DECISION MAKING

Luu Trong Tuan, PhDLuu Trong Tuan, PhD

Learning ObjectivesLearning Objectives After studying this chapter, you will be After studying this chapter, you will be able to:able to:• Describe the kinds of decisions you will face as a Describe the kinds of decisions you will face as a managermanager

• Summarize the steps in making “rational” decisionsSummarize the steps in making “rational” decisions• Recognize the pitfalls you should avoid when Recognize the pitfalls you should avoid when making decisionsmaking decisions

• Evaluate the pros and cons of using a group to Evaluate the pros and cons of using a group to make decisionsmake decisions

• Identify the procedures to use in leading a Identify the procedures to use in leading a decision-making groupdecision-making group

• Explain how to encourage creative decisionsExplain how to encourage creative decisions• Discuss the processes by which decisions are made Discuss the processes by which decisions are made in organizationsin organizations

• Describe how to make decisions in a crisisDescribe how to make decisions in a crisis

PerceptionPerception A process by which individuals A process by which individuals organize and interpret their organize and interpret their sensory impressions in order to sensory impressions in order to give meaning to their give meaning to their environment.environment.

The world as it is perceived is The world as it is perceived is the world that is behaviorally the world that is behaviorally important.important.

Attribution TheoryAttribution Theory Suggests that when we observe an Suggests that when we observe an individual’s behavior, we attempt individual’s behavior, we attempt to determine whether it was to determine whether it was internally or externally causedinternally or externally caused• Internally – believed to be under Internally – believed to be under the personal control of the the personal control of the individualindividual

• Externally – resulting from outside Externally – resulting from outside causescauses

Determinants of Determinants of AttributionAttribution

1.1. Distinctiveness – whether an Distinctiveness – whether an individual displays different individual displays different behaviors in different behaviors in different situationssituations

2.2. Consensus – if everyone who Consensus – if everyone who faces a similar situation faces a similar situation responds in the same wayresponds in the same way

3.3. Consistency – does the person Consistency – does the person respond the same way over timerespond the same way over time

Attribution ErrorsAttribution Errors Fundamental Attribution Error – Fundamental Attribution Error – when we make judgments about the when we make judgments about the behavior of others, we tend to behavior of others, we tend to underestimate external influence underestimate external influence and overestimate internal influenceand overestimate internal influence

Self-serving Bias – we tend to Self-serving Bias – we tend to attribute our own success to attribute our own success to internal factors and put the blame internal factors and put the blame for failure on external factorsfor failure on external factors

Shortcuts used in Judging Shortcuts used in Judging OthersOthers

Selective Perception – a characteristic Selective Perception – a characteristic that makes someone stand out in our mind that makes someone stand out in our mind will increase the probability that it will will increase the probability that it will be perceivedbe perceived

Halo Effect – drawing a general impression Halo Effect – drawing a general impression based on a single characteristicbased on a single characteristic

Contrast Effects – our reaction is Contrast Effects – our reaction is influenced by others we have recently influenced by others we have recently encounteredencountered

Projection – the tendency to attribute our Projection – the tendency to attribute our own characteristics to other peopleown characteristics to other people

Stereotyping – judging someone on the Stereotyping – judging someone on the basis of our perception of the group to basis of our perception of the group to which they belongwhich they belong

Link between Perception Link between Perception and Decision Makingand Decision Making

Decision making occurs as a Decision making occurs as a reaction to a problemreaction to a problem

Perception influences:Perception influences:• Awareness that a problem existsAwareness that a problem exists• The interpretation and evaluation The interpretation and evaluation of informationof information

• Bias of analysis and conclusionsBias of analysis and conclusions

Lack ofStructure

Risk

Conflict

Uncertainty

Characteristics Of Managerial Characteristics Of Managerial DecisionsDecisions

Lack of structureLack of structure• programmed decisionsprogrammed decisions - decisions - decisions encountered and made in the pastencountered and made in the past

have objectively correct answershave objectively correct answers can be solved by using simple rules, can be solved by using simple rules, policies, or numerical computationspolicies, or numerical computations

• nonprogrammed decisionsnonprogrammed decisions - new, novel, - new, novel, complex decisions having no proven complex decisions having no proven answersanswers

a variety of solutions exist, all of which a variety of solutions exist, all of which have merits and drawbackshave merits and drawbacks

demand creative responses, intuition, and demand creative responses, intuition, and tolerance for ambiguitytolerance for ambiguity

Uncertainty and riskUncertainty and risk• certaintycertainty - have sufficient information to - have sufficient information to predict precisely the consequences of one’s predict precisely the consequences of one’s actionsactions

• uncertaintyuncertainty - have insufficient information to - have insufficient information to know the consequences of different actionsknow the consequences of different actions

cannot estimate accurately the likelihood of cannot estimate accurately the likelihood of various consequences of their actionsvarious consequences of their actions

• riskrisk - the state that exists when probability - the state that exists when probability of an action being successful is less than of an action being successful is less than 100 percent and losses may occur. 100 percent and losses may occur.

good decision makers prefer to good decision makers prefer to managemanage risk. risk. They accept the fact that decisions have They accept the fact that decisions have consequences entailing risk, but they do consequences entailing risk, but they do everything they can to anticipate the risk, everything they can to anticipate the risk, minimize it, and control it. minimize it, and control it.

ConflictConflict• opposing pressures from different opposing pressures from different sourcessources

• occurs at two levelsoccurs at two levels psychological conflict - individual psychological conflict - individual decision makers:decision makers:• perceive several attractive optionsperceive several attractive options• perceive no attractive optionsperceive no attractive options

conflict between individuals or conflict between individuals or groupsgroups

Identifying anddiagnosingthe problem

Generatingalternativesolutions

Evaluatingalternatives

Evaluatingthe decision

Implementingthe decision

Making thechoice

The Stages Of Decision The Stages Of Decision MakingMaking

Identifying and diagnosing the problemIdentifying and diagnosing the problem• recognize that a problem exists and must recognize that a problem exists and must be solvedbe solved

problem - discrepancy between current state problem - discrepancy between current state and and pastpast performance, performance, currentcurrent performance of performance of other organizations, or other organizations, or futurefuture expected expected performanceperformance

decision maker must want to resolve the decision maker must want to resolve the problem and have the resources to do soproblem and have the resources to do so

Generating alternative solutionsGenerating alternative solutions• ready-made solutionsready-made solutions - ideas that have been tried - ideas that have been tried beforebefore

may follow the advice of others who have may follow the advice of others who have faced similar problemfaced similar problem

• custom-made solutionscustom-made solutions - combining new ideas into - combining new ideas into new, creative solutionsnew, creative solutions

Evaluating alternativesEvaluating alternatives• determining the value or adequacy of the determining the value or adequacy of the alternativesalternatives

• there are potentially more alternatives there are potentially more alternatives available than managers may realizeavailable than managers may realize

• predict the consequences that will occur if predict the consequences that will occur if the various options are put into effectthe various options are put into effect

• success or failure of the decision will success or failure of the decision will affect the track record of the decision affect the track record of the decision makermaker

• contingency planscontingency plans - alternative courses of - alternative courses of action that can be implemented based on how action that can be implemented based on how the future unfoldsthe future unfolds

required to prepare for different required to prepare for different scenariosscenarios

Making the choiceMaking the choice• maximizemaximize - a decision realizing the best - a decision realizing the best possible outcomepossible outcome

greatest positive consequences and fewest greatest positive consequences and fewest negative consequencesnegative consequences

greatest benefit at the lowest cost and the greatest benefit at the lowest cost and the largest expected total returnlargest expected total return

• satisficesatisfice - choose an option that is acceptable - choose an option that is acceptable although not necessarily the best or perfectalthough not necessarily the best or perfect

compare the choice with the goal, not compare the choice with the goal, not against other optionsagainst other options

search for alternatives ends when an okay search for alternatives ends when an okay solution is foundsolution is found

• optimizingoptimizing - achieving the best possible balance - achieving the best possible balance among several goalsamong several goals

Implementing the decisionImplementing the decision• those who implement the decision those who implement the decision must: must:

understand the choice and why it was madeunderstand the choice and why it was made be committed to its successful be committed to its successful implementationimplementation

• can’t assume that things will go can’t assume that things will go smoothly during implementationsmoothly during implementation

identify potential problemsidentify potential problems identify potential opportunitiesidentify potential opportunities

List the resources andactivities required toimplement each step

Estimate the time neededfor each step

Determine how things willlook when the decisionis fully operational

ImplementationPlan

Order the steps necessaryto achieve a fullyoperational decision

Assign responsibility foreach step to specific

individuals

Steps In The Implementation Steps In The Implementation PlanPlan

Evaluating the decisionEvaluating the decision• collecting information on how well the collecting information on how well the decision is workingdecision is working

• if decision appears inappropriate, the process if decision appears inappropriate, the process cycles back to the first stagecycles back to the first stage

The best decisionThe best decision• nothing can guarantee a “best” decisionnothing can guarantee a “best” decision• managers should be at least confident that managers should be at least confident that they followed proper they followed proper proceduresprocedures that will yield that will yield the best possible decision under the the best possible decision under the circumstancescircumstances

vigilancevigilance - decision maker carefully and - decision maker carefully and conscientiously executes all stages of conscientiously executes all stages of decision makingdecision making

Bounded RationalityBounded Rationality The limited information-processing The limited information-processing capability of human beings makes it capability of human beings makes it impossible to assimilate and understand impossible to assimilate and understand all the information necessary to optimizeall the information necessary to optimize

So people seek solutions that are So people seek solutions that are satisfactory and sufficient, rather than satisfactory and sufficient, rather than optimaloptimal

Bounded rationality is constructing Bounded rationality is constructing simplified models that extract the simplified models that extract the essential features from problems without essential features from problems without capturing all their complexitycapturing all their complexity

Common Biases and ErrorsCommon Biases and Errors Overconfidence Bias – As managers and Overconfidence Bias – As managers and employees become more knowledgeable employees become more knowledgeable about an issue, the less likely they about an issue, the less likely they are to display overconfidenceare to display overconfidence

Anchoring Bias – a tendency to fixate Anchoring Bias – a tendency to fixate on initial information and fail to on initial information and fail to adequately adjust for subsequent adequately adjust for subsequent informationinformation

Confirmation Bias – seeking out Confirmation Bias – seeking out information that reaffirms our past information that reaffirms our past choices and discounting information choices and discounting information that contradicts past judgmentsthat contradicts past judgments

Common Biases and ErrorsCommon Biases and Errors Availability Bias – the tendency to Availability Bias – the tendency to base judgments on information that is base judgments on information that is readily availablereadily available

Representative Bias – the tendency to Representative Bias – the tendency to assess the likelihood of an occurrence assess the likelihood of an occurrence by inappropriately considering the by inappropriately considering the current situation as identical to past current situation as identical to past situationssituations

Escalation of Commitment – staying with Escalation of Commitment – staying with a decision even when there is clear a decision even when there is clear evidence that it is wrongevidence that it is wrong

Common Biases and ErrorsCommon Biases and Errors Randomness Error – the tendency to Randomness Error – the tendency to believe that we can predict the believe that we can predict the outcome of random eventsoutcome of random events

Hindsight Bias – the tendency to Hindsight Bias – the tendency to believe falsely that we accurately believe falsely that we accurately predicted the outcome of an event predicted the outcome of an event after that outcome is actually knownafter that outcome is actually known

Potential Advantages

1. Larger pool of information2. More perspectives and

approaches3. Intellectual stimulation4. People understand the decision5. People are committed to the decision

Decision Making In GroupsDecision Making In GroupsPotential Disadvantages

1. One person dominates2. Satisficing3. Groupthink - team spirit discourages disagreement4. Goal displacement - new

goals replace original goals

Leadership 1. Avoid domination 2. Encourage input 3. Avoid groupthink and satisficing 4. Remember goals

Effective GroupDecision Making

Constructive Conflict 1. Air legitimate differences 2. Stay task-focused 3. Be impersonal 4. Play devil’s advocate

Managing Group Decision Managing Group Decision MakingMaking

Devil’s advocate: Devil’s advocate: a person who has a person who has the job of the job of criticizing ideas criticizing ideas to ensure that to ensure that their downsides their downsides are fully exploredare fully explored

Creativity 1. Brainstorm 2. Avoid criticizing 3. Exhaust ideas 4. Combine ideas

Leadership styleLeadership style• leader must attempt to minimize leader must attempt to minimize process-related problemsprocess-related problems

• leader should:leader should: avoid dominating the discussion or avoid dominating the discussion or allowing another individual to dominateallowing another individual to dominate

encourage less vocal members to express encourage less vocal members to express themselvesthemselves

mitigate pressures for conformitymitigate pressures for conformity stay alert to groupthink and satisficingstay alert to groupthink and satisficing prevent group from losing sight of the prevent group from losing sight of the primary objectiveprimary objective

Constructive conflictConstructive conflict• a certain amount of constructive conflict a certain amount of constructive conflict should existshould exist

• cognitive conflictcognitive conflict - issue-based differences in - issue-based differences in perspectives or judgmentsperspectives or judgments

most constructive type of conflictmost constructive type of conflict can air legitimate differences of opinion and can air legitimate differences of opinion and develop better ideasdevelop better ideas

• affective conflictaffective conflict - emotional disagreement - emotional disagreement directed toward other people that is likely directed toward other people that is likely to be destructiveto be destructive

• devil’s advocatedevil’s advocate - has the job of criticizing - has the job of criticizing othersothers

• dialecticdialectic - structured debate comparing two - structured debate comparing two conflicting courses of actionconflicting courses of action

Encouraging creativityEncouraging creativity• creativity involves:creativity involves:

creationcreation - bringing a new thing into being - bringing a new thing into being synthesissynthesis - joining two previously unrelated - joining two previously unrelated thingsthings

modificationmodification - improving something or giving it - improving something or giving it new applicationnew application

• to become creative one must:to become creative one must: recognize creative potential in little recognize creative potential in little opportunitiesopportunities

obtain sufficient resourcesobtain sufficient resources escape from work once in awhile and read widelyescape from work once in awhile and read widely

• brainstormingbrainstorming - group members generates as many - group members generates as many ideas about a problem as they canideas about a problem as they can

criticism is withheld until all ideas have been criticism is withheld until all ideas have been proposedproposed

Organizational Decision Organizational Decision MakingMaking

Constraints on decision makersConstraints on decision makers• organizations cannot do whatever they wishorganizations cannot do whatever they wish

They face various constraints on their actions – They face various constraints on their actions – financial, legal, market, human, and financial, legal, market, human, and organizational – that inhibit certain actionsorganizational – that inhibit certain actions

Models of organizational decision processesModels of organizational decision processes• bounded rationalitybounded rationality - decision makers cannot be truly - decision makers cannot be truly rational because:rational because:

they have imperfect, incomplete information about they have imperfect, incomplete information about alternativesalternatives

the problems they face are so complexthe problems they face are so complex human beings cannot process all the information human beings cannot process all the information to which they are exposedto which they are exposed

time is limitedtime is limited people in the organization have conflicting goalspeople in the organization have conflicting goals

Constraints On Decision MakersConstraints On Decision Makers

MarketHuman

Financial

Constraints

LegalOrganizational

Models of organizational decision Models of organizational decision processes (cont.)processes (cont.)• incremental modelincremental model - major decisions arise - major decisions arise through a series of smaller decisionsthrough a series of smaller decisions

piecemeal approach to larger solutionspiecemeal approach to larger solutions• coalitional modelcoalitional model - groups with differing - groups with differing preferences use power and negotiation to preferences use power and negotiation to influence decisionsinfluence decisions

used when people disagree about goals used when people disagree about goals or compete for resourcesor compete for resources

• garbage can modelgarbage can model - a chaotic process - a chaotic process leading to seemingly random decisionsleading to seemingly random decisions

occurs when people are unsure of their occurs when people are unsure of their goals and what should be donegoals and what should be done

Decision making in a crisisDecision making in a crisis• stress and time constraints make stress and time constraints make decisions less effectivedecisions less effective

• should be prepared for crises in should be prepared for crises in advanceadvance

Plan For Crisis ManagementPlan For Crisis Management

Evaluation andDiagnostic Actions

CommunicationActions

StrategicActions

CrisisManagement

Technical andStructural Actions

Psychological andCultural Actions