Decision Making

Prof. Dr. Brooke A. Gazdag

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Junior-Prof. Dr. Brooke Gazdag. Institute for Leadership
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Prof. Dr. Brooke Gazdag 1

Recap and objectives
Last time we met, we discussed how power and
influence play a role in interpersonal interactions

TODAY we will talk about how we make decisions

and the potential biases we face when making them

Lets start out with some basics

Why decision making?
What is the role of rationality in decision making?

Prof. Dr. Brooke Gazdag 2

Why decision making?
Involves mental processes such as
Attention
Memory
Producing
Understanding language
Problem solving
Decision making

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Decision making models
System 1 and System 2
Rational Model
Bounded Rationality

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 Our brains and decision making

Daniel Kahneman, Thinking Fast and Slow

Graphic: http://upfrontanalytics.com/
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Types of Decisions
Top
Ill-structured Nonprogrammed
Decisions Level in
Type of
Programmed Organization
Problem
Decisions
Well-structured Bottom

Programmed Decision
A decision that is repetitive and routine and can be made by
using a definite, systematic procedure.
Nonprogrammed Decision
A decision that is unique and novel.
The Principle of Exception
Only bring exceptions to the way things should be to the
managers attention. Handle routine matters yourself.

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Rationality vs. Bounded rationality

Rationality
A logical, step-by-step approach
to decision making, with a
thorough analysis of Bounded Rationality
alternatives and their
The real world model: seeks
consequences
satisfactory and sufficient solutions
from limited data and alternatives

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Rational Model

1. The outcome will be completely

rational

The decision maker uses a

2. consistent system of preferences
to choose the best alternative

3. The decision maker is aware of all

alternatives

The decision maker can calculate

4. the probability of success for each
alternative
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Bounded Rationality Model

1. The first satisfactory alternative

2. Recognize that their conception

of the world is simple

Comfortable making decisions

3. without determining all the
alternatives

4. Make decisions by rules of thumb

or heuristics
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Bounded Rationality Model

1. The first satisfactory alternative

Satisfice to select the

2. Recognize that their conception first alternative that is
of the world is simple
good enough, because
the costs in time and effort
Comfortable making decisions are too great to optimize
3. without determining all the
alternatives Heuristics
shortcuts in decision
making that save
4. Make decisions by rules of thumb
or heuristics mental activity
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 Rational decision making model
1.
Define the
problem
6. 2.
Select the Identify the
best alternative criteria

Making a Decision

5. 3.
Evaluate the Allocate weights
alternatives to the criteria
4.
Develop
alternatives

Langton & Robbins, 2007

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 Step 1. Define the problem
Start by writing down your initial assessment of the
problem
Dissect the problem
What triggered this problem (as Ive assessed it)?
Why am I even thinking about solving this problem?
What is the connection between the trigger and the
problem?

G.Dessler, 2003

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 Step 2. Identify the criteria
Write down all the concerns you hope to address
through your decision
Convert your concerns into specific, concrete
objectives
Separate ends from means to establish your
fundamental objectives
Clarify what you mean by each objective
Test your objectives to see if they capture your
interests
G.Dessler, 2003

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 Step 3. Allocate weights
Weight the previously identified criteria in order to
give them the correct priority in the decision
Bring in the interests and values to help prioritize
Think about dealbreakers

G.Dessler, 2003

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 Step 4. Develop alternatives
Generate as many alternatives as you can yourself
Expand your search, by checking with other people,
including experts
Look at each of your objectives and ask, how?
Know when to stop

G.Dessler, 2003

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 Step 5. Evaluate the alternatives
Mentally put yourself into the future
Process Analysis
Solving problems by thinking through the process involved from
beginning to end, imagining, at each step, what actually would
happen.
Rate each alternative on each criterion
Eliminate any clearly inferior alternatives
Organize your remaining alternatives into a table
(matrix) that provides a concise, bird's-eye view of
the consequences of pursuing each alternative
G.Dessler, 2003

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 Step 6. Select the best alternative
Time to make a choice!
Compute the optimal decision
Analyses are useless unless the right choice is made
Under perfect conditions, simply review the
consequences of each alternative, and choose the
alternative that maximizes benefits
In practice, making a decisioneven a relatively simple
one like choosing a computerusually cant be done so
accurately or rationally

G.Dessler, 2003

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Assumptions (1)
Problem clarity
The problem is clear and unambiguous
Known options
The decision maker can identify all relevant criteria and
viable alternatives
Clear preferences
Rationality assumes that the criteria and alternatives can
be ranked and weighted

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Assumptions (2)
Constant preferences
Specific decision criteria are constant and the weights
assigned to them are stable over time
No time or cost constraints
Full information is available because there are no time or
cost constraints
Maximum payoff
The choice alternative will yield the highest perceived
value

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Biases
Information processing biases
Attribution theory
Escalation of committment

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Video
Selective attention test - Daniel Simons and Christopher Chabris

https://www.youtube.com/watch?v=vJG698U2Mvo

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Information processing biases
Representativeness bias
Overweight recent information and deemphasize base rates or priors
Conservatism bias
Slow to update beliefs, underweight new information
Overconfidence
Too much faith in the ability to process information
Confirmation bias
Tendency to seek out information that confirms ones inferences than
disconfirms them
Availability heuristic
The tendency of people to base their judgments on information
readily available to them
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Kelleys Theory of Attribution (1)
Distinctiveness
Does the person behave the same way in other
situations?
Consensus
What about others?
Consistency
Happens every time?

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Kelleys Theory of Attribution (2)
Distinctiveness is determined by comparing a
persons behavior on one task with his or her
behavior on other tasks.
Low High

A B C D E A B C D E
Prof. Dr. Brooke Gazdag Tasks Tasks 24
Kelleys Theory of Attribution (3)
Consensus Involves the comparison of an
individuals behavior with that of his or her peers
Low High

A B C D E A B C D E

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People People 25
Kelleys Theory of Attribution (4)
Consistency is determined by judging if the
individuals performance on a given task is
consistent over time.
Low High

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Time Time
Example attribution situation
Nadias performance is declining. Her peers
performance hasnt changed, it is occurring on
several tasks, and has occurred for the past six
months.
This represents:
1. High (A) or Low (B) consensus
2. High (A) or Low (B) distinctiveness
3. High (A) or Low (B) consistency
4. The attribution her supervisor is likely to make is
a. Internal
b. External

7-27
Prof. Dr. Brooke Gazdag
Attribution biases
Fundamental Attribution Error
Tendency to underestimate the influence of external
factors on anothers behavior and to overestimate the
influence of internal factors
Self-serving Bias
Tendency to overestimate the contribution of internal
factors to ones successes and the contribution of
external factors to ones failures

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Escalation of commitment
The tendency to continue to commit resources to a
failing course of action
Why it occurs

Humans dislike inconsistency

Optimism
Control
Sunk costs

How to deal with it

Split responsibility for decisions

Provide individuals with a graceful exit
Have groups make the initial decision
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How to make better
decisions
...and final question!

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Checklist (Kahneman et al., 2011)
Check for
1. Self interest
2. The affect heuristic
3. Group think
4. Saliency bias
5. Availability bias
6. Anchoring bias
7. Halo effect
8. Overconfidence, planning fallacy, optimism biases, competitor
neglect
9. Disaster neglect
10. Loss aversion

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 How to make better decisions (1)
1. Increase your knowledge
Ask questions.
Get experience.
Use consultants.
Do your research.
Force yourself to recognize the facts when you see them
(maintain your objectivity).
2. Use your intuition
A cognitive process whereby a person instinctively makes
a decision based on his or her accumulated knowledge
and experience.
G.Dessler, 2003

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 How to make better decisions (2)
3. Weigh the pros and cons
Quantify realities by sizing up your options, and taking
into consideration the relative importance of each of
your objectives.
4. Dont overstress the finality of your decision
Remember that few decisions are forever.
Knowing when to quit is sometimes the smartest thing a
manager can do.
5. Make sure the timing is right

G.Dessler, 2003

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 Avoid decision fatigue
Decision fatigue is a problem of modern life
Making decisions uses cognitive resources
The more decisions we make the more mental resources we
use
Decision fatigue occurs when the quality of decisions
deteriorates after making many decisions
Can we avoid making so many decisions?
Difficult! We are overloaded with options
We make on average 226.7 decision per day on food alone
But we can cut back on certain decisions
Top CEOS and leaders eat the same thing for breakfast, wear the
same outfit
Wansink, B. & Sobal, J. (2007). Mindless eating: The 200 daily food decisions we overlook. Environment and Behavior, 39:1, 106-
123.
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In Summary
Programmed vs. non-programmed decisions
Rational decision making was good in theory,
but not in practice
Most use bounded rationality
Meaning they satisfice
Attributions can be either external (to the
situation) or internal (to the person)
Decided through 3 criteria
Be aware of, and minimize, biases
Make better decisions!
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 Supplementary & required
reading
Ariely, D. (2008). Predictably irrational. New York: HarperCollins
Ariely, D. (2009). The end of rational economics. Harvard Business
Review, 87(7-8), 78-84
Ariely, D., & Jones, S. (2010). The upside of irrationality: The unexpected
benefits of defying logic at work and at home. New York: Harper
Kahneman, D. (2011). Thinking, fast and slow. Macmillan
Kahneman, D., Lovallo, D., & Sibony, O. (2011). Before you make that big
decision. Harvard business review, 89(6), 50-60
Additional suggested resources:
NPR.org: Hidden Brain. Episode 22: Originals
NPR.org: Hidden Brain: Episode 42: Decide Already!
ASAP Science: https://www.youtube.com/watch?v=JiTz2i4VHFw&t=209s
Required articles are indicated in class. All articles are available through the library:
https://login.emedien.ub.uni-muenchen.de/menu
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