Ch. 11: Making Decisions

Types of Decisions

"Most discussions of decision making assume that only senior executives make decisions or that only senior executives' decisions matter. This is a dangerous mistake." Peter Drucker

11.4 Key Takeaway

There are trade-offs between making decisions alone and within a group. Groups have a greater diversity of experiences and ideas than individuals, but they also have potential process losses such as groupthink. Groupthink can be avoided by recognizing the eight symptoms discussed. Finally, there are a variety of tools and techniques available for helping to make more effective decisions in groups, including the nominal group technique, Delphi technique, majority rule, consensus, GDSS, and decision trees.

11.3 Key Takeaway

Understanding decision-making traps can help you avoid and manage them. Common biases include anchoring and adjustment, availability bias, escalation of commitment, fundamental attribution error, hindsight bias, judgments about correlation and causality, misunderstandings about sampling, overconfidence bias, framing bias, and satisficing.

Escalation of commitment bias

When individuals continue on a failing course of action after information reveals this may be a poor path to follow; aka sunk cost fallacy • decision makers do not want to admit that they are wrong, and this bias is related to a desire to save face and preserve one's reputation • also associated with time invested into the failing course of action; may incorrectly believe that spending more time and energy might somehow help them recover their losses

Analysis paralysis

a decision making process in which more and more time is spent on gathering information and thinking about it, but no decisions actually get made • the availability of too much information and too many choices can lead to this

Delphi Technique

a group process that utilizes written responses to a series of questionnaires instead of physically bringing individuals together to make a decision • each subsequent questionnaire is built from the information gathered in the previous one • the process ends when the group reaches a consensus

Brainstorming

a process of generating ideas that follows a set of guidelines, including not criticizing ideas during the process, the idea that no suggestion is too crazy, and building on other ideas (piggybacking)

Rational decision-making model

a series of steps that decision makers should consider if their goal is to maximize their outcome and make the best choice • best applied to major decisions in which the costs are high and the consequences of different decision outcomes are significant • involves a number of unrealistic assumptions: assumes that people completely understand the decision to be made, that they know all their available choices, that they have not perceptual biases, and that they want to make optimal decisions • a helpful device in aiding decision makers; can learn from studying how and when individuals deviate from the model

Idea quotas

a set number of ideas a group must reach before they are done with brainstorming

Decision criteria

a set of parameters against which all of the potential options in decision making will be evaluated • prevents decision-makers from favoring one option too much and setting criteria accordingly

Fundamental attribution error

a situation in which good outcomes are attributed to personal characteristics, such as intelligence, but undesirable outcomes are attributed to external circumstances, such as the weather

Availability bias

a situation in which information that is more readily available is viewed as more likely to occur

Nominal Group Technique (NGT)

a technique designed to help with group decision making by ensuring that all members participate fully • used to structure group meeting when members are grappling with problem solving or idea generation • follows 4 steps 1) each member of the group begins by independently and silently writing down ideas 2) the group goes in order around the room to gather all the ideas that were generated; this continues until all the ideas have been shared 3) a discussion takes place around each idea, and members ask for and give clarification and make evaluative statements 4) group members vote for their favorite ideas by using ranking or rating techniques • helps avoid group decision-making problems such as groupthink

Groupthink

a tendency to avoid a critical evaluation of ideas the group favors

Making Intuitive Decisions

a total of 89% of managers surveyed admitted to using intuition to make decisions at least sometimes and 59% said they used intuition often

Wildstorming

a variation of brainstorming in which the group focuses on ideas that are impossible and then imagines what would need to happen to make them possible

Premortem

a way to imagine what might go wrong and avoid it before spending a cent or having to change course along the way • five-step process

The bounded rationality model

according to this model, individuals knowingly limit their options to a manageable set and choose the first acceptable alternative without conducting an exhaustive search for alternatives

Making Creative Decisions

an addition to the rational decision making, bounded rationality models, and intuitive decision making, creative decision making is a vital part of being an effective decision maker

Intuitive decision-making model

arriving at decisions without conscious reasoning; the model argues that in a given situation, experts making decisions scan the environment for cues to recognize patterns • managers make decisions under challenging circumstances, including time pressures, constraints, a great deal of uncertainty, changing conditions, and highly visible and high-stakes outcomes; thus it makes sense that they would not have the time to use the rational decision-making model • only one choice is considered at a time

Decision rule

automated response to problems that occur routinely; automated response to programmed decisions

Programmed decisions

choices that occur frequently enough that we develop an automated response to them Ex) simple and habitual decisions such as what to wear, what to eat, and which route to take to work/home

Correlation and causality bias

confusing correlation with causation • simply looking at the correlation between two variables may result in misleading conclusions

Tactical decisions

decisions about how things will get done Ex) What should we do to help facilitate employees from the two companies working together? How should we market the new product line? Who should be let go when we downsize? who typically makes decisions: managers

Operational decisions

decisions employees make each day to make the organization function Ex) How often should I communicate with my new coworkers? What should I say to customers about our new product? How will I balance my new work demands? who typically makes decisions: employees throughout the organization

Strategic decisions

decisions that are made to set the course of an organization Ex) Should we merge with another company? Should we pursue a new product line? Should we downsize our organization? who typically makes decisions: top management teams, CEOs, Boards of Directors

Nonprogrammed decisions

decisions that require conscious thinking, information gathering, and careful consideration of alternatives Ex) how to deal with lower than expected earnings, who to appoint to an open position, or who to choose as the supplier

Decision trees

diagrams where answers to yes or no questions lead decision makers to address additional questions until they reach the end of the tree • helpful in avoiding errors such as framing bias • can be helpful in guiding the decision maker to a predetermined alternative and ensuring consistency of decision making

Flexibility

how different the ideas are from each other; if individuals are able to generate several unique solution to a problem, they are high on flexibility

Originality

how unique a person's ideas are

Avoiding Decision-Making Traps

individuals are influenced by a number of biases; understanding the nature of decision biases (aka cognitive biases) helps individuals avoid areas where their decision processes may be flawed Ex) the biases of anchoring and adjustment, availability bias, escalation of commitment, fundamental attribution error, hindsight bias, judgements about correlation and causality, misunderstandings about sampling, overconfidence bias, framing bias, and satisficing

Consensus

reaching a general agreement • process works by discussing the issues at hand, generating a proposal, calling for consensus, and discussing any concerns • if concerns still exists, the proposal is modified to accommodate them • these steps are repeated until consensus is reached • this decision-making rule is inclusive, participatory, cooperative, and democratic • research shows that consensus can lead to better accuracy and helps members feel greater satisfaction with decisions

Knowledge management systems

systems for managing knowledge in organizations, supporting creation, capture, storage, and dissemination of information

Creativity

the generation of new ideas that are original, fluent, and flexible • innovation begins with creative ideas, but it also involves realistic planning and follow-through

Fluency

the number of ideas a person is able to generate

Hindsight bias

the opposite of overconfidence bias as it occurs when a person, looking at the past, judges that mistake that was made should have been recognized as a mistake at the time • a problem especially when judging someone else's decisions

Anchoring and adjustment bias

the tendency for individuals to rely too heavily on a single piece of information • arbitrary numbers, irrelevant traits, or facts

Framing bias

the tendency of decision makers to be influenced by the way a situation or problem is presented to them • depending on how a problem is presented, individuals choose an alternative that is disadvantageous simply because of how it is framed

Satisfice

to accept the first alternative that meets minimum criteria; a term coined by Herbert Simon from satisfy and suffice • decision maker saves cognitive time and effort by accepting the first alternative that meets the minimum threshold • taking this approach may be effective as too many choice actually lead to fewer choices being made

Sampling bias

when individuals draw broad conclusions from small sets of observations instead of more reliable sources of information derived from large, randomly drawn samples Ex) using one's own experience and treating it like the common experience

Overconfidence bias

when individuals overestimate their ability to predict future events

Satisficing

when individuals settle for the first acceptable alternative instead of seeking the best possible (optimal) solution

When it Comes to Decision Making, Are Two Heads Better Than One?

whether an individual or a group decision is preferable will depend on the specifics of the situation

Making "Good Enough" Decisions

while we tend to value having choice, paradoxically, having too much choice can actually make us less effective

Pros of Group Decision Making

• Diversity of ideas and can piggyback on others ideas • Greater commitment to ideas • Interaction can be fun and serves as a team building task

Cons of Individual Decision Making

• Fewer ideas • Identifying the best individual can be challenging • Possible to put off making decisions if left alone to do it

When to use the INTUITIVE decision-making model

• Goals are unclear • There is time pressure and analysis paralysis would be costly • You have experience with the problem

When to use the RATIONAL decision-making model

• Information on alternatives can be gathered and quantified • The decision is important • You are trying to maximize your outcome

Tools and Techniques for Making Better Decisions

• Nominal Group Technique (NGT) • Delphi Technique • Majority Rule • Consensus • GDSS • Decision Trees

When to use the CREATIVE decision-making model

• Solutions to the problem are not clear • New solutions need to be generated • You have time to immerse yourself in the issues

Cons of Group Decision Making

• Takes longer • Group dynamics such as group think can occur • Social loafing--harder to identify responsibility for decisions

When to use the BOUNDED RATIONALITY decision-making model

• The minimum criteria are clear • You do not have or you are not willing to invest much time to make the decision • You are not trying to maximize your outcome

Pros of Individual Decision Making

• Typically faster than group decision making • Best individual in a group usually outperforms the group • Accountability is easier to determine

UNDERSTANDING DECISION MAKING

11.2 Learning Objectives: 1) Define decision making 2) Understand different types of decisions

FAULTY DECISION MAKING

11.3 Learning Objectives: 1) Understand overconfidence bias and how to avoid it 2) Understand hindsight bias and how to avoid it 3) Understand anchoring and how to avoid it 4) Understand framing bias and how to avoid it 5) Understand escalation of commitment and how to avoid it

DECISION MAKING IN GROUPS

11.4 Learning Objectives: 1) Understand the pros and cons of individual and group decision making 2) Learn to recognize the signs of groupthink 3) Recognize different tools and techniques for making better decisions

How do you know if your decision-making process is creative?

3 factors: 1) Fluency 2) Flexibility 3) Originality

SCAMPER

A checklist tool that helps you think of changes you can make to an existing marketplace to create something new; technique to enhance and improve creativity Substitute Combine Adapt Modify Put to other uses Eliminate Rearrange

Majority rule

A decision-making rule in which each member of the group is given a single vote, and the option receiving the greatest number of votes is selected • popular due to its simplicity, speed, ease of use, and representational fairness • research supports its effectiveness as a decision-making technique

3 elements necessary to understand why one thing affects another

1) Correlation 2) Temporal order 3) Ruling out other potential causes

8 symptoms of groupthink

1) Illusion of invulnerability 2) Collective rationalizations 3) An unquestioned belief in the group's inherent morality 4) Stereotyped views of out-groups 5) Direct pressure 6) Self-censorship 7) Illusions of unanimity 8) The emergence of self-appointed mindguards

The Creative Decision-Making Process

1) Problem identification: recognize that a problem exists 2) Immersion: think about the problem consciously and gather information 3) Incubation: set the problem aside and do not think about it for a while 4) Illumination: insight moment, when the solution to the problem becomes apparent; Eureka! 5) Verification and application: consciously verify the feasibility of the solution and implement the decision

Three levels of decisions

1) Strategic decisions 2) Tactical decisions 3) Operational decisions

Ch. 11 Learning Objectives

1) Understand the meaning of decision making 2) Compare and contrast different decision-making models 3) Compare and contrast individual and group decision 4) Understand potential decision-making traps and how to avoid them 5) Understand the pros and cons of different decision-making aids 6) Engage in ethical decision 7) Understand cross-cultural differences making

Ch. 11 Conclusion

Decision making is a critical component of business. Some decisions are obvious and can be made quickly, without investing much time and effort in the decision-making process. Others, however, require substantial consideration of the circumstances surrounding the decision, available alternatives, and potential outcomes. Fortunately, there are several methods that can be used when making a difficult decision, depending on various environmental factors. Some decisions are best made by groups. Group decision-making processes also have multiple models to follow, depending on the situation. Even when specific models are followed, groups and individuals can often fall into potential decision-making pitfalls. If too little information is available, decisions might be made based on a feeling. On the other hand, if too much information is presented, people can suffer from analysis paralysis, in which no decision is reached because of the overwhelming number of alternatives. Ethics and culture both play a part in decision making. From time to time, a decision can be legal but not ethical. These gray areas that surround decision making can further complicate the process, but following basic guidelines can help people ensure that the decisions they make are ethical and fair. Additionally, different cultures can have different styles of decision making. In some countries such as the United States, it may be customary to come to a simple majority when making a decision. Conversely, a country such as Japan will often take the time to reach consensus when making decisions. Being aware of the various methods for making decisions as well as potential problems that may arise can help people become effective decision makers in any situation.

11.2 Key Takeaway

Decision making is choosing among alternative courses of action, including inaction. There are different types of decisions ranging from automatic, programmed decisions to more intensive nonprogrammed decisions. Structured decision-making processes include rational, bounded rationality, intuitive, and creative decision making. Each of these can be useful, depending on the circumstances and the problem that needs to be solved.

Group Decision Support Systems (GDSS)

interactive computer-based systems that are able to combine communication and decision technologies to help groups make better decisions • can improve the output of groups' collaborative work through higher information sharing • as the quality of these systems grow, they risk being counterproductive; humans can only process so many ideas and information at one time • as virtual meetings grow larger, it is reasonable to assume that information overload can occur and good ideas will fall through the cracks, essentially recreating a problem that GDSS was intended to solve, which is to make sure every idea is heard • as the quality of these systems grow, they risk being counterproductive; humans can only process so many ideas and information at one time • as the quality of these systems grow, they risk being counterproductive; humans can only process so many ideas and information at one time • as virtual meetings grow larger, it is reasonable to assume that information overload can occur and good ideas will fall through the cracks, essentially recreating a problem that GDSS was intended to solve • another problem is the system possibly becoming too complicated • many of these programs fail to take into account the factor of human psychology

Decision making

making choices among alternative courses of action, including inaction • decisions may affect the lives of others and change the course of an organization

Alternatives

other possible solutions to a problem in the decision making process • by generating a large number of alternatives that cover a wide range of possibilities, individuals are likely to make a more effective decision that does not sacrifice one criterion for the sake of another

Crowdsourcing

outsourcing a problem to a large group