based on previously formed stereotypes. The adjustment heuristic refers to decisions being based on a certain starting point. Individuals are also susceptible to other forms of bias, including confirmation, escalation of commitment, status quo, and framing. With the confirmation bias, individuals place greater weight on info that confirms or favors his or her point of view and discounts any evidence that contradicts it. With escalation of commitment, individuals become emotionally committed to a course of action even when continued investment in that action is counterproductive. Individuals who succumb to the status quo bias are reluctant to change; they prefer what they already know. Finally, the way a decision is framed can significantly influence the choices that are made

Decision Making in Organizations

Decisions in organizations vary based on the degree to which the decision making process is programmed -•Programmed decisions •Nonprogrammed decisions •Rely on different techniques

Decision Making

Definition: The process of identifying issues and making choices from alternative courses of action -Management is about making decisions. In all of these decisions, managers must evaluate a variety of alternatives against a set of organizational values and objectives as well as the evolving contextual landscape. The success of an organization is dependent on a manager's ability to make the right decisions at the right time with the right information. We generally believe that we make decisions rationally, but upon a closer look, find that we are influenced by a number of factors.

Acquire experience and expertise.

Develop awareness for what constitutes rational decision making and learn to recognize biases that limit your rationality (for example, escalation of commitment and anchoring and adjustment).

Summary Lesson 2

In reality, managers often do not have all the necessary information to make the best decisions. As a result, rationality is constrained. Managers generally need to make decisions based on incomplete or ambiguous information. In many cases, managers have to opt for a solution that is "good enough", called satisficing, because they do not have the time or resources to consider every possible option. Sometimes individuals rely on their intuition to make a decision. While intuition can be helpful in making quick judgment calls, it can also be dangerous in complex situations, when relying on intuition may result in discounting new informational or perspectives.

Intuitive versus reasoning systems in moral judgments

Intuition: Fast and effortless Reasoning: Slow and effortful Intuition: Process is unintentional and automatic Reasoning: Process is intentional and rational Intuition: Context dependent Reasoning: Context dependent Intuition: Depends on individual Reasoning: Process can be conducted by any individual or machine

Confirmation bias

Maintains that people tend to seek information that confirms a decision before seeking information that disconfirms a decision, even if the disconfirming information is more powerful and important. Happens when people have already made up their mind about something and then seek information to support their decision, and ignore information that may disconfirm that decision

Heuristics

Mental shortcuts -Availability heuristic -Representativeness heuristic -Adjustment heuristic -they can be useful in helping make decisions quickly, and in certain cases can lead to accurate decisions, but usually lead managers to make a less than ideal decision

Escalation of commitment

Occurs when decision makers commit themselves to a particular course of action beyond the level suggested by rationality as a means of justifying previous commitments. Even when it makes the most sense to exist or give up that course of action, we are unable to do so and rationalize our choice to continue by focusing on past investments we have made.

How Biases Impact Decision Making

One issue that complicates the decision-making process is bias. These biases tend to result in suboptimal decisions. Biases can arise from our use of Heuristics, which are rules of thumb or shortcuts that individuals use to save time when making complex decisions.

Summary Lesson 5

Rational decision making is especially challenging at the organizational level bc many individuals can affect the decision making process. To make effective decisions in the context of an organization, it is important to understand how decisions are made in these environments. Thus, four decision making models are used to analyze how decisions are made in organizations; the classical (rational) model, the administrative model, the political model, and the garbage can model

Ambiguity

Situations that are characterized by uncertainty and risk and where the optimal decision is not clear or obvious. Two types of conditions associated with ambiguity.

Rational Decision Making Process

Step 1: A problem or opportunity is defined Step 2: Objectives and goals are identified Step 3: Objectives are weighted according to the importance of each Step 4: Possible courses of action or alternatives are considered Step 5: Each objective is rated according to how well it will achieve the desired course of action Step 6: The optimal decision is chosen

Status Quo Bias

The tendency to favor the "here and now" and to reject potential change. It is because of this bias that creating Dissatisfaction with the status quo is so important to change management

Implement statistical models

Use statistical or other computer software to build models that analyze and judge future decisions.

Take an outsider's view

When making a decision, invite an outsider to share his or her insight or thoughts about the situation. This process allows you to challenge your existing perspective to consider an issue from a different vantage point.

Impact of Emotions and the Situation

•Different moods and emotions can influence decision making -Influence how we perceive the situation, recall of information, to what we pay attention -Ex. Positive moods can encourage riskier behavior; negative moods encourage risk-averse behavior •Decisions are made within social contexts -The presence and opinion of others influences our decisions

Reduce bias in your judgment.

•Reduce or eliminate your biases by first "unfreezing" ingrained thinking and behaviors. This step will help you consider alternative information. Then "change" your decision-making process by explaining why your bias exists and what underlies it. Accept that everyone is subject to judgment biases. Finally, "refreeze" your new thoughts by examining your decisions for bias on an ongoing basis.