Individual Decision Making Session 6

1. Individual Decision MakingSession 6

2. The Link Between Perceptions and Individual Decision Making ProblemA perceived discrepancy between the current state of affairs and a desired state. Perception of the decision maker DecisionsChoices made from among alternatives developed from data perceived as relevant which lead to a desired state of affairs. Outcomes

3. Decision Making Models Rational Decision Making Model Bounded Rationality Model Intuitive Model

4. Rational Decision Making Model Describes how individuals should behave in order to maximize some outcome. Steps - Define the problem Identify the decision criteria Allocate weights to the criteria Develop the alternatives Evaluate the alternatives Select the best alternatives

5. Assumptions Problem clarity Known options Clear preferences Constant preferences No time or cost constraints Maximum payoff

6. Methods to identify problem • Historical Cues • Planning • Other people’s perception

7. How Are Decisions Actually Made in Organizations Bounded Rationality Individuals make decisions by constructing simplified models that extract the essential features from problems without capturing all their complexity.

8. How Are Decisions Actually Made in Organizations (cont’d) • How/Why problems are identified • Visibility over importance of problem • Attention-catching, high profile problems • Desire to “solve problems” • Self-interest (if problem concerns decision maker) • Alternative Development • Satisficing: seeking the first alternative that solves problem. • Engaging in incremental rather than unique problem solving through successive limited comparison of alternatives to the current alternative in effect.

9. Intuitive Model • Intuitive Decision Making • An unconscious process created out of distilled experience. • Conditions Favoring Intuitive Decision Making • A high level of uncertainty exists • There is little precedent to draw on • Variables are less scientifically predictable • “Facts” are limited • Facts don’t clearly point the way • Analytical data are of little use • Several plausible alternative solutions exist • Time is limited and pressing for the right decision

10. The Three Components of Creativity Creativity The ability to produce novel and useful ideas. Three-Component Model of Creativity Proposition that individual creativity requires expertise, creative-thinking skills, and intrinsic task motivation. Source: T.M. Amabile, “Motivating Creativity in Organizations,” California Management Review, Fall 1997, p. 43.

11. Common Biases and Errors • Overconfidence Bias • Believing too much in our own decision competencies. • Anchoring Bias • Fixating on early, first received information. • Confirmation Bias • Using only the facts that support our decision. • Availability Bias • Using information that is most readily at hand. • Representative Bias • Assessing the likelihood of an occurrence by trying to match it with a preexisting category.

12. Common Biases and Errors • Escalation of Commitment • Increasing commitment to a previous decision in spite of negative information. • Randomness Error • Trying to create meaning out of random events by falling prey to a false sense of control or superstitions. • Hindsight Bias • Falsely believing to have accurately predicted the outcome of an event, after that outcome is actually known.

13. Common Biases and Errors Framing Bias – Tendency to consider risks about gains differently than risks pertaining to losses Eg- US is preparing for the outbreak of an unusual Asian disease that is expected to kill 600 people. Two alternative programs are proposed. If Program A is adopted, 200 people will be saved. If Program B is adopted, 1/3 probability of 600 people being saved and 2/3 probability that nobody will be saved. Winner’s Curse – Winning participants in a competitive auction pay too much for the item. Some may underestimate the value and others may overestimate it. Highest bidder overestimates the most. Therefore, unless bidders undervalue, there is a good chance that winner will pay too much.

14. Dynamics of Decision Making 1. Improving Decision Making through Effective Knowledge Management • Knowledge Management is implementing systems and practices that increase the sharing of knowledge and information throughout an organization. • Tacit Knowledge & Explicit Knowledge affect quality of decisions. • Knowledge Sharing – Knowledge Management Software

15. Contd 2. General Decision Making Styles A combination of how individuals perceive and respond to information. Styles vary along two dimensions – • Value Orientation / Way of Thinking • Tolerance for Ambiguity

16. Decision-Style Model Source: A.J. Rowe and J.D. Boulgarides, Managerial Decision Making, (Upper Saddle River, NJ: Prentice Hall, 1992), p. 29.

17. Individual Constraints on Decision Makers • Personality • Conscientiousness - Achievement Striving & Dutiful • Self Esteem - Self serving bias • Gender • Rumination – Reflecting at length (Over thinking problems) • Women engage more in rumination than men

18. Organizational Constraints on Decision Makers • Performance Evaluation • Evaluation criteria influence the choice of actions. • Reward Systems • Decision makers make action choices that are favored by the organization. • Formal Regulations • Organizational rules and policies limit the alternative choices of decision makers. • System-imposed Time Constraints • Organizations require decisions by specific deadlines. • Historical Precedents • Past decisions influence current decisions.

19. Ethics in Decision Making • Ethical Decision Criteria • Utilitarianism • Seeking the greatest good for the greatest number. • Decisions are made solely on the basis of outcomes. • Rights • Respecting and protecting basic rights of individuals such as whistleblowers. • Justice • Imposing and enforcing rules fairly and impartially.

20. Ethics in Decision Making • Ethics and National Culture • There are no global ethical standards. • The ethical principles of global organizations that reflect and respect local cultural norms are necessary for high standards and consistent practices.

21. Ways to Improve Decision Making Analyze the situation and adjust your decision making style to fit the situation. Be aware of biases and try to limit their impact. Combine rational analysis with intuition to increase decision-making effectiveness. Don’t assume that your specific decision style is appropriate to every situation. Enhance personal creativity by looking for novel solutions or seeing problems in new ways, and using analogies.

22. Toward Reducing Bias and Errors • Focus on goals. • Clear goals make decision making easier and help to eliminate options inconsistent with your interests. • Look for information that disconfirms beliefs. • Overtly considering ways we could be wrong challenges our tendencies to think we’re smarter than we actually are. • Don’t try to create meaning out of random events. • Don’t attempt to create meaning out of coincidence. • Increase your options. • The number and diversity of alternatives generated increases the chance of finding an outstanding one. Source: S.P. Robbins, Decide & Conquer: Making Winning Decisions and Taking Control of Your Life (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2004), pp. 164–68.

23. Group Decision Making Group Involvement in Decision Making Advantages and Disadvantages of Group Decision Making Group Problem Solving Techniques

24. GGroup Involvement in Decision Making Creating an environment of participation Minority Dissent – members comfort of disagreement with other members Developing a clear understanding of the decision situation Developing a clear understanding of the requirements for an effective choice Thoroughly and accurately assessing the positive and negative qualities of alternative solutions

25. Advantages of Group Decision Making Greater pool of knowledge Different Perspectives Greater Comprehension Increased Acceptance Training Ground

26. Disadvantages Social Pressure Domination by a Vocal Few Logrolling Goal Displacement Groupthink

27. Group Problem Solving Techniques Brainstorming Nominal Group Technique Delphi Technique Computer Aided Decision Making