BA105-1: BA105-1: Organizational BehaviorOrganizational Behavior

Professor Jim LincolnProfessor Jim Lincoln

Week 10: Lecture Week 10: Lecture

Decision Making Decision Making

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Agenda

• Today: – Models of individual- and group-level decision

making– Biases in decision-making

• Thursday – Case: “The collapse of Barings”

• Discussion questions will be forthcoming

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What is a “decision?”

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What are some examples of decision making in organizations?

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Manager as decision-maker: engineer or leader?

• As a leadership role – – –

• As an engineering role – – –

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Individual-level models of decision-making

• Rational model

• Behavioral model

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The classical theory of rational decision-making

• Decision-maker knows all the possible choices (action alternatives) in advance

• Decision-maker knows all the possible consequences of every choice in advance

• Decision-maker has a utility function that ranks the consequences from least- to most-preferred

• Decision-maker makes the choice that maximizes (optimizes) his/her utility function

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Multiattribute utility analysis of job choice

EXP PAY LOC WORK TRAPreference weights (wi): 0.38 0.26 0.16 0.12 0.08

Scores (sij) of choice alternatives on each dimension:

UTILITY*Big 5 0.9 0.8 0.7 0.2 0.3 0.710Dot.com 1.0 0.7 0.9 0.8 1.0 0.826Local bank 0.3 0.5 0.1 0.1 0.4 0.304

Decision: take the Dot.com job

*Uj = iwi sij

EXP=Quality of experience; PAY=Level of Pay; LOC=Location; WORK=Workload; TRA=Travel required

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Rational decision making under uncertainty

– DM knows consequences of choices with certainty

– DM knows risks (probabilities) of consequences of choices

• Solution: Maximize expected utility ipiAi

– Dm knows the possible consequences of all choice but does not know the probabilities

• Minimax solution: make the “least-worst” choice

A decision-tree analysis of the expected A decision-tree analysis of the expected utility of buying computer insuranceutility of buying computer insurance

Choice Outcome Prob. of Value of Outcome Outcome

stolen (-3500)

not stolen ($0)

not stolen ($0)

stolen (-$3500+3450)-$100

-$50

-$3500

$0

.01

.99

.01

.99

-$50.50

-$35.00

Computer cost = $3500.00Insurance cost = $ 50.00Deductible = $ 50.00

Expected Value or Utility

BUY

DON’T BUY

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The behavioral model (James G. March, Herbert Simon)

People are “boundedly rational.” They have:• Limited time and resources• Limited awareness of decision alternatives• Limited awareness of consequences• Limited information-processing capabilities

– Cognitive biases distort information gathering and processing

• Even limited awareness of their own preferences

Given bounded rationality, decision-makers do not optimize; the best they can do is “satisfice”

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When people act like rational optimizers, they become ill-adjusted and unhappy

“Individuals with high maximization scores experienced less satisfaction with life and were less happy, less optimistic and more depressed than people with low maximization scores. Indeed, those with extreme maximization ratings had depression scores that placed them in the borderline clinical range”

Barry Schwartz: “The tyranny of choice” Scientific American, April 2004

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Optimizing scaleBarry Schwartz: “The tyranny of choice”

Scientific American, April 2004

1. Whenever I’m faced with a choice, I try to imagine what all the other possibilities are, even ones that aren't present at the moment

2. No matter how satisfied I am with my job, it’s only right for me to b e on the look out for better opportunities

3. When I am in the car listening to the radio, I often check other stations to see if something better is playing, even if I am relatively satisfied with what I’m listening to.

4. When I watch TV, I channel surf, often scanning through the available options even while attempting to watch one program.

5. I treat relationships like clothing: I expect to try a lot on before finding the perfect fit

6. I often find it difficult to shop for a gift for a friend7. Reading videos is really difficult. I’m always struggling to pick the best one.8. When shopping, I have a hard time finding clothing that I really love. 9. I’m a big fan of lists that attempt to rank things (the best movies, the best singers, the

best athletes, etc.).10. I find that writing is very difficult, even if it’s just writing a letter to a friend,

because it’s so hard to word things just right. I often do several drafts of even simple things.

11. No matter what I do, I have the highest standards for myself.12. I never settle for second best.13. I often fantasize about living in ways that are quite different from my actual life

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Heuristics and biases in decision making

(Kahneman and Tversky)

People are imperfectly or boundedly rational. They rely on heuristics (cognitive rules or biases) to guide or simplify or routinize decision-making

Decision making heuristicsDecision making heuristics• The availability heuristic: People assess the frequency,

probability, or likely causes of an event by the degree to which instances or occurrences of that event are readily “available” in memory.

• The representativeness heuristic: People assess the likelihood of an event’s occurrence by the similarity of that occurrence to their stereotypes of similar occurrences.

• Anchoring and adjustment: People make assessments by starting from an initial value and adjusting to yield a final decision. The initial value, or starting point, may be suggested from historical precedent, from the way in which a problem is presented or from random information.

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Confirmation and hindsight bias

• Confirmation bias– People seek confirmatory information for what

they think is true and neglect the search for disconfirmatory evidence

• Hindsight bias– After finding out whether or not an even

occurred, people tend to overestimate the degree to which they would have predicted that outcome

Risk aversion or toleranceRisk aversion or tolerance

(Kahneman and Tversky, 1982)(Kahneman and Tversky, 1982)

People are risk averse with respect to maintaining gains but risk seeking with respect to avoiding losses; in other words, losses loom larger than equivalent gains.

NASA’s Frank AdamsMarshall Space Flight Center’s Deputy Manager for Boosters

Soon after shuttle flights resumed in 1988, Adams moved on to unmanned missions, passing up a promotion:

“I just didn’t think I could face the potential risk any more of going through something like Challenger. And that risk is there...The odds will sooner or later get us.”

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Escalation of commitment

– Tendency to keep supporting previously unsuccessful courses of action due to sunk costs.

• Bad decision that results in a negative outcome, investment loss

• Rather than changing course of action, more is invested to try to recoup sunk costs

• Process continues...

– Psychological mechanisms• Cognitive dissonance

• Risk-seeking after losses

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Heuristics may be learned responses to decision situations

• A decision is a response to an environmental stimulus (e.g., competitive threat, customer complaint)

• There are two types of response:

– Routinized or programmed response:• Stimulus evokes previously learned response (or performance program)

– Problem-solving response (search)• Stimulus evokes search (problem-solving activity) resulting in a new

performance program

– Search is costly and stressful. It is psychologically easier to invoke programmed responses.

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Biases may be an unintended cause of unethical organizational behavior

• Discrimination on the basis of race, gender, etc.

• Reliance on heuristics versus careful information gathering and analysis in accounting, board oversight, etc.

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Group- (including organization-) level decision-making

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The pros of group (team) decision-making

• Teams make more accurate decisions than their average member – Greater detection of error– Greater memory of facts – Greater probability that someone will know the right answer

• Teams bring together a greater diversity of skills, information, knowledge, points of view– Brainstorming

• Teams, especially diverse teams, tend to be more creative• Decision acceptance is greater when people are involved in the

decision-making process– “Standardized work” at NUMMI

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The cons of group decision making

– Takes time – The potential for conflict is high– Responsibility is diffused – Group shift/polarization (“risky shift”)– Reduced learning?

• Zajonc: Audience effects enhance performance but depress learning

– Groupthink

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The “risky shift”

When people are in groups, they are likely to make riskier (more extreme) decisions, as the shared risk makes the individual risk less

– Myers and Bishop (1970) put highly prejudiced students together to discuss racial issues. They became even more prejudiced. The reverse happened with unprejudiced students, who became even more unprejudiced.

– Entire football teams sometime get into aggressive or defensive moods as they either throw caution to the winds trying to score or desperately try to avoid being caught out.

– Juries given weak evidence will become very lenient after discussion, whilst when given strong evidence they are likely to give harsh judgment.

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Beware of groupthink! (Janis, 1972)Definition: when members fail to disagree, to bring up doubts and fears, or to bring

up information that contradicts the team’s decision. Suddenly, they are going in a direction that makes no one happy simply because no one wants to cause conflict.

Components:– Illusion of invulnerability– Rationalizations collectively devised to discount negative feedback– Unquestioning belief by members in team’s inherent morality and stereotyped negative views of

external detractors– Direct pressure on any individual who expresses doubts about the team’s shared illusions or

questions validity of the majority view– Reluctance to deviate from what appears to be team consensus despite misgivings, and tendency to

minimize personal doubts– Escalation of commitment

President John F. Kennedy after the Bay of Pigs invasion: “How could we have been so stupid?”

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Consensus decision-making • Upsides: everyone is on board; fast & thorough implementation

• Downsides: Very slow; consensus may not be reached or is unreal; risk of groupthink

• Examples:– American juries– The ringi system of Japanese decision-making

• The Delphi technique: a consensus-building tool– Identify a panel of experts, send the problem to each one individually,

each one solves the problem, a central location compiles all these comments, each panelist receives a copy of the whole thing, each expert provides feedback on all the other comments, and the last 2 steps are repeated until consensus is reached

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Models of group and organization-level decision-making

• Administrative model

• Political/bargaining model

• Garbage can model

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Classical administrative theory on decision making

• Managers devise programs (“standard operating procedures”) so that decisions can be made “by the book”

• Such routine or programmed decisions are delegated down the hierarchy; exceptions are managed by higher-ups

• Higher level decisions are nonroutine, uncertain, risky, require problem-solving search

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The political model of decision-making

• Decisions are made through bargaining and negotiation or through power plays and political strategizing (next week)

Bob EbelingManager of the Rocket Ignition System at Morton-Thiokol

“We did our level best, but it wasn’t good enough...The decision to recommend a launch was pre-ordained by others, by NASA leaning on our upper management. The deck was stacked.”

“I was so sure that Challenger was doomed that I asked my daughter, Leslie, then 33, to my office to watch a super colossal disaster unfold on live TV...and then I prayed”

The fact that he foresaw disaster and could not stop it has tortured

him since.

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The garbage can model of decision making (Cohen, March, & Olson)

• Preferences, criteria, alternatives, decisions, etc., are jumbled together as if thrown into a garbage can– Many decisions are stumbled into or forced by past

decisions – Preferences/intensions/criteria are afterthoughts or

rationalizations

• Wisconsin School Superintendency study– Screening generated such a homogeneous pool of

candidates that the choice among them was random

• Is random decision making necessarily bad?