Chapter 7 Individual and Group

Decision Making

Rational and non-rational decision making

3 non-rational models
Evidence-based decision making and the use of analytics
General decision-making styles
Ethical decision making.
How individuals respond to decision situations
Four common decision-making biases
Group decision making, participative management, group problem-

The biggest part of a manager's job is making decisions-and quite often they are
wrong. Some questions you might ask next time you're poised to make a
decision:

The overconfidence bias.

o "Am I being too cocky?"
The prior hypothesis bias.
o "Am I considering the actual evidence, or am I wedded to my prior
beliefs?"
The ignoring-randomness bias.
o "Are events really connected, or are they just chance?"
The unrepresentative sample bias.
o "Is there enough data on which to make a decision?"
The 20-20 hindsight bias.
o "Looking back, did I (or others) really know enough then to have
made a better decision?"

Decision making, the process of identifying and choosing alternative courses of

action, may be rational, but often it is nonrational.

4 steps in making a rational decision are

(1) identify the problem or opportunity,
(2) think up alternative solutions,
(3) evaluate alternatives and select a solution, and
(4) implement and evaluate the solution chosen.

3 examples of nonrational models of decision making are

(1) satisficing,
(2) incremental, and
(3) intuition.

A decision is a choice made from among available alternatives.

Decision making is the process of identifying and choosing alternative courses
of action.
The rational model of decision making, also called the classical model,
explains how managers should make decisions; it assumes managers will make
logical decisions that will be the optimum in furthering the organization's best
interests.

4 stages associated with rational decision making:

Stage 1: Identify the Problem or OpportunityDetermining the Actual versus the Desirable

Opportunities are situations that present possibilities for exceeding

existing goals.
Problems or difficulties will inhibit the achievement of goals.
Whether you're confronted with a problem or an opportunity, the decision
you're called on to make is how to make improvements-how to change
conditions from the present to the desirable.
o This is a matter of diagnosis - analysing the underlying causes.
The Buffet Approach (Warren Buffet trades like a woman)
Women trade much less often than men, do a lot
more research, and tend to base their investment
decisions on considerations other than just numbers"
"Men are frazzled, frenetic day traders. Patience and
good decision making help set women apart here."
Women - spend a lot of time trying to make a correct
diagnosis, doing deep research
Men- chase "hot" tips and make snap judgments

Stage 2: Think Up Alternative Solutions-Both the

Obvious & the Creative
Employees burning with bright ideas are an employer's greatest competitive
resource.

After you've identified the problem or opportunity and diagnosed its causes, you
need to come up with alternative solutions.

Stage 3: Evaluate Alternatives & Select a SolutionEthics, Feasibility, & Effectiveness

Evaluate each alternative not only according to cost and quality but also
according to the following questions:
(1) Is it ethical?
a. (If it isn't, don't give it a second look.)
(2) Is it feasible?
a. (If time is short, costs are high, technology unavailable, or
customers resistant, for example, it is not.)
(3) Is it ultimately effective?
a. (If the decision is merely "good enough" but not optimal in the long
run, you might reconsider.)

Stage 4: Implement & Evaluate the Solution Chosen

Successful Implementation For implementation to be successful, you
need to do two things:
1. Plan carefully.
a. Especially if reversing an action will be difficult, you need to make
careful plans for implementation.
i. written plans.
2. Be sensitive to those affected.
a. Consider how the people affected may feel about the change
i. inconvenienced, insecure, even fearful, all of which can
trigger resistance.
- It helps to give employees and customers some leeway
during a changeover in business practices or working
arrangements.

Evaluation there will always be the law of unintended consequences, things

happen that werent foreseen. Hence we need to evaluate decisions.
What should you do if the action is not working?

Give it more time.

o You need to make sure employees, customers, and so on have had
enough time to get used to the new action.
Change it slightly.
o Maybe the action was correct, but it just needs "tweaking" -a small
change of some sort.
Try another alternative.
o If Plan A doesn't seem to be working, maybe you want to scrap it for
another alternative.
Start over.

If no alternative seems workable, you need to go back to the

drawing board-to Stage I of the decision-making process.

What's Wrong with the Rational Model?

The rational model is prescriptive, describing how managers ought to make
decisions. It doesn't describe how managers actually make decisions.
Indeed, the rational model makes some highly desirable assumptions

that managers have complete information,

are able to make an unemotional analysis,
and are able to make the best decision for the organization.

Nonrational Decision Making: Managers Find It Difficult

to Make Optimal Decisions
Nonrational models of decision making explain how managers make decisions;

they assume that decision making is nearly always uncertain and risky,
making it difficult for managers to make optimal decisions.

Nonrational models are

(1)
(2)
(3)

Satisficing,
Incremental, and
Intuition.

Bounded Rationality & the Satisficing Model:

"Satisfactory Is Good Enough."
Herbert Simon - proposed that managers could not act truly logically because
their rationality was bounded by so many restrictions.

Called bounded rationality, the concept suggests that the ability of decision
makers to be rational is limited by numerous constraints, such as
complexity, time and money, and their cognitive capacity, values, skills,
habits, and unconscious reflexes.
Because of such constraints, managers don't make an exhaustive search for the
best alternative. Instead, they follow what Simon calls the satisficing model
that is, managers seek alternatives until they find one that is satisfactory, not
optimal.

While looking for a solution that is merely "satisficing" might seem to be a

weakness, it may well outweigh any advantages gained from delaying
making a decision until all information is in and all alternatives weighed.
However, making snap decisions can also backfire.

The Incremental Model:

"The Least That Will Solve the Problem."
Managers take small, short-term steps to alleviate a problem,
Rather than steps that will accomplish a long-term solution.
Of course, over time a series of short-term steps may move toward a longterm solution.
However, the temporary steps may also impede a beneficial long-term
solution.

The Intuition Model:

"It Just Feels Right."
"Going with your gut," or intuition, is
Making a choice without the use of conscious thought or logical inference.

Intuition that stems from

o expertise-

a person's explicit and tacit knowledge about a person,

situation, object, or decision opportunity is known as a holistic hunch.
feelings the involuntary emotional response to those same matters is known as automated experience.

Intuition has at least two benefits.

(1) It can speed up decision making, useful when deadlines are tight.
(2) It can be helpful to managers when resources are limited.
A drawback, however, is that it can be difficult to convince others that your
hunch makes sense.
In addition, intuition is subject to the same biases as those that affect rational
decision making.

EVIDENCE-BASED DECISION MAKING & ANALYTICS

"Too many companies and too many leaders are more interested in just copying
others, doing what they've always done, and making decisions based on beliefs
in what ought to work rather than what actually works," - Jeffrey Pfeffer and
Robert Sutton

Seven Implementation Principles

Treat your organization as an unfinished prototype.

o Leaders need to think and act as if their organization is an
unfinished prototype that won't be ruined by dangerous new ideas
or impossible to change because of employee or management
resistance
No brag, just facts.
o This slogan is an antidote for assertions made with complete
disregard for whether they correspond to facts.
o Evaluate data before making decisions
See yourself and your organization as outsiders do.
o Most managers are afflicted with "rampant optimism," with
inflated views of their own talents and prospects for success,
which
causes them to downplay risks and continue on a path
despite evidence that things are not working.
"Having a blunt friend, mentor, or counsellor can help
you see and act on better evidence." Pfeffer &
Sutton
Evidence-based management is not just for senior executives.
o The best organizations are those in which everyone, not just the
top managers, is guided by the responsibility to gather and act
on quantitative and qualitative data and share results with
others.
Like everything else, you still need to sell it.
o New and exciting ideas grab attention
even when they are vastly inferior to old ideas
o Vivid, juicy stories and case studies sell better
than detailed, rigorous, and admittedly dull data-no matter
how wrong the stories or how right the data.
o To sell an evidence based approach, you may have to identify a
preferred practice based on solid if unexciting evidence, then
use vivid stories to grab management attention.
If all else fails, slow the spread of bad practice.
o Under pressure to do things that are known to be ineffective,
It may be necessary for you to practice "evidence-based
misbehaviour "-

that is, ignore orders you know to be wrong or delay

their implementation.
The best diagnostic question: What happens when people fail?
o Failure hurts, it is embarrassing, and we would rather live without it
o Yet there is no learning without failure
when something goes wrong, people
face the hard facts,
learn what happened and why, and
keep using those facts to make the system better

What Makes It Hard to Be Evidence Based

Despite your best intentions, it's hard to bring the best evidence to bear on your
decisions.
Among the reasons:
(1) There's too much evidence.
(2) There's not enough good evidence.
(3) The evidence doesn't quite apply.
(4) People are trying to mislead you.
(5) You are trying to mislead you.
(6) The side effects outweigh the cure.
(7) Stories are more persuasive, anyway.
Perhaps the purest application of evidence-based management is the use of
analytics, or business analytics, the term used for sophisticated forms of
business data analysis.
One example of analytics is portfolio analysis, in which an investment adviser
evaluates the risks of various stocks.
Another example is the time-series forecast, which predicts future data
based on patterns of historical data.

3 Key

Attributes among Analytics Competitors

1. Use of Modeling: Going beyond Simple Descriptive Statistics

a. Look well beyond basic statistics,
i. Using data mining and predictive modeling to identify
potential and most profitable customers.
b. Predictive modeling is a
i. Data-mining technique used to predict future behaviour
and anticipate the consequences of change.
2. Having Multiple Applications, Not Just One
a. Analytics competitors "don't gain advantage from one killer
application, but rather from multiple applications supporting many
parts of the business"
3. Support from the Top

a. requires leadership from executives at the very top who have a

passion for the quantitative approach

4 General Decision Making Styles

Your decision-making style reflects how you perceive and respond to information.
It could be Directive, Analytical, Conceptual, or Behavioural.
Risk propensity is the willingness to gamble or to undertake risk for the
possibility of gaining an increased payoff.
A decision-making style reflects the combination of how an individual perceives
and responds to information.
Could also be viewed as competitiveness, or risk-aversion.

Men are avid competitors and eager to continue,

o Partly from overconfidence regardless of their success in earlier
rounds, and they
o Rated their abilities more highly than the women rated theirs.
Most women declined to compete,
o even when they had done the best in earlier rounds

2 Dimensions of Decision Making

1. Value orientation reflects the extent to which a person focuses on
either
a. task and technical concerns or
b. people and social concerns when making decisions.
i. Some people, for instance, are very task focused at work and
do not pay much attention to people issues, whereas others
are just the opposite.
2. The second dimension pertains to a person's tolerance for ambiguity.
a. This individual difference indicates the extent to which a person has
a high need for structure or control in his or her life.
i. Some people desire a lot of structure in their lives (a low
tolerance for ambiguity) and find ambiguous situations
stressful and psychologically uncomfortable.
ii. In contrast, others do not have a high need for structure
and can thrive in uncertain situations (a high tolerance for
ambiguity).
1. Ambiguous situations can energize people with a high
tolerance for ambiguity.
When the dimensions of value orientation and tolerance for ambiguity are
combined, they form four styles of decision making:, analytical, behavioural,
conceptual, directive.

A
D

The Analytical Style:

Careful Decision Makers Who Like Lots of Information &
Alternative Choices
High tolerance for ambiguity and are characterized by the tendency to
overanalyse a situation.
Like to consider more information and alternatives than those following the
directive style.
Analytic individuals are careful decision makers who take longer to make
decisions but who also respond well to new or uncertain situations.

The Behavioural Style:

The Most People-Oriented Decision Makers
Work well with others and enjoy social interactions in which opinions are
openly exchanged.
Behavioural types are supportive, receptive to suggestions, show warmth, and
prefer verbal to written information.
Although they like to hold meetings, people with this style have a tendency to
avoid conflict and to be concerned about others.

This can lead behavioural types to adopt a wishy-washy approach to

decision making and to have a hard time saying no.

The Conceptual Style:

Decision Makers Who Rely on Intuition & Have a Long-Term
Perspective
High tolerance for ambiguity and tend to focus on the people or social
aspects of a work situation.
They take a broad perspective to problem solving and like to consider many
options and future possibilities.
Conceptual types adopt a long-term perspective and rely on intuition and
discussions with others to acquire information.
They also are willing to take risks and are good at finding creative solutions to
problems.
However, a conceptual style can foster an indecisive approach to decision
making.

The Directive Style:

Action-Oriented Decision Makers Who Focus on Facts
Low tolerance for ambiguity and are oriented toward task and technical
concerns in making decisions.
They are efficient, logical, practical, and systematic in their approach to
solving problems.
People with this style are action oriented and decisive and like to focus on
facts.
In their pursuit of speed and results, however, these individuals tend to be
autocratic, to exercise power and control, and to focus on the short run.

You can use knowledge of decision-making styles in three ways:

1. Know Thyself
2. Influence Others
3. Deal with Conflict

MAKING ETHICAL DECISIONS

Many companies now have an ethics officer, someone trained about matters
of ethics in the workplace, particularly about resolving ethical dilemmas.
Harvard Business School professor Constance Bagley suggests that what is
needed is a decision tree to help with ethical decisions.
A decision tree is a graph of decisions and their possible consequences; it is
used to create a plan to reach a goal.

Ethical Decision Tree

7 General Moral Principles for Managers

How Do Individuals Respond to a Decision Situation?

Four Ineffective Reactions
1. Relaxed Avoidance-"There's no point in doing anything; nothing bad's
going to happen."
a. In relaxed avoidance, a manager decides to take no action in the
belief that there will be no great negative consequences.
i. Sign of complacency
1. Either don't see or you disregard the signs of danger
2. Relaxed Change-"Why not just take the easiest way out?"
a. In relaxed change, a manager realizes that complete inaction will
have negative consequences
i. but opts for the first available alternative that involves low
risk.

3. Defensive Avoidance-"There's no reason for me to explore other solution

alternatives."
a. This is a posture of resignation and a denial of responsibility for
taking action.
b. In defensive avoidance, a manager can't find a good solution and
follows by
i. procrastinating,
1. you put off making a decision
ii. passing the buck, or
1. you let someone else take the consequences of making
the decision
iii. denying the risk of any negative consequences.
1. engaging in rationalizing
4. Panic-"This is so stressful, I've got to do something-anything-to get rid of
the problem!"
a. This reaction is especially apt to occur in crisis situations.
i. Clouded judgement
1. In panic, a manager is so frantic to get rid of the
problem that he or she can't deal with the situation
realistically.

Three Effective Reactions

Deciding to Decide
In deciding to decide, a manager agrees that he or she must decide what to do
about a problem or opportunity and take effective decision-making steps.
1. Importance-"How high priority is this situation?"
a. Determine how much priority to give the decision situation.
2. Credibility-"How believable is the information about the situation?"
a. Evaluate how much is known about the possible threat or
opportunity.
3. Urgency-"How quickly must I act on the information about the situation?"
a. Is the threat immediate?

Six Common Decision-Making Biases:

Rules of Thumb, or Heuristics"
Heuristics - Strategies that simplify the process of making decisions.
Among those that tend to bias how decision makers process information are
(1) availability,
(2) confirmation,
(3) representativeness,
(4) sunk cost,
(5) anchoring and

(7) Overconfidence bias in which peoples

subjective confidence in their decision making
is greater than the objective accuracy
(8) Hindsight tendency for people to view
events as more predictable than they really

adjustment,
(6) escalation of
commitment.

are
(9) Framing tendency of decision makers to be
influenced by the way a situation or problem
is presented to them.

1. The Availability Bias:

Using Only the Information Available
a. This is because of the availability bias - managers use information
readily available from memory to make judgments.
b. Managers tend to give more weight to more recent behaviour, but
readily available information may not present a complete picture of
a situation

2. The Confirmation Bias:

Seeking Information to Support One's Point of View
a. The confirmation bias is when people seek information to support
their point of view and discount data that do not.

3. The Representativeness Bias:

Faulty Generalizing from a Small Sample or a Single
Event
a. The representativeness bias is the tendency to generalize from a
small sample or a single event.

4. The Sunk-Cost Bias:

Money Already Spent Seems to Justify Continuing
a. The sunk-cost bias, or sunk-cost fallacy, is when managers add up
all the money already spent on a project and conclude it is too
costly to simply abandon it.

5. The Anchoring & Adjustment Bias:

Being Influenced by an Initial Figure
a. The anchoring and adjustment bias is the tendency to make
decisions based on an initial figure.

6. The Escalation of Commitment Bias:

Feeling Overly Invested in a Decision
a. The escalation of commitment bias is whereby decision makers
increase their commitment to a project despite negative information
about it.
b. Managers hate to admit that they are wrong.

Advantages & Disadvantages of Group Decision Making

Advantages

Disadvantages

Greater pool of knowledge

If one person does not have
the expertise, someone else
might
Greater pool of information to
draw upon

A few people dominate or

intimidate
Sometimes a handful of people
will talk the longest and loudest,
rest of the group will give in
Or one individual will exert
disproportional influence, and
cuts down on the variety of ideas

Different perspectives
Different people have
different perspectives
Each sees the problem from
different angles

Groupthink
Groupthink occurs when group
members strive to agree for the
sake of unanimity and thus avoid
accurately assessing the
decision situation.

Intellectual stimulation
A group of people can bring
greater intellectual
stimulation and creativity to
the decision-making process
than one person

Satisficing
Because most people would just
as soon cut short a meeting, the
tendency is to seek a decision
that is "good enough" rather
than to push on in pursuit of
other possible solutions.
Satisficing can occur because
groups have limited time, lack
the right kind of information, or
are unable to handle large
amounts of information.

Better understanding of
decision rationale
Participants in the decision
making process better
understand the rationale
behind the decision made

Goal displacement
Although the primary task of the
meeting may be to solve a
particular problem, other
considerations may rise to the
fore, such as rivals trying to win
an argument.
Goal displacement occurs when
the primary goal is subsumed by
a secondary goal

Deeper commitment to the

decision
Being part of the group which
came up with the final
decision, you are more likely
to be committed to the course
of action.

4 Characteristics of Groups
When a Group wont help:
Groups take longer to make decisions. Thus, if time is of the essence, you may
want to make the decision by yourself. Faced with time pressures or the serious
effect of a decision, groups use less information and fewer communication
channels, which increases the probability of a bad decision.
Their Size Affects Decision Quality

The larger the group, the lower the quality of the decision

They May Be Too Confident

Groups are more confident about their judgments and choices than
individuals are
Can be a liability as it can lead to groupthink

Knowledge Counts

Decision-making accuracy is higher when

o group members know a good deal about the relevant issues
o a group leader has the ability to weight members' opinions

Although groups don't make as high-quality decisions as

the best individual acting alone, groups generally make
better decisions than most individuals acting alone.

When a Group will help:

Participative Management:
Involving Employees in Decision Making
Participative management (PM), is the process of involving employees in
(1) setting goals,
(2) making decisions,
(3) solving problems, and
(4) making changes in the organization.
PM can increase employee job involvement, organizational commitment,
and creativity, and it can lower role conflict and ambiguity. Though this is
true, the effect of PM is small.
Using groups to make decisions generally requires that they reach a consensus,
which occurs when members are able to express their opinions and reach
agreement to support the final decision.

Dos:

Use active listening skills.

Involve as many members as possible.
Seek out the reasons behind arguments.
Dig for the facts.

Don'ts:

Avoid making an agreement simply to keep relations amicable and not

rock the boat.
Finally, don't try to achieve consensus by putting questions to a vote;
o this will only split the group into winners and losers,
perhaps creating bad feelings among the latter.

Group Problem-Solving Techniques

(1) brainstorming,
(2) the Delphi technique, and
(3) computer-aided decision making.

Brainstorming: For Increasing Creativity

Brainstorming is a technique used to help groups generate multiple ideas and
alternatives for solving problems.
Developed by advertising executive A . F. Osborn, the technique consists in
having members of a group meet and review a problem to be solved. Individual
members are then asked to silently generate ideas or solutions, which are then
collected and written on a board or flip chart. A second session is then used to
critique and evaluate the alternatives.

A modern-day variation is electronic brainstorming, sometimes called

brainwriting, in which members of a group come together over a computer
network to generate ideas and alternatives.
Rules for brainstorming suggested by IDEO, a product design company:

Advantage of brainstorming is that it is an effective technique for encouraging

the expression of as many useful new ideas or alternatives as possible.
Disadvantage is that brainstorming also can waste time generating a lot of
unproductive ideas, and it is not appropriate for evaluating alternatives or
selecting solutions.

The Delphi Technique: For Consensus of Experts

The Delphi technique is a group process that uses physically dispersed
experts who fill out questionnaires to anonymously generate ideas; the
judgments are combined and in effect averaged to achieve a consensus of
expert opinion.
Useful when face-to-face discussions are impractical.
Practical when disagreement and conflicts are likely to impair communication,
when certain individuals might try to dominate group discussions, and when
there is a high risk of groupthink.

Computer-Aided Decision Making

The two types of computer-aided decision-making systems are chauffeur
driven and group driven, as follows:

Chauffeur-driven systems
o for push-button consensus.
Systems ask participants to answer predetermined questions
on electronic keypads or dials.
These have been used as polling devices, for instance, with
audiences on live television shows such as Who Wants to Be
a Millionaire, allowing responses to be computer-tabulated
almost instantly.
Group-driven systemso for anonymous networking.
A group-driven computer-aided decision system involves a
meeting within a room of participants who express their ideas
anonymously on a computer network.
Instead of talking with one another, participants type their
comments, reactions, or evaluations on their individual
computer keyboards.
The input is projected on a large screen at the front of the
room for all to see.
Because participation is anonymous and no one person is
able to dominate the meeting on the basis of status or
personality, everyone feels free to participate, and the
roadblocks to consensus are accordingly reduced.

Group-driven systems have been shown to produce greater quality and quantity
of ideas for large groups of people, although there is no advantage with groups
of 4-6 people.
The technique also produces more ideas as group size increases from 5 to 10
members.
However, use of online chat groups led to decreased group effectiveness and
member satisfaction and increased time to complete tasks compared with faceto-face groups.