The Psychology of Decision-Making GRA 6820 Strategic Choice 1 GRA 6820 The Psychology of Decision Making (Harrison, Chapter 6)

The Psychology of Decision-Making

GRA 6820Strategic Choice

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GRA 6820

The Psychology of Decision Making

(Harrison, Chapter 6)



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Overview of chapter 6

• The role of personality

• Risk behavior

• Perception in decision making

• Subconscious influences



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The disciplines of decision making

Information technology and decision support

Mathematics and statistics

PsychologyThe Descriptive

approach

The Normative approach



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Disciplinary roots of decision scienceDESCRIPTIVE THEORIES PRESCRIPTIVE THEORIES

INDIVIDUAL

• Psychology• Marketing• Psychiatry• Literature

• Decision science• Economics• Operations research• Philosophy/logic

GROUP

• Social psychology• Organizational behavior • Anthropology• Sociology

• Game theory• Organizational behavior • Clinical psychiatry/therapy• Finance/economics

ORGANIZATION

• Organization theory• Sociology• Industrial organization• Political science

• Planning/strategy• Control theory/cybernetics • Organization design • Team theory/economics

SOCIETY

• Sociology• Anthropology• Macroeconomics

• Legal philosophy• Political sciences• Social choice

Kleindorfer, P.R., Kunreuther, H.C. and Schoemaker, P.J.H. (1993). Decision Sciences: An integrative perspective, Cambridge.



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Sense-making A characteristic of humans is trying to make sense of

incomprehensible things.Sense-making is described as…

– Structuring the unknown, but in different ways.– Placing stimuli into some sort of framework – a “frame of reference” that

guides interpretations.– A thinking process that uses retrospective accounts to explain surprises.– Reciprocal interaction of information seeking, meaning assignment and

action.– An interpretive process needed for organizational members to understand

and share understandings about features of the organization.– A process in which individuals develop cognitive maps of their environment.

Sense may be in the eye of the beholder, but beholders vote and the majority rules. K.E. Weick



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Factors influencing strategy Complexity

Uncertainty

Long time delays between action and reaction

Conflicting objectives

Multiple decision makers

We seek a rational framework to help us sort through these issues

We seek a rational framework to help us sort through these issues



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Problem structure

Degree of Structure

OperationalPerformance

OperationalManagement

ManagementControl

StrategicPlanning

StructuredPayroll

ProductionAccounts

ReceivableBudget

ManagementPortfolioAnalysis

EquipmentScheduling

InventoryControl

Short-termForecasting

SiteLocation

DispatchingMaintenanceManagement

Long-termForecasting

Mergers andAcquisitions

UnstructuredEquipmentDiagnosis

CashManagement

BudgetPreparation

ProductPlanning



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Sense-making:

Multiple perspectives

Descriptions of relevant systems of purposeful activity

Yields choices of...

Comparison of descriptions with the perceived reality

Actions to improve the

situation

Influenced by individuals’ mental models

A real-world situation of

concern

A real-world situation of

concern



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The principle of ”bounded rationality”

”The capacity of the human mind for

formulating and solving complex

problems is very small compared to the

size of those problems whose solution is

required for objectively rational behavior

in the real world or even for a reasonable

approximation to such objectivity.”Simon, H.A. (1957). Administrative Behavior: A study of decision making processes in administrative organizations, 4th ed. New York: The Free Press.



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The mind of the strategist

• “Successful business strategies result not from rigorous analysis, but from a particular state of mind.”

• Strategy making is in essence a creative and partly intuitive process, often disruptive of the status quo.

• Strategists employ analysis only to stimulate the creative process, to test the ideas that emerge, to work out their strategic implications or to ensure successful execution.



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The anatomy of a decision

The “rational” approach to decision making

1. Define the problem.

2. Identify the criteria.

3. Weight the criteria.

4. Generate alternatives.

5. Rate each alternative on each criterion.

6. Compute the optimal decision.



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Phases in the strategic decision making process

DESIGNDESIGN CHOICECHOICE

FEEDBACK andLEARNING

FEEDBACK andLEARNING

INTELLIGENCEINTELLIGENCE IMPLEMENTATIONIMPLEMENTATION

Subject to constraints….• Individual

• Organizational

• Cultural



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Problem solving constraints

• Cultural constraints– “Cultural Iceberg”

• Organizational constraints– Contextual variables– Structural variables

• Individual constraints– Cognitive– Personality



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The cultural iceberg

Primarily in awareness

Primarily out of awareness

fine arts literaturedrama classical music popular music

folk dancing games cooking dress

notions of modesty conception of beauty cosmology ideals governing childrearing rules of descent

relationship to animals patterns of superior subordinate relations definition of sin courtship practices conception of justice incentives to work

notions of leadership tempo of work patterns of decision makingconception of cleanliness attitudes towards the dependent theory of disease

approaches to problem solving conception of status mobility eye behavior

roles in relation to status by age, sex, class, occupation, kinship etc..

conversational patterns in social contexts conception of past and future

definition of insanity nature of friendship ordering of time conception of “self”patterns of visual perception preference for competition or cooperation

body language social interaction rate notions of adolescence

notions about logic and validity patterns of handling emotions facial expressions

arrangement of physical space ...AND MUCH, MUCH MORE...



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Problem solving constraints:

Organizational factors

Contextual variables

• Differentiation• SOP formalization• Centralization

• Division of labor• Status system• Managerial

• Size• Technology• Environmental uncertainty

• Age• Interdependence

Structural variables



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Constraints: Individual factors

• Stereotypical thinking

• Risk of failure

• Memory constraints

• World-view constraints

• Self imposed constraints

• Lack of a questioning attitude

• Functional constraints

• Problem solving language constraints



A model of cognition:

The human information processing model

Schema Task Environment

FEEDBACKFEEDBACK

DATAPROCESSING

DATAPROCESSING

DATAACQUISITION

DATAACQUISITION ACTIONACTION OUTCOMEOUTCOME



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BiasesAssumptions:

– Judgment is plagued by random error and systematic biases.

– Good judgment requires mental skills exceeding our capabilities.

Capacity of the mind is small relative to the size of the problems. Heuristics and rules of thumb are used to cope with problem

complexity.Good news

This allows us to deal with the real world.

Bad news This often leads to faulty data acquisition and processing.



Biases in problem solving

Acquisition biases

• Availability

• Selective perception

• Frequency

• Base rate

• Illusory correlation

• Data presentation

• Framing

Processing biases

• Inconsistency

• Conservatism

• Nonlinear extrapolation

Information sources• Source consistency

– Consistent information sources can increase confidence in judgments, but not increase predictive accuracy.

• Data presentation




Decision environment

• Time pressure

• Information overload

• Distractions

• Emotional stress

• Social pressures

Processing heuristics• Habits/rules of thumb

• Anchoring and adjustment

• Representativeness

• Justifiability

• Law of small numbers

• Regression bias

• Best guess strategy




Output bias• Question format

• Scale effects

• Wishful thinking

• Illusion of control

Feedback bias• Outcome irrelevant learning

structures

• Misperception of chance occurrences

• Failure/success attributions

• Logical fallacies in recall

• Hindsight



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Feedback biases and learning

ActingActing

ChoosingChoosing

Observing consequences(match/mismatch with expectations)

Observing consequences(match/mismatch with expectations)

Mental model(governing variables

and relationships)

Mental model(governing variables

and relationships)D

ou

ble

lo

op

le

arn

ing

Single loop learning



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Heuristics and biases in decision making - Summary

Availability Judgments distorted by easily recalled events

Selective perception Expectations bias observations

Illusory correlation Encourages belief that unrelated variables are correlated

Conservatism Ignoring full effect of new information

Law of small numbers Overestimating representativeness of small groups

Regression bias Failure to allow for regression to the mean

Wishful thinking Probability of desired events judged too highly

Illusion of control Overestimating personal control over outcomes

Logical reconstruction “Logical” reconstruction of inaccurately recalled events

Hindsight bias Overestimation of predictability of past events



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Antid

ote

s to co

unte

ract

bia

ses

Bias Antidote

Under-estimating uncertainty

1. Use frameworks for stratgic analysis2. Use multiple perspectives3. Devil’s advocate4. Consider improbable or unpopular assumptions5. Re-evaluate over time

Believing chance is predictable

1. Use frameworks for stratgic analysis2. Devil’s advocate3. Consider improbable or unpopular assumptions4. Re-evaluate over time

Selective perception

1. Use frameworks for stratgic analysis2. Use multiple perspectives3. Devil’s advocate4. Consider improbable or unpopular assumptions

Anchoring and adjustment

1. Use multiple perspectives2. Devil’s advocate3. Consider improbable or unpopular assumptions4. Re-evaluate over time

Seeing opportunities incrementally

1. Use frameworks for stratgic analysis2. Use multiple perspectives3. Consider improbable or unpopular assumptions

Seeking only confirming evidence


Framing biases1. Use multiple perspectives2. Devil’s advocate3. Re-evaluate over time

Reasoning by inappropriate analysis

1. Use multiple perspectives2. Devil’s advocate3. Re-evaluate over time

Escalating commitment irrationally


Teisberg, E.O. (1991). ”Why do good managers choose poor strategies?” Harvard Business School Case 9-391-172.



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Mental models

• Personal theories of how things work – The most important factors.– The causal and correlational relationships that

link them.

• These models have different names:– Conceptual structures– World views– Schema– Cognitive maps– Institutional models



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How do mental models affect behavior?

Events Sale of a new office building. Property prices up 10% compared to last year.

Patterns Annual new construction activity over the past 50 years.

Structure

Mental models Application of economic supply and demand models to

real estate market behavior.

Demand Expected earnings New construction activity Supply Demand



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The la

dder o

f in

fere

nce

Reflexive loop - our

beliefs affect what data

we select next tim

e

I takeA

CT

ION

based on my

beliefs

I drawC

ON

CL

US

ION

S

I make

AS

SU

MP

TIO

NS

based on the m

eanings I add

I addM

EA

NIN

G(cultural and personal)

I selectD

AT

Afrom

what I observe

Observable “data” andE

XP

ER

IEN

CE

S(as a video recorder m

ight capture)

I adoptB

EL

IEF

Sabout the w

orld



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Skills for working with mental models

• Becoming more aware of your own thinking and reasoning. Reflection

• Inquiring into others’ thinking and reasoning. Inquiry

• Making your own thinking and reasoning more visible to others. Advocacy



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The role of personality

• Jungian personality dimensions

• Jung’s psychological types

• Myers-Briggs Type Indicator test

• Implications for decision making



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BehaviorOrderly reason for

personal differences

Preference for…

Making decisions

How and where one uses these function

How one deals with the world

Behavior

Perceiving

JungBriggs



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Personality dimensions

– Results in four basic problems solving ”styles.”

– Each style has strengths and weaknesses.

– No one style is uniquely superior.

– Typology can be related to different inquiry, managerial and organizational styles.

Extravert/Introvert Thinking/Feeling

Sensing/Intuition Judgment/Perception

Extravert/Introvert Thinking/Feeling

Sensing/Intuition Judgment/Perception



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Individual cognitive style

• Provides insight into yourself and your behavior…– as a manager.– as a communicator.– as a problem solver.

• Provides a logical model of human behavior

• Empirically verified



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Jungian personality dimensions

NPrefers possibilities and relationshipsEnjoys new problemsReaches conclusions rapidly

FUses personal values in judgmentsVery aware of others’ feelingsEnjoys harmony

PFlexible, spontaneousAdapts well to changeMay have trouble making decisions

IPrefers the world of ideasCareful with detailsDislikes sweeping statements

SWorks with known facts, rarely errs with factsDoes not look at possibilitiesLikes standard solutions

TBases judgment on impersonal analysis and logicLow emotionalityHas trouble dealing with others’ feelings

JLikes planned, orderly life styleEnjoys working through a schedule

ERelate positively to outside worldLikes variety, actionOpen communicator



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Individual benefits

• Communication

• Career choices

• Leadership style

• Team building

• Learning and teaching skills

• Problem solving



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Cognitive style – how is it measured?

• Myers-Briggs Type Indicator

• Based on the concepts of Jungian psychology

• Time for a small test…



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Why we need each other (1)

• Feelers need Thinkers– To examine, analyze and organize.– To stand against opposing people, or to fire people if

necessary.– To change, reform, or withdraw priviledges.– To maintain policy.

• Thinkers need Feelers– To convey how others feel.– To persuade other to solve problems.– To help people understand one another’s views.– To build support for a system.



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Why we need each other (2)

• Intuitives need Sensers– To notice essential facts.– To point out prolems.– To offer illustrations based on experience.– To point out assets and liabilities in the here and now.– To keep track of details.

• Sensers need Intuitives– To see possibilities in the future.– To plan and prepare.– To develop new ideas and systems.– To solve problems creatively and ingeneously.– To maintain enthusiasm.



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Focus of the MBTI• The sources of our energy

– The question of introversion and extroversion

• The ways we perceive reality– Sensingly, in concrete detail, or intuitively by

appreciating hunches and possibilities

• The ways we act– Thinking clearly and logically, or in a more subjective

way, basing decisions on personal values ahead of logic – feeling

• Our propensity to act– Judging and decisiveness, or keeping options open -

perceiving



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Myers-Briggs Type Indicator test

• MBTI questionnaire

• MBTI scoring sheet

• MBTI calculations

• Interpretation



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The perfect problem-solver

INTUITION: Look for patterns,

inferences, relationships

INTUITION: Look for patterns,

inferences, relationships

THINKING: Logically analyze data, patterns, inferences to

reach conclusion

THINKING: Logically analyze data, patterns, inferences to

reach conclusion

FEELING: Evaluate impact of

solution on stakeholders inside and outside

the organization

FEELING: Evaluate impact of

solution on stakeholders inside and outside

the organization

SENSE: Collect data

with all 5 senses

SENSE: Collect data

with all 5 senses



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Implications for decision making• Data acquisition

– By Sensation or by Intuition, but not both at the same time

• Sensation – information input through the senses.

• Intuition – acquisition by imagination, seeing the whole of a situation, the gestalt.

• Data processing– Decisions are reached by Thinking or Feeling

• Thinking – decision based on impersonal analyses and analytical modes of reasoning.

• Feeling – decision based on personalistic, value judgments.



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The process of perception – gathering data/information

(S) Sensing function

”The reality factor”

• perceives in terms of specifics, using the five senses

• ”sees” things one-at-time, in the concrete• has a ”present” time focus; the here and

now• occupied with and attentive to facts• can be criticized for being ”set in ways”• sometimes cannot ”see the forest for the

trees”

(N) Intuitive function

”The sixth sense”

• perceives in terms of patterns, relations• ”sees” possibilities• has a ”future” time focus; oriented to change,

innovation• tends to estimate or approximate factual

details• can be criticized for ”having head in the

clouds”, not enjoying the present• sometimes ”cannot see the tree for the

forest”



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The process of judging – coming to conclusion/rational process for closure

(T) Thinking function

”The analytic factor”

• comes to conclusion using established principles, logically attending to cause and effect

• principal concern for ”truth” and the wider principles involved

• values fairness highly; particularly sensitive to injustice

• has an atemporal time orientation; appeals to reason, likes analysis

• consistency and validity are important; principles are applied impersonally

• values what is true

(F) Feeling function

”The bonding factor”

• comes to conclusion by an associative process – by analogy,and comparison with past experience

• principal concern for the interpersonal and intersubjective dimensions involved

• values harmony highly; particularly sensitive to conflict

• oriented to past events; appeals to what is ”meaningful”, relies on the psychological

• compassion is important• values what is good



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Attitude – observable preference, style of interacting with the

world(J) Judging• needs closure on events, relationships,

ideas• wants to finish – get things done• Values punctuality; sees time in terms of

decision• prefers advance clarity, order, structure• likes schedules and working to a plan• comes across as decisive• interested only in essentials• keys in on the conscious factors• can leap to conclusion and move into action

out of sheer urgency to come to closure• can be stubborn or ”one track”• can be vulnerable in not considering

alternatives

(P) Perceiving• needs to ”hang loose” with events, relationships,

ideas• prefers openness to what may come• punctuality is not a high value; sees time in terms of

opportunity• has tolerance for ambiguity, open-endedness• prefers spontaneity, is adaptable to changes• tends to postpone decisions and action• never has enough information• keys in on the unconscious• can move into action out of sheer intensity of

perception• can be pulled in many different directions• can be vulnerable in not recognizing ”the tragedy of

the excluded possibility”



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Attitude – orientation/direction of energy flow

(E) Extraversion• the outside world captures attention; life is

discovered mutually in the external forum• needs a public forum to sort out experience• tends to expand and propagate rather than

conserve; is expansive, energized by interaction

• engages others easily; comfortable in new groups

• assumes free movement; can intrude on others unawares; can make demads for response by sheer force of presence

• ”if you don’t know where they are, you haven’t been listening”

• ”the unlived life isn’t worth examining”

(I) Introversion• the inner world is the world of most

important activity; life is discovered interiorly and shared

• needs time and space to process life-experience interiorly

• tends to consolidate, defend; moderates and controls personal disclosure and interaction; energized by privacy and intimacy

• can appear withdrawn; is generally cautious of others’ ”space”; can stalemate a situation by silence

• ”the unexamined life isn’t worth living”



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Problem solving styles

• ST – represents concepts of the Industrial Revolution.

• NT – stress conceptual analyses instead of precise quantification.

• SF and NF – define different types of qualitative analyses.

– ST and NF are polar opposites in preferences for information gathering and processing.

– NT and SF are two forms of qualitativeness and do not conflict to the same extent as ST-NF types.



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Problem solving using Type preferences (1)

1. Sensing• What are the facts?• What exactly is the situation?• What has been done?• What am I and others doing?• How would an outsider look at this situation?

2. Intuition• What are the possibilities?• What other ways are there for solving this problem?• What do the data imply?• What are the implications beyond the facts?• What is this problem analogous to?



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3. Thinking• What are the pros and cons of each possibility?

• What are the logical consequences of each possibility?

• What is the cost of each?

• What are the pleasant and unpleasant outcomes of each?

• What is the consequence of not acting?

4. Feeling• How much do I care about what I gain or lose in each

alternative?

• What are the values involved for each possibility?

• How will people concerned react to the outcome?

• Who is committed to carry out the solution?

• Will the outcome contribute to individual or group harmony?



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4. Perception• Use at each step to ensure openness to all aspects of

the problem.

5. Judgment• Use to set a timetable for moving on to the next step

of the decision process.

6. Introversion• Use to reflect at each step along the way.

7. Extroversion• Use to discuss each step and to implement the

solution.



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Contributions

A knowledge of ”cognitive type”…– Lessens friction.– Reveals the value of differences.– Helps to understand and appreciate the

strengths of each type.– Lessens waste of potential.

and…– Opposites can supplement each other in joint

undertakings.– Pooling preferences offers best chance of

finding a solution valid for both.



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Decision trapsRusso and Schoemaker, Decision Traps 1989

1. Plunging in.2. Frame blindness.3. Lack of frame control.4. Overconfidence in your judgment.5. Shortsighted shortcuts.6. Shooting from the hip.7. Group failure.8. Fooling yourself about feedback.9. Not keeping track.10. Failure to audit your decision process.



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Risk behavior – A small test

Decision 1: Choose between

a. A certain gain of $240

b. A 25% chance to gain $1000, and a 75% chance to gain nothing

Decision 2: Choose between

c. A certain loss of $750

d. A 75% chance to lose $1000, and a 25% chance to lose nothing



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Risk behavior – A small test, continued

Decision 2a: Choose between

e. A 25% chance to win $240, and a 75% chance to lose $760

f. A 25% chance to win $250, and a 75% chance to lose $750



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Holdout slides



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Risk behavior

• Tversky and Kahneman work on the effect of framing on risk preference.– Risk-averse concerning gains– Risk-seeking concerning losses



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Perception in decision making

• Biases and heuristics

• Antidotes



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Definition: Problem

• A formal statement of a set of assumptions about the world.

• The assumptions are rarely made explicit.• Whether we see an event or situation as a

”problem” depends on our view of the world.– Problems do not exist independently of

the person who sees them.– Mistaking the map for the territory.



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Factors affecting strategic decisions About resources, core competencies and capabilities:

Complexity:regarding the interrelated causes shaping a firm’s environments and perceptions of the environments.

Complexity:regarding the interrelated causes shaping a firm’s environments and perceptions of the environments.

Intra-organizational conflicts:among people making managerial decisions and those affected by them.

Intra-organizational conflicts:among people making managerial decisions and those affected by them.

Uncertainty:regarding characteristics of both the general and the industry environments, competitors’actions and customers’ preferences.

Uncertainty:regarding characteristics of both the general and the industry environments, competitors’actions and customers’ preferences.

Documents

The Psychology of Decision-Making GRA 6820 Strategic Choice 1 GRA 6820 The Psychology of Decision Making (Harrison, Chapter 6)