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-solving techniques

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. "Am I being too cocky?" The prior hypothesis bias. "Am I considering the actual evidence, or am I wedded to my prior beliefs?" The ignoring-randomness bias. "Are events really connected, or are they just chance?" The unrepresentative sample bias. "Is there enough data on which to make a decision?" The 20-20 hindsight bias. "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 Opportunity-Determining 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. 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 CreativeEmployees 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 Solution-Ethics, Feasibility, & EffectivenessEvaluate 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 ChosenSuccessful 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. You need to make sure employees, customers, and so on have had enough time to get used to the new action. Change it slightly. Maybe the action was correct, but it just needs "tweaking" -a small change of some sort. Try another alternative. 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 DecisionsNonrational 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) Satisficing, (2) Incremental, and (3) 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 long-term 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 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. 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. This slogan is an antidote for assertions made with complete disregard for whether they correspond to facts. Evaluate data before making decisions See yourself and your organization as outsiders do. 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. 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. New and exciting ideas grab attention even when they are vastly inferior to old ideas 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. 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. 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? Failure hurts, it is embarrassing, and we would rather live without it 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 Competitors1. Use of Modeling: Going beyond Simple Descriptive Statisticsa. 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 Onea. 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 Topa. requires leadership from executives at the very top who have a passion for the quantitative approach4 General Decision Making StylesYour 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, Partly from overconfidence regardless of their success in earlier rounds, and they Rated their abilities more highly than the women rated theirs. Most women declined to compete, even when they had done the best in earlier rounds2 Dimensions of Decision Making1. 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.C

DBA

The Analytical Style: Careful Decision Makers Who Like Lots of Information & Alternative ChoicesHigh 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 MakersWork 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 PerspectiveHigh 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 FactsLow 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 Thyself2. Influence Others3. Deal with ConflictMAKING ETHICAL DECISIONSMany 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 complacency1. 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 decisionii. passing the buck, or 1. you let someone else take the consequences of making the decisioniii. 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 judgement1. 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 ReactionsDeciding to DecideIn 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 adjustment,(6) escalation of commitment.(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 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 Availablea. 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 situation2. The Confirmation Bias: Seeking Information to Support One's Point of Viewa. 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 Eventa. 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 Continuinga. 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 Figurea. 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 Decisiona. 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 MakingAdvantagesDisadvantages

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 GroupsWhen 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 decisionThey 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 groupthinkKnowledge Counts Decision-making accuracy is higher when group members know a good deal about the relevant issues 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 MakingParticipative 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; 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 CreativityBrainstorming 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 ExpertsThe 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 MakingThe two types of computer-aided decision-making systems are chauffeur driven and group driven, as follows: Chauffeur-driven systems 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 systems- 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 face-to-face groups.