Michael A. Hitt

C. Chet Miller

Adrienne Colella

Slides by R. Dennis Middlemist

Michael A. Hitt

C. Chet Miller

Adrienne Colella

Chapter 10

Decision Making by Individuals and Groups

Knowledge Objectives

1. Describe the basic steps in decision making.

2. Discuss the four decision-making styles, emphasizing the effectiveness of each one.

3. Explain the role of risk-taking propensity and reference points.

4. Define cognitive bias and explain the effects of common types of cognitive bias on decision making.

Knowledge Objectives

5. Discuss common pitfalls of group decision making.

6. Describe key group decision-making techniques.

7. Explain the factors managers should consider in determining the level of associate involvement in managerial decisions.

Decision-Making Process

Adapted from Exhibit 10-1: The Decision-Making Process

Define the Problem

Identify Criteria

Gather and Evaluate Data

Decisions: Choices of actions from among multiple feasible alternatives

• Define the problem– Gaps between where we are

today and where we would like to be tomorrow

• Identify the criteria– What information is needed in

order to evaluate alternatives?• Gather and evaluate data

– Collect information relevant to the criteria and potential alternatives

Decision-Making Process

Adapted from Exhibit 10-1: The Decision-Making Process

Define the Problem

Identify Criteria

Gather and Evaluate Data

List and Evaluate Alternatives

Select Best Alternative

Implement and Follow Up

• List and evaluate alternatives– Develop an complete list of

possible solutions to the problem (few constraints)

– Assess each alternative using each criterion from step 2

• Select best alternative– Choose the one which satisfies

the criteria the best• Implement and follow up

– Monitor the results

Decisions: Choices of actions from among multiple feasible alternatives

Optimal versus Satisfactory Decisions

Optimal decision– The maximizing decision, yielding the absolute best result

Satisficing decision– Satisfactory rather than optimal decision

Lack capability to collect and process all of the information relevant for a particular decision

Will never know if all possible alternatives have been identified Lack of time and other necessary resources for completing all of

the decision activities Thus, a tendency to choose the first satisfactory alternative

discovered

Decision-Making Styles

Individual’s predispositions can affect decision process at two critical stages– Gathering (Perceiving) of information

Sensing style Intuition style

– Evaluating (Judging) of alternatives Thinking style Feeling style

Decision-Making Styles

Adapted from Exhibit 10-2: Influence of Decision Styles

Define the Problem

Identify Criteria

Gather and Evaluate Data

Develop and Evaluate List of

Alternatives

Choose Best Alternative

Implement and Follow Up

Per

cept

ual

Influ

ence

s

Using abstractions and describing the

“big picture”

Intuition

Using subjective values with emotional and personal factors

Feeling

Using the five senses to identify

factual details

Sensing

Using objective analysis and

rational procedures

Thinking

Per

cept

ual

Influ

ence

s

Fee

dbac

k

Degree of Acceptable Risk

Risk exists when the outcome of a chosen course of action is not certain

Risk-taking propensity (Willingness to take chances)

– Low risk takers May collect and evaluate more information May become paralyzed by trying to obtain and consider too

much information

– High risk takers May may decisions based on too little information May jump to decisions too quickly

Degree of Acceptable Risk

Reference point– Possible level of performance used to evaluate

one’s current standing, and may be a goal a minimum acceptable level of performance the average performance level of others

– If one’s current standing is below his reference point he may take more risk to move above it

– If one’s current standing is above his reference point he may take less risk to avoid moving below it

Cognitive Biases

Cognitive Biases

Confirmation biasSeeking information that confirms early beliefs and ideas

Ease of recall biasRelying too much on information that is easy to recall from memory

Anchoring biasEmphasizing too much, the first piece of information encountered

Sunk-cost biasNot treating past investments (time, effort, money) as sunk-costs when deciding to continue an investment

Escalation of Commitment

1. A decision maker initially makes a decision that results in some kind of loss or negative outcome.

2. Rather than change the course of action contained in the initial decision, the decision maker commits more time, money, or effort to the course of action.

3. Further losses are experienced because of this escalation of commitment to a failing course of action.

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Legend for Chart: A - Date B - Cost Estimate C - Projected Completion and Operation A B C April 14, 1966 $65-75 million 1973 September 20, 1970 250 million 1975 December 19, 1971 271 million 1977 December 5, 1972 350 million 1977 April 1, 1973 506 million 1978 April 1, 1974 695 million 1978 April 1, 1976 969 million 1978 March 7, 1979 1.3 billion End of 1980 June 4, 1979 1.5 billion December 1981 April 15, 1980 2.2 billion Late 1982 December 27, 1981 2.5 billion 1983 November 4, 1982 3.1 billion 1983 November 28, 1983 4.0 billion Complete but not ready February 24, 1984 4.1 billion July 1985 June 1, 1985 4.3 billion October 1985 November 11, 1985 4.5 billion September 20, 1987 4.6 billion December 13, 1987 5.0 billion March 18, 1988 5.2 billion March 1, 1989 5.5 billion Agreement to abandon

Reasons forEscalation of Commitment

1. Decision makers often do not want to admit to themselves or to other people that they have made a mistake.

2. Decision makers erroneously believe that an additional commitment of resources is justified, given how much has been spent already, and may help to recoup some of the losses.

3. Decision makers tend to take more risks when they frame or view decisions in negative terms rather than in positive terms.

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Group Decision Making

Decisions often are made by groups of people– May be composed of individuals at different or at the

same level in the organization– May make some decisions without managerial input– Tend to follow the same decision-making process– Will have dynamics and interpersonal processes

that make group decision making very different from decisions made by an individual

Decision-Making Process

Adapted from Exhibit 10-3: Group Decision-Making Phenomena—Pitfalls and Techniques

Diversity-based Infighting

Risky Shift

Devil’s Advocacy

Dialectical Inquiry

Delphi Technique

Nominal Group Technique

Brainstorming

Groupthink

Common Information Bias

Group Decision Making

Group Decision-Making Pitfalls

Groupthink– Group members maintain or seek consensus at the

expense of identifying and debating honest disagreements

Group members like one another and therefore do not want to criticize each other’s ideas

Group members have high regard for the group’s collective wisdom and therefore yield to early ideas or the ideas of a leader

Group members derive satisfaction from membership in a group possessing a positive self-image and therefore try to prevent the group from having any serious divisions

Group Decision-Making Pitfalls

Groupthink– Symptoms include

Self-censorship Pressure Unanimity

Rationalization Invulnerability Mindguards

Common information bias– Group members overemphasize information held by a

majority, failing to be mindful of information held by one or a few group members reduces

Availability of unique information ideas Perspectives possessed by individual group members

Morality Stereotype

Group Decision-Making Pitfalls

Diversity-based infighting– Instead of creating rich discussions and insight, diverse ideas

create ill will and fractured groups May occur when individuals feel strongly about their ideas No mechanisms exist to channel disagreement in productive ways

Risky Shift– Groups make either riskier decisions than would have been

made by individual members acting alone Direction of shift may be affected by diffusion of responsibility

Group Decision-Making Techniques

Brainstorming– Large number of ideas are generated while evaluation of

the ideas is deferred Imagination is encouraged. No idea is too unique or different,

and the more ideas offered the better Using or building on the ideas of others is encouraged There is no criticism of any idea, no matter how bad it may

seem at the time Evaluation is postponed until the group can no longer think of

any new ideas

Group Decision-Making Techniques

Nominal group technique1. Individuals silently, and without discussion, write down their

ideas2. Each member presents one idea at a time, until all ideas are

presented, without discussion3. Ideas presented on a blackboard and then discussed to clarify

and evaluate4. Silent and independent vote or ranking of alternative choices

Delphi technique– Highly structured survey of participants regarding their opinions

or best judgments

Group Decision-Making Techniques

Dialectical inquiry– Debate between very different sets of recommendations

and assumptions to encourage full discussion– Overcomes tendency of group to avoid conflict when

evaluating alternatives Devil’s advocacy

– Individual or subgroup argues against the recommended actions and assumptions put forth by other members of the group

– Also overcomes tendency of group to avoid conflict when evaluating alternatives

Who Should Decide? (Vroom-Yetton Method)

Exhibit 10-4 Managerial Approaches to Associate Involvement in Decision Making

AI—Manager solves problem or makes decision alone, using information to which she has current access.

AII—Manager requests information or may not explain the problem to associates. Associates’ role in process is only to provide specific information requested.

CI—Manager explain problem to relevant associates, one by one, requesting input as individuals. After discussion with individuals, manager makes decision along, either using or not using associate’s input.

CII—Manager explains problem to associates as a group, obtaining group members’ ideas and suggestions. Later, manager makes decision alone, either using or not using associate’s input.

GII—Manager explains problem to associates as a group, working together with them to generate and evaluate alternatives and agree on a solution. Manager acts as facilitator, does not force group to accept his solution, and will accept and implement a solution supported by the group.

Adapted from Exhibit 10-4: Managerial Approaches to Associate Involvement in Decision Making

Approach

Leve

l of A

ssoc

iate

Invo

lvem

ent

in D

ecis

ion

Low

High

Who Should Decide? (Vroom-Yetton Method)

Questions asked to determine level of associate involvement in decision makingA. Is there a quality requirement such that one solution is likely to be

more rational than solution, or will any number of solutions work reasonably well)?

B. Do I have sufficient information to make a high-quality decision?C. Is the problem structured (do I know the question to ask and where to

look for relevant information?D. Is acceptance of the decision by associates critical to effective

implementation?E. If I were to make the decision by myself, is it reasonably certain that it

would be accepted by my associates?F. Do the associates share the organizational goals to be attained in

solving this problem?G. Is conflict among associates likely in preferred solutions?

Who Should Decide? (Vroom-Yetton Method)

14-CII

10-AII

4-AI

1-AI 2-AI

3-GII

5-AI

9-AII

11-CII

13-CII

12-GII

6-GII7-CII

8-CI

No

Yes

No

No

No

No

NoNo

No

No

NoNo

NoNo

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Decision points

Recommended strategies

A B C D E F G

Pro

ble

m

Value of Individual vs. Group Decision Making

Important considerations for judging the overall value of group decision vs. individual decision making– Time– Cost– Nature of the problem– Satisfaction and commitment– Personal growth

Value of Individual vs. Group Decision Making

Exhibit 10-6 Advantages and Disadvantages of Group Decision Making

Groups can accumulate more knowledge and facts and thus generate more and better alternatives.

Adapted from Exhibit 10-6: Advantages and Disadvantages of Group Decision Making

Communication In the United States Elsewhere

Groups take more time to reach decisions than do individuals.

Groups often display superior judgment when evaluating alternatives, especially for complex problems.

Group social interactions may lead to premature compromise and failure to consider all alternatives fully.

Group involvement in decisions leads to a higher level of acceptance of the decisions and satisfaction.

Groups are often dominated by one or two “decision leaders” which may reduce acceptance, satisfaction and quality.

Group decision making can result in growth for members of the group.

Managers may rely too much on group decisions, leading to loss of their own decision and implementation skills.