M A N A G E M E N T M A N A G E M E N T 1 st E D I T I O N 1 st E D I T I O N Gulati | Mayo | Nohria Gulati | Mayo | Nohria Chapter 15 Chapter 15 DECISION MAKING DECISION MAKING INDIVIDUALPERSPECTIVE ©South-Western, a part of Cengage Learning PowerPoint Presentation by Charlie Cook

Learning Objectives Explain the step-by-step process of rational decision makingExplain the step-by-step process of rational decision making Describe how time constraints, lack of information, and complexity influence the rational decision-making processDescribe how time constraints, lack of information, and complexity influence the rational decision-making process Describe the various biases that can influence an individual’s perspective and how these biases impact decision makingDescribe the various biases that can influence an individual’s perspective and how these biases impact decision making Articulate how emotions, intuition, and social situations impact decision makingArticulate how emotions, intuition, and social situations impact decision making Compare and contrast the different ways in which decisions are made in an organizationCompare and contrast the different ways in which decisions are made in an organization Describe the ways in which managers can improve their decision- making abilitiesDescribe the ways in which managers can improve their decision- making abilities © South-Western, a part of Cengage Learning15–2

15–3 Decision Making The process of identifying issues and making choices from alternative courses of action

Rational Decision Making © South-Western, a part of Cengage Learning15–4 The theory that individuals make decisions based on a rational thought process that optimizes self-interest Theory of rational choice When confronted with a choice, people try to make the best possible decision; one that maximizes their expected utility Expected utility Individuals assign a numerical value to each alternative and select the one that offers the highest payoff or profit

Factors that Impact Decision Making © South-Western, a part of Cengage Learning15–5 Incomplete, imperfect, or misleading informationIncomplete, imperfect, or misleading information Limited ability or background to process information i.e. lack of experienceLimited ability or background to process information i.e. lack of experience Limited time to make a decisionLimited time to make a decision Conflicting preferences, incentives, or goals of various organizational playersConflicting preferences, incentives, or goals of various organizational players

How Managers Make Decisions © South-Western, a part of Cengage Learning15–6 A set of boundaries or constraints that tend to complicate the rational decision- making process Bounded rationality The act of choosing a solution that is good enough Satisficing

Decision-Making Conditions © South-Western, a part of Cengage Learning15–7 Conditions in which individuals have all of the information they need to make the best possible decision Conditions of certainty Situations that are characterized by uncertainty and risk and where the optimal decision is not clear or obvious Ambiguity Conditions in which individuals have information about an organization’s goals, objectives, priorities, and potential courses of action, but they do not have complete information about the possible outcomes for each course of action Conditions of risk Conditions in which individuals have information related to an organization’s objectives and priorities, but they do not have complete information about alternative course of action or about the possible outcomes for each one Conditions of uncertainty

How Biases Impact Decision Making © South-Western, a part of Cengage Learning15–8 Rules of thumb or short-cuts that individuals use to save time when making complex decisions Cognitive heuristics Contends that individuals assess the frequency, probability, or likely cause of an event by the degree to which instances or occurrences of that event are readily available in memory Availability heuristic Contends that individuals tend to look for traits in another person or situation that corresponds with previously formed stereotypes Representative- ness heuristic

How Biases Impact Decision Making © South-Western, a part of Cengage Learning15–9 Contends that individuals make estimates or choices based on a certain starting point Adjustment heuristic Alternative wordings for same information that significantly alters a decision Framing

Emotional Commitment © South-Western, a part of Cengage Learning15–10 The tendency to favor the “here and now” and to reject potential change Status quo bias A type of bias in which decision makers commit themselves to a particular course of action beyond the level suggested by rationality as a means of justifying previous commitments Escalation of commitment A bias in which people tend to seek information that confirms a decision before seeking information that disconfirms a decision, even if the disconfirming information is more powerful and important Confirmation bias

Intuitive Decision Making © South-Western, a part of Cengage Learning15–11 Insights that are tapped through intuition and are not always fully understood by the decision makerInsights that are tapped through intuition and are not always fully understood by the decision maker –Referred to as gut feel or hunches Can emerge as a form of automated expertise if it is drawn from connections to past experiencesCan emerge as a form of automated expertise if it is drawn from connections to past experiences

Social Influence on Decisions © South-Western, a part of Cengage Learning15–12 Solomon Asch’s experiment indicated that:Solomon Asch’s experiment indicated that: –Individuals tend to conform to majority when they rely less on their experience and insight –Dominance of conformity can cause people to make decisions that go against their values Social decisions involving norms are shaped by:Social decisions involving norms are shaped by: –Appropriateness framework: The process of making decisions based on societal norms or expectations

Decision Making in Organizations © South-Western, a part of Cengage Learning15–13 Decisions that are made in response to recurring organizational problems that require individuals to follow established rules and procedures Programmed decisions Decisions that are made in response to novel, poorly defined, or unstructured situations that require managers to use their best judgments Nonprogrammed decisions

Models of Organizational Decision Making © South-Western, a part of Cengage Learning15–14 Seeks to maximize economic or other outcomes using a rational choice process Classical model Acknowledges that managers may be unable to make economically rational decisions because they lack sufficient information on which to base their decisions Administrative model

Models of Organizational Decision Making © South-Western, a part of Cengage Learning15–15 Acknowledges that most organizational decisions involve many managers who have different goals and who have to share information to reach an agreement Political model A model of decision making whereby, problems, solutions, participants, and choices flow throughout an organization. A decision process is not viewed as a sequence of steps that begins with a problem and ends with a solution Garbage can model Playfulness: The deliberate, temporary relaxation of rules to explore many possible alternatives

Improving Decision-Making Skills: Managing Your Biases © South-Western, a part of Cengage Learning15–16 Take an outsider’s view Implement statistical models Understand biases in others Actions can help to “de-bias” your judgments Acquire experience and expertise Reduce bias in your judgment Engage in analogical reasoning

SCRIPTS Process © South-Western, a part of Cengage Learning15–17 Helps managers prepare for high-stake decisionsHelps managers prepare for high-stake decisions Involves following stepsInvolves following steps –Search for signals of threats and opportunities –Find the causes –Evaluate the risks –Apply intuition and emotion –Take different perspectives –Consider the time frame –Solve the problem

KEY TERMS © South-Western, a part of Cengage Learning15–18 Adjustment heuristic Administrative model AmbiguityAnchoring Appropriateness framework Availability heuristic Bounded rationality Classical model Conditions of certainty Conditions of risk Conditions of uncertainty Confirmation bias Decision making Escalation of commitment Framing Garbage can model Heuristics Intuitive decision making Nonprogrammed decisions Playfulness Political model Programmed decisions Representativeness heuristic Satisficing Status quo bias Theory of rational choice