Business Leadership and Organizational Behavior Decision Making Craig W. Fontaine, Ph.D.

The Nature of Managerial Decision Making  Decision Making –The process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. Decisions in response to opportunities—occurs when managers respond to ways to improve organizational performance. Decisions in response to threats—occurs when managers are impacted by adverse events to the organization.

Today’s Business Environment New strategies Frequent organizational re-structuring Mergers/Acquisitions Downsizing New product/market development... etc. That means that lots of decisions……

Decisions Made Inside the Organization Complex, often emotionally charged issues Rapid decisions often needed But the stakes are often HIGH !!

Who Makes Decisions? No one person has enough information to make important decisions. No one person has enough time. No on person typically has the credibility to convince others of solutions. That means GROUP (TEAM) decision making……

1.More knowledge through pooling of group resources 2.More alternatives generated 3.Increased acceptance and commitment due to multiple voices in decisions Advantages 1. Pressure in groups to conform 2. Domination by one forceful member or dominant clique 3. Amount of time required, because group is slower than individual to make a decision Disadvantages © 2013 Cengage Learning Group Decision Making

Groupthink – a deterioration of mental efficiency, reality testing, and moral judgment resulting from pressures within the group Group Polarization – the tendency for group discussion to produce shifts toward more extreme attitudes among members Group Decision Making Probems

Programmed and Non-Programmed Decisions  Programmed Decision –Routine, virtually automatic decision making that follows established rules or guidelines. Managers have made the same decision many times before. There are rules or guidelines to follow based on experience with past decisions. Example: Disciplinary action to be taken concerning a tardy employee.

Programmed and Non-Programmed Decisions  Non-Programmed Decisions –Non-routine decision making that occurs in response to unusual, unpredictable opportunities and threats. –The are no rules to follow since the decision is new. Decisions are made based on information, and a manager’s intuition, and judgment. Example: Deciding to invest in additional production equipment to meet forecasted demand. It is non-programmed decisions that cause most of problems…

Effective Decision © 2013 Cengage Learning A timely decision that meets a desired objective and is acceptable to those individuals affected by it Modeling of Decision Making

The Classical/Rational Model  Classical Model of Decision Making –A prescriptive model of decision making that assumes the decision maker(s) can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action. –Optimum decision The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization.

1. The outcome will be completely rational 2. The decision maker(s) uses a consistent system of preferences to choose the best alternative 3. The decision maker(s) is aware of all alternatives 4. The decision maker(s) can calculate the probability of success for each alternative © 2013 Cengage Learning Rational Model

Six Steps in Decision Making

Rational/Classical Model of Decision Making

Evaluating Alternatives

Bounded rationality is the idea that in decision- making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision Bounded Rationality Model

Trade-off Constraints and Trade-offs During Non-programmed Decision-Making Personal Constraints: Desire for prestige, success; personal decision style; and the need to satisfy emotional needs, cope with pressure, maintain self-concept Organizational Constraints: Need for agreement, shared perspective, cooperation, support, corporate culture and structure, ethical values Bounded Rationality: Limited time, information, resources to deal with complex, multidimensional issues Satisficing Trade-off

Bounded Rationality Model  Satisficing –Searching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decision. Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision. Managers assume that the limited options they examine represent all options. This is the typical response of managers when dealing with incomplete information and time constraints.

Assumes that managers develop heuristics, short cuts, to make decisions in order to make decisions to save mental activity. (Sometimes called Cognitive Biases) Bounded Rationality Model

Cognitive Biases and Decision Making  Heuristics –Rules of thumb to deal with complex situations. –Decision makers use heuristics to deal with bounded rationality. If the heuristic is wrong, however, then poor decisions result from its use. Systematic errors can result from use of an incorrect heuristic and will appear over and over since the rule used to make decision is flawed.

Types of Cognitive Biases  Prior Hypothesis Bias –Allowing strong prior beliefs about a relationship between variables to influence decisions based on these beliefs even when evidence shows they are wrong.  Representativeness –The decision maker incorrectly generalizes a decision from a small sample or a single incident.

Types of Cognitive Biases  Illusion of Control –The tendency to overestimates one’s own ability to control activities and events.  Escalating Commitment –Committing considerable resources to project and then committing more even if evidence shows the project is failing.

Other Common Biases and Errors  Overconfidence Bias –Believing too much in our own decision competencies.  Anchoring Bias –Fixating on early, first received information.  Confirmation Bias –Using only the facts that support our decision.  Availability Bias –Using information that is most readily at hand.

Intuition (Opposite of the Rational Model) Intuitive Decision Making An unconscious process created out of distilled experience. Conditions Favoring Intuitive Decision Making –A high level of uncertainty exists –There is little precedent to draw on –Variables are less scientifically predictable –“Facts” are limited –Facts don’t clearly point the way –Analytical data are of little use –Several plausible alternative solutions exist –Time is limited and pressing for the right decision

How Are Decisions Actually Made in Organizations How/Why problems are identified: 1)Visibility over importance of problem a.Desire to “solve problems” b.Attention-catching, high profile problems 2)Self-interest (if problem concerns decision maker) 3)Engaging in incremental rather than unique problem solving through successive limited comparison of alternatives to the current alternative in effect.

Organizational Constraints on Decision Making Performance evaluations Reward systems Formal regulations Self-imposed time constraints Historical precedents

Cultural Differences in Decision Making Problems selected Time orientation Importance of logic and rationality Belief in the ability of people to solve problems Preference for collective decision making