Session 10

Decision-Making

Chapter 11
Learning Objectives

L .1 Define decision making, and differentiate well-structured

and ill-structured problems.
L .2 Compare and contrast perfectly rational decision making
with decision making under bounded rationality.
L .3 Discuss the impact of framing and cognitive biases on
the decision process.
L .4 Explain the process of escalation of commitment to an
apparently failing course of action.
Learning Objectives

L .5 Summarize the pros and cons of using groups to make

decisions, with attention to the groupthink phenomenon
and risk assessment.
L .6 Discuss contemporary approaches to improving
organizational decision making.
 Decision Making
• process of generating and choosing from a
set of alternatives to solve a problem.
• process of developing a commitment to
some course of action
• process of problem solving.
 Three things are noteworthy about decision
making:
 It involves making a choice among several
action alternatives.
 It is a process.
 It involves a commitment of resources.
Is the problem well-structured or ill-structured?
Well-Structured Problems &
Programmed Decisions
 A problem for which the existing state is clear, the desired state
is clear, and how to get from one state to another is fairly
obvious.
 These problems are simple, and their solutions arouse little
controversy.
 They are repetitive and familiar and they can be programmed.
 A program is a standardized way of solving a problem.
Cont’d
 Such programs enable the decision maker to go directly from
problem identification to solution.
 They are also known as rules, routines, standard operating
procedures, or rules of thumb.
 They provide a useful means of solving well-structured
problems.
Ill-Structured Problems &
Non-Programmed Decisions

 A problem for which the existing and desired states are unclear
and the method of getting to the desired state is unknown.
 They are unique and unusual problems that have not been
encountered before.
 They tend to be complex and involve a high degree of
uncertainty.
 They frequently arouse controversy and conflict.
 Ill-Structured Problems
BUT those assumptions don’t apply to many work situations…

Should we engage in this merger?

Should we go global?
How can we
improve our
market share?

Should I change
my career?
Should we expand
our product
line?
Ill-structured problems Cont’d

 Cannot be solved with programmed decisions.

 Decision makers must resort to non-programmed decision
making.
 They can entail high risk.
 A rational decision maker might use a model that involves a
sequence of steps that are followed when making a decision.
Ill-structured problems Cont’d

Describes how individuals should behave in order to

maximize some decision outcome.
The model describes a series of steps that individuals or
teams should follow to increase the likelihood that their
decisions will be logical and well founded.
 Describes how individuals should behave in order to
maximize some decision outcome.
 The model describes a series of steps that individuals or
teams should follow to increase the likelihood that their
decisions will be logical and well founded.
 Two forms of rationality that can be
contrasted are perfect rationality and
bounded rationality.
Perfect Rationality

 Perfect rationality is a decision strategy that is completely

informed, perfectly logical, and oriented toward economic
gain.
 The prototype for perfect rationality is the Economic Person
who is the perfect, cool, calculating decision maker.
Perfect Rationality

 Economic Person:
 Can gather information without cost and is completely
informed.
 Is perfectly logical.
 Has only one criterion for decision making: economic gain.
 These perfectly rational characteristics do not exist in real
decision makers.
Bounded Rationality
 Herbert Simon recognized that the rational characteristics of
Economic Person do not exist in real decision makers.
 He suggested that managers use bounded rationality rather than
perfect rationality.
 Bounded rationality is a decision strategy that relies on limited
information and that reflects time constraints and political
considerations that act as bounds to rationality.
 Bounded Rationality Model:
How we really make decisions…

 There are limitations on one’s

ability to interpret, process,
and act on information

 Because of Bounded
Rationality we cannot always
process everything that we
ideally need in order to make
an optimal decision.
Given our bounded rationality, we often rely on judgement
shortcuts that can distort the decision process…
Sources of influence on our decision process

๏ Cognitive biases – availability bias,

confirmation, bias anchoring effect
๏ Framing – you can read about this in our text
๏ Information overload
๏ Justification, hindsight
๏ Sunk cost effect
๏ Escalation of commitment
Cognitive Biases
 Cognitive biases are tendencies to acquire and process
information in a particular way that is prone to error.
 They constitute assumptions and shortcuts that can improve
decision-making efficiency, but they frequently lead to serious
errors in judgment.
 Intelligence does not counteract biases, and both more and less
smart people are equally prone to them.
 Biases are particularly likely to arise for non-programmed/ill
structured decision problems
The framing effect
 Framing refers to the aspects of the presentation of information
about a problem that are assumed by decision makers.
 How problems and decision alternatives are framed can have a
powerful impact on resulting decisions.
 Framing and cognitive biases illustrate the operation of bounded
rationality, as does the impact of emotions and mood on
decisions.

 The framing effect explained in detail:

https://www.youtube.com/watch?v=Xb1LOEzw9qs
Information Search

 Once a problem is identified, a search for information is

instigated.
 The perfectly rational decision maker has free and instantaneous
access to all information necessary to clarify the problem and
develop alternative solutions.
 Decision makers can have too little or too much information.
Availability bias
 When decision makers do not gather sufficient information for a
decision cognitive bias can arise.

 The availability bias means we favour information that can be

accessed quickly and easily, and we thus tend to remember vivid
recent events.

 What is the connection between perceptions of shark attacks and

investments when it comes to the availability bias?
https://www.youtube.com/watch?v=z65rb1TFyyg
Confirmation Bias
 Another cognitive bias that contributes to an incomplete
information search is the tendency for people to be
overconfident in their decision making.
 Such overconfidence is magnified by the confirmation bias.
 Confirmation bias refers to the tendency to seek out
information that conforms to one’s own definition of or solution
to a problem.
Too Much Information

 Too much information can also damage the quality of decisions.

 Information overload is the reception of more information than
is necessary to make effective decisions.
 Information overload can lead to errors, omissions, delays, and
cutting corners.
Alternative Development,
Evaluation, and Choice
 The provision of information concerning alternatives is crucial
to good decision making.
 The search for alternatives is often very limited.
 Firms invest very little money in exploring alternatives.
The Anchoring Effect
 Decision makers often overestimate the odds of complex chains
of events occurring.
 People are poor at revising estimates of probabilities and values
as they acquire additional information.
 A good example of this is the anchoring effect.
 The anchoring effect illustrates that decision makers do not
adjust their estimates enough from some initial estimate that
serves as an anchor.
Maximizing choice of a decision?

 The decision maker can now list alternative solutions to the

problem, examine the solutions, and choose the best one.
 The perfectly rational decision maker exhibits maximization
—the choice of the decision alternative with the greatest
expected value.
 under bounded rationality, all of the alternative solutions and the
probabilities of success are not known.
 Cognitive biases come into play.
Satisficing vs. maximizing
 The decision maker working under bounded rationality
frequently “satisfices” rather than maximizes.
 Satisficing means that the decision maker establishes an
adequate level of acceptability for a solution to a problem and
then screens solutions until one is found that exceeds this level.
 When this occurs, evaluation of alternatives ceases, and the
solution is chosen for implementation.
Solution Evaluation

 The perfectly rational decision maker should be able to evaluate

the effectiveness of a decision with calm, objective detachment.
 The bounded decision maker might encounter problems at this
stage of the process:
 Justification
 Hindsight
Justification
 People are overconfident about the adequacy of their
decisions.
 Substantial dissonance can be aroused when a decision turns
out to be faulty.
 To prevent such dissonance, decision makers avoid careful
tests of the adequacy of the decision.
 The decision maker may devote their energy to trying to
justify a faulty decision.
Sunk costs
 The justification of faulty decisions is best seen in the irrational
treatment of sunk costs.
 Sunk costs are permanent losses of resources incurred as a result
of a decision.
 Since these resources have been lost (sunk) due to a past
decision, they should not enter into future decisions.
Escalation of Commitment

 People often “throw good resources after bad,” acting as if they

can recoup sunk costs.
 This process is known as escalation of commitment.
 Escalation of commitment refers to the tendency to invest
additional resources in an apparently failing course of action.
• The decision to continue to follow a failing
course of action
• Increased commitment to a previous decision
despite evidence that it may have been wrong
• Refusal to admit that the initial decision may
have been flawed
๏ Throwing good money after bad
 Sunk costs and escalation of commitment

If you do not enjoy the university program you are in, you have 2
choices:

1. Drop the program & try another program

2. Continue in the program with the hopes that things may get
better

What would you do?

The first option is a sure loss…but it also is a “sunk cost”…

“the sunk cost fallacy and escalation of commitment:
https://www.youtube.com/watch?v=vpnxd31y0Fo
Reasons for escalation of commitment:

 Dissonance reduction.
 Social norm for consistent behaviour.
 Motivation to not appear wasteful.
 The way the problem is framed.
 Personality, moods, and emotions.
 And the sunk cost effect!
https://www.youtube.com/watch?v=HMBWMdP0-tg
Preventing Escalation of Commitment
 Be alert for excessive optimism or extremely positive media
attention early in a project cycle.
 Encourage continuous experimentation with reframing the
problem. Shift the frame to saving rather than spending.
 Set specific goals for the project in advance that must be met if
more resources are to be invested.
 Prevention cont’d
 Place more emphasis on evaluating managers on how they made
decisions and less on decision outcomes.
 Separate initial and subsequent decision making so that
individuals who make the initial decision to embark on a course
of action are assisted or replaced by others who decide if a
course of action should be continued.
 Leadership changes can sometimes break a spiral of escalation.

 Joe Rogen and Gary Vee discuss quitting an unsatisfying job.

How is this escalation of commitment and what are ways to
fight it? https://www.youtube.com/watch?v=SZEo1KFjTn4
Hindsight
 The careful evaluation of decisions is also inhibited by faulty
hindsight.
 Hindsight refers to the tendency to review the decision-making
process that was used to find what was done right or wrong.
 While it can prove useful, it often reflects a cognitive bias.
Hindsight
 It is the tendency to assume, after the fact, that we knew all
along what the outcome of a decision would be.
 Another form of faulty hindsight is the tendency to take
personal responsibility for successful decision outcomes while
denying responsibility for unsuccessful outcomes.
Rational Decision Making—
A Summary
 The rational decision-making model provides a good guide for
how decisions should be made.
 It provides only a partially accurate view of how they are made.
 For complex, unfamiliar decisions, the rational model provides a
pretty good picture of how people actually make decisions.
Rational Decision Making—A
Summary

 Organizational decision makers often short-circuit the rational

model in part due to the various biases.
 A study of 356 decisions in medium to large organizations found
that half of them failed.
 True experts in a field often short-circuit the rational model,
using their intuitive knowledge base to skip steps logically.
Group Decision Making

 Many organizational decisions are made by groups,

especially when problems are ill structured.
 Groups usually produce more and better solutions to
problems than do individuals working alone.
 Do groups actually make higher-quality decisions than
individuals?
 Groups should perform better than
individuals when:

 The group members differ in relevant skills and abilities, as

long as they do not differ so much that conflict occurs.
 Individual judgments can be combined by weighting them
to reflect the expertise of the various members.
 Groups can be wiser than individuals when independent
thinking is encouraged and those with more knowledge are
accorded more influence.
Group Effects on decision making
 Decision quality
 Decision acceptance and commitment
 Diffusion of responsibility
Decision Quality
 Experts argue that groups or teams can make higher-quality
decisions than individuals. This is based on a number of
assumptions:
 Groups are more vigilant.
 Groups can generate more ideas.
 Groups can evaluate ideas better.
 Thus, groups should make higher-quality decisions than
individuals.
Decision Acceptance and
Commitment

 A group decision will be more acceptable to those involved.

 Acceptability is especially important in getting a decision
implemented.
 If decision makers understand the decision and feel committed
to it, they should be willing to see that it is carried out.
Diffusion of Responsibility

 Diffusion of responsibility refers to the ability of group members

to share the burden of the negative consequences of a poor
decision.
 No one person will be singled out for punishment.
 When this happens, individual group members often “abandon
ship” and exhibit biased hindsight.
Disadvantages of Group Decision
Making
 There are a number of potential disadvantages to group decision
making:
 Time
 Conflict
 Domination
 Groupthink
Time
 Groups seldom work quickly or efficiently compared with
individuals due to process losses.
 The time problem increases with group size.
 When speed at arriving at a solution is important, organizations
should avoid using groups.
Conflict
 Participants in group decisions may have their own personal
axes to grind or their own resources to protect.
 Decision quality can take a back seat to political wrangling and
infighting.
 Groups will make better decisions when their members feel
psychologically safe.
Domination
 When meetings are dominated by a single individual or a small
coalition the advantages of group decision making will not be
realized.
 Domination is not likely to lead to group acceptance and
commitment.
 If the dominant person is misinformed, the group decision is
likely to be ineffective.
 Groupthink

 The capacity for group pressure to damage the judgment of

decision-making groups.
 Unanimous acceptance of decisions is stressed over quality of
decisions.
 Victims of groupthink are operating in an atmosphere of unreality
that lead to low-quality decisions.
Groupthink

 Factors that can cause groupthink include:

 High group cohesiveness.
 Strong identification with the group.
 Concern for approval from the group.
 Isolation of the group from other sources of information.
 The promotion of a particular decision by the group leader
(this appears to be the strongest cause).
Groupthink

Example:
 Dove ad was the product of a marketing
decision making team:
https://www.youtube.com/watch?v=vL4b-Il3EnE
Groupthink Symptoms

 Illusion of invulnerability
 Rationalization
 Illusion of morality
 Stereotypes of outsiders
 Pressure for conformity
 Self-censorship
 Illusion of unanimity
 Mindguards
Illusion of Invulnerability

 Members are overconfident and willing to assume great risks.

 They ignore obvious danger signals.
Rationalization
 Problems and counterarguments that members cannot ignore are
“rationalized away.”
 Seemingly logical but improbable excuses are given.
Illusion of Morality
 The decisions the group adopts are not only perceived as
sensible, they are also perceived as morally correct.
Stereotypes of Outsiders
 The group constructs unfavourable stereotypes of those outside
the group who are the targets of their decisions.
Pressure for Conformity
 Members pressure each other to fall in line and conform with
the group’s view.
Self-Censorship
 Members convince themselves to avoid voicing opinions
contrary to the group.
Illusion of Unanimity
 Members perceive that unanimous support exists for their
chosen course of action.
Mindguards
 Some group members may adopt the role of “protecting” the
group from information that goes against its decisions.
Strategies to Prevent Groupthink

 Leaders must avoid exerting undue pressure for a particular

decision outcome and concentrate on good decision processes.
 Leaders should establish norms that encourage and even reward
responsible dissent.
 Outside experts should be brought in from time to time to
challenge the group’s views.
Stimulating and Managing
Controversy
 Full-blown conflict among organizational members as well as a
complete lack of controversy can be harmful to good decision
making.
 One method of controversy stimulation is the appointment of a
devil’s advocate to identify and challenge the weaknesses of a
proposed plan or strategy.
Stimulating and Managing
Controversy
 The advocate’s role is to challenge the weaknesses of a plan or
strategy and state why it should not be adopted.
 The controversy promoted by the devil’s advocate improves
decision quality.
 To be effective, the advocate must present their views in an
objective, unemotional manner.
How Do Groups Handle Risk?

 Will the degree of risk assumed

by the group simply equal the
average risk preferred by its
individual members?
 Group decisions can involve risky
and conservative shifts, and they
occur in a wide variety of
settings.
How Do Groups Handle Risk?
 A risky shift is the tendency for groups to make riskier decisions
than the average risk initially advocated by their individual
members.
 A conservative shift is the tendency for groups to make less
risky decisions than the average risk initially advocated by their
individual members.
 What determines which kind of shift occurs?
How Do Groups Handle Risk?
 A key factor appears to be the initial positions of the group
members before they discuss the problem.
 Group discussion seems to polarize or exaggerate the initial
position of the group:
 Somewhat conservative members exhibit a conservative
shift when they discuss the problem.
 Somewhat risky members exhibit a risky shift after
discussion.
How Do Groups Handle Risk?
 This exact polarization process has been demonstrated for
boards of directors deciding how much to pay for an acquisition
target—high individual judgements result in an even higher
average offer after group deliberation, and vice versa for low
judgments.
How Do Groups Handle Risk?

 Why do risky and conservative shifts occur when groups make

decisions?
How Do Groups Handle Risk?

 Two main factors explain the occurrence of risky and

conservative shifts:
 Group discussion generates ideas and arguments that
individual members have not considered before.
 Group members try to present themselves as basically
similar to other members but “even better.”
How Do Groups Handle Risk?
 Managers should be aware of the tendency for group interaction
to polarize initial risk levels.
 If polarization results from the sensible exchange of
information, it might actually improve the group’s decision.
 If it results from one-upmanship, it might lead to low-quality
decisions.
Contemporary Approaches to
Improving Decision Making

 Good decisions are vital for organizational success.

 Decisions can be improved if decision makers are encouraged to
adhere to the rational model.
 This should help preclude the various biases and errors that we
have alluded to earlier.
Contemporary Approaches to
Improving Decision Making
 Several themes of contemporary approaches to improve
decision making:
 Managers have to be more mindful of the quality of the
evidence they use to make decisions.
 Managers have to be open to new and improved sources of
evidence.
 An array of new people might be involved in the decision-
making process.
 Summary
1. Types of decision problems
2. Rational decision process
3. Types of rationality
4. Limitations of adhering to the rational model –
including cognitive biases
5. Group decision making
6. Improving decision process