MGMT 3130 Judgment and Decision

Making in Organizations

COURSE INTRODUCTION

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 Today’s Agenda

• Introduce ourselves
• Introduce the course (and have some class
activities)

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 ABOUT THIS COURSE

Why do we need to make decision?

• We have a goal to achieve.
• We have choices (multiple options).
• We have finite resources which prevent us from pursuing all
the options simultaneously.

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What is judgment and decision-making?

Judgment & Decision Making

Judgment of
Value and Choice
Probability

To estimate the value of alternatives To select from alternatives, e.g.

and the likelihood of events, e.g. • Choose Candidate A or
• How good is this job candidate? Candidate B?
• How likely will this investment be • To invest or not to invest?
profitable?

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 Overview of Course Units

Decision Heuristics Choice and Applications

Analysis and Biases Preference
Two systems of
Problem thinking Performance
Prospect theory
definition appraisal
Availability
heuristic
Decisions Motivating
Escalation of
involving multiple Representativeness employees by
commitment
objectives heuristic money? Or…?

Anchoring and Why people

Decision-making adjustment Time and
become bad
under uncertainty preferences
apples?
Embodied
cognition
Collecting more Is more choice
Bounded Going green
information always better?
awareness

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 PART 1: DECISION ANALYSIS

Let’s meet Samuel…

Samuel Friend
(Manager of ABC company) - “Why don’t you set up your own
- job nature ü consulting company?”
- colleagues ü - “You have the skills needed, and
- company politics û contacts to build client base.”
- promotion û - Possible outcome: Good income,
à upset freedom of being your own boss.

Samuel’s wife Colleague

- Current job: Stable!!
- Set up own company: Risky!!
May hurt your self-esteem!
- Home-office or rent an office?
Employ secretarial staff or do
clerical work yourself?
- “In our department, I know
2 people who have done what
you’re suggesting, and they
gave up after a year.”
- “Why don’t you simply change
job?”

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 Components of Complex Decision Problems

Objectives
• Your goals. What do you want? What do you need?
Alternatives
• Different courses of action from which you can choose.
Tradeoffs
• In comparing different alternatives, you need to consider the
tradeoffs between the benefits offered by them.
Uncertainties
• The consequences of alternatives may not be certain.
• Associated with this is your risk attitude – would you prefer the
least risky alternative or to tolerate a higher level of risk?
Linked decisions
• Some of the decisions are sequential in nature.

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By now Samuel finds it difficult to think clearly about the decision.
What he needs is a method that will enable him to address the
complexity of the problem – Decision Analysis.
Income Enjoyment Enjoyment
at work from family
? ? ?

Stay with ABC Success (?%)

company ? ? ?
Home office
Fail (?%)
? ? ?
Success (?%)
Set up own ? ? ?
business
Rent a Fail (?%)
? ? ?
luxury office

Change job to
XYZ company ? ? ?
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Decision Analysis (DA) involves
(1) the decomposition of a complex decision problem into a set of
smaller elements (objectives, alternatives, tradeoffs, uncertainties),
(2) the systematical thinking about each element, and
(3) the integration of the results so that a provisional best alternative
can be selected.
Benefits of performing DA
• Provide structure to a complex problem – You need to spell out
clearly the objectives, alternatives, tradeoffs, and uncertainties.
• DA shows you what you should do given the judgments that have
been elicited from you during the analysis.
• Provide a defensible rationale for choosing a particular option by
tracing back through the analysis.
• If the solution suggested by DA is inconsistent with your intuitive
feelings, the conflict can then be explored.
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 Game: The Monty Hall problem

• Taken from a television game show, “Let’s Make a Deal,” which is very
popular in the United States in the 1970’s.
• The host was Mr. Monty Hall.
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 Monty shows you 3 doors

Behind one of the doors is the STAR PRIZE - CAR

1 2 3

Behind the other doors is just a goat

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 You don’t know which door conceals which item,
and were asked to pick a door.
Instead of opening the door you picked,
Monty always opens one of the 2 other doors to reveal a goat.
1 2 3

Lucky you
At least 1 of these doors MUST didn't choose
contain a goat THIS door 12
Do you want to STAY with Door #1 or SWITCH to Door #2?
Does it even matter?

1 2 3

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 Suppose you picked door #1
3 possible scenarios To open a door If you Stay, If you Switch,
(possible locations of car and goats) containing a goat, will you get a will you get a
Monty picked car? car?
Door 1: Door 2: Door 3:

Door ________
(1/3)
Door 1: Door 2: Door 3:

Door ________
(1/3)
Door 1: Door 2: Door 3:

Door ________
(1/3)
Numbers in ( ) are probabilities of each scenario happening

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 Takeaway from the Monty Hall problem

Our intuition Rational approach

It doesn’t matter if we switch Switch (you have 2/3
or stay (each door has ½ chance of getting the
chance of containing a car) car if you switch)

• Our intuition may not produce a correct solution.

• By solving the problem systematically, using logics, we have a higher
chance of getting a correct solution.
• Is there a way to make decisions systematically and logically?
Yes. Using decision analysis!
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In Part 1 of this course, you will learn how to Decision
complete a decision analysis. Analysis

We’ll talk about how to structure a decision problem, Problem

definition
then solve it using (1) simple multi-attribute rating
technique, and (2) decision tree.
Decisions
involving multiple
To do well, you need: objectives
• Ability to use a calculator to do simple + - ´ ÷
• Basic knowledge on probability Decision-making
under uncertainty
• Willingness to express your judgments in
numerical form
• Patience in following a step-by-step process Collecting more
information

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 PART 2: JUDGMENT HEURISTICS AND BIASES

Which cube is darker?

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Our judgment may not be accurate, and is often influenced by
irrelevant factors.

• In an experiment (with 2 experimental conditions):

} Male participants were asked to run for either
15 sec. (low arousal condition) or 2 min. (high arousal condition)

15 seconds 2 minutes

} Participants were then asked to rate an attractive female

confederate (e.g. How attractive she is? 1 = not at all attractive,
7 = very attractive)
} Which group of participants would give a higher rating? Why?

White, G. L., Fishbein, S., & Rutstein, J. (1981). Passionate love and misattribution of arousal. 18
Journal of Personality and Social Psychology, 41, 56-62.
• In another study (with two experimental conditions):
} Male participants were told to cross a bridge to meet a researcher
(a good-looking female) and complete a survey.
} At the end of the survey, participants were told that they can call
the researcher if they want to know more about the study.
High arousal condition Low arousal condition

50% of participants called

12.5% of participants called

Dutton, D. G., & Aron, A. P. (1974). Some evidence for heightened sexual attraction under
conditions of high anxiety. Journal of Personality and Social Psychology, 30, 510–517. 19
Implication for organizations
Why holding a product-launch party? Customers may
attribute the excitement from the party to the product.
* Caution: This is true only when your product is not a poor one.

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In Part 2 of this course, you will learn a variety of Heuristics
judgment heuristics and biases. and Biases
Two systems of
Be prepared to know that we do make a lot of errors thinking
in making judgment! Availability
heuristic
We will also explore how those errors influence our
Representativeness
personal life and organizationally relevant domains. heuristic

Anchoring and
adjustment

Embodied
cognition

Bounded
awareness

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 PART 3: CHOICE AND PREFERENCE

• Consider the following study:

Effective consent rates, by country.

100
90
80
Effective consent %

70
60
50
40
30
20
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Johnson, E. J., & Goldstein, D. (2003). Do defaults save lives? Science, 302, 1338-1339. 22
 In some countries (e.g. Holland), In some countries (e.g. Belgium),
the organ donation policy is an the organ donation policy is an
opt-in (expressed consent) opt-out (presumed consent)
system: system:

Opt-in: Opt-out:
Check this box if Check this box if
you want to you do not want
participate in the to participate in
program the program

People do nothing – and thus they People do nothing – and thus they
do not register as organ donors. do register as organ donors.

We make our own choice!? The environment in which we make decisions

has a lot to say about our final decisions!
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 • Consider another experiment:

when the when the

middle middle
option is option is
available kicked out

16% 68%

0%

84% 32%
Ariely, D. (2008). Predictably
Irrational. New York: Harper.

Once again, the environment in which we make decisions has a lot to

say about our final decisions! 24
In Part 3 of this course, you will learn decision biases Choice and
that are related to choice and preference. Preference
• Why do we have inconsistent preference across
situations that are objectively identical? Prospect theory
• Why do we prefer a suboptimal option to an
optimal one?
• Why do we stick with a failing course of action? Escalation of
commitment
• Why are we happier with fewer rather than
more options?
We will explore these issues, and examine their Time and
preferences
impacts on our personal life as well as in
organizations.
Is more choice
always better?

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 PART 4: APPLICATIONS ON SPECIAL TOPICS

In Part 4 of this course, we will explore JDM issues on Applications

four important topics in contemporary organizations:
Performance
appraisal

Motivating
employees by
money? Or…?

Why people
become
“bad apples”?

Going green

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LET’S READ THE SYLLABUS TOGETHER…

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Time for REFLECTION

What ideas/concepts/findings in this class surprised you most?

What’s your key takeaway?

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