INDIVIDUAL AND GROUP DECISION MAKING
Rational and Non-Rational Decisions
Rational – theoretically should Rational Model Process:
1. Identify problem / opportunity 2. Develop possible solutions
3. Evaluate alternatives and select solution (effective? ethical? feasible?) 4. Implement and evaluate solution (in hindsight)
Non-rational models – actually, in reality
Bounded Rationality (Herbert Simons): people are bounded by their time and resources, biases, limited attention spans, etc. → need for satisficing behaviour (can’t reach perfect)
➢ Spoilt for info: more data created in the last 2 years than the last 5000 years
Incremental Decision-Making: decision that deals with the circumstances in the short-term, but will require revisiting later down the track (e.g. political decision-making)
Intuition: often based off experience and pre-existing knowledge – generally useful, HOWEVER becomes an issue when it replaces analytical processes
➢ As managers become accustomed to making decisions, they increasingly rely on intuition – decisions mimic past actions
➢ Knowledge influences perception – projecting past on to present Four General Decision-Making Styles
Analytical Style (me!): high tolerance for ambiguity and a tendency to value task and technical concerns. Analytic decision makers tend to take a longer time to make decisions, but they respond well to new or uncertain situations. Of concern is the tendency to over-analyse a situation or problem.
Directive Style: low tolerance for ambiguity and a value for task and technical concerns. Those who prefer a directive style tend to be decisive and
make fast decisions. Of concern is the tendency for autocratic and controlling behaviour.
Conceptual Style: high tolerance for ambiguity and a focus on people and social concerns.
These people tend to rely on intuition, favour discussion and consensus, take risks, and are often good at finding creative solutions. On the downside, they can be indecisive.
Behavioural Style: low tolerance for ambiguity and a focus on people and social concerns.
People with this decision making style are warm, supportive, and open to suggestions. Of possible concern, these people can be overly concerned with avoiding conflict and have difficulty making difficult decisions.
These illustrate two decision-making systems at play:
1. Rational-analytical 2. Emotional-impulsive When making decisions, it’s integral to consider:
1. Legality
2. Shareholder benefit 3. Ethics; community
Hindrances to rational decision-making:
➢ Conflicting goals
➢ Imperfect info
➢ Limited cognitive capacity
INDIVIDUAL AND GROUP DECISION MAKING
How to Overcome Barriers to Decision Making
➢ Although heuristics (common practical methods sufficient in reaching immediate goals) are often useful in simplifying decision making, they don’t always work Ineffective Reactions to Challenging Decisions
➢ Relaxed avoidance: complacency; presuming similar / same issues will not arise in the future; therefore, no action is taken
➢ Relaxed change: satisficing behaviour; insufficient action to respond to challenge
➢ Defensive avoidance: overwhelming situation → unhealthy reaction
o Procrastinating, ‘passing the buck’, denying the risk of negative consequences
➢ Panic: urgency to get rid of an issue → situation not being considered realistically, alternatives being inappropriately (or not at all) evaluated
Effective Response to Challenging Decisions
➢ Deciding to decide – agreeing that a decision must be made, because it is:
o Important (high priority), credible (believable info about situation), urgent (requiring a rapid response)
Biases and Errors
➢ Availability Bias: readily available information is exclusively, or primarily, relied upon (may include recency and primacy biases)
➢ Representative Bias: expectation that large-scale statistical likelihood = small-scale
➢ Confirmation Bias: tendency to search for information that fits an original perception with little preparedness to alter perceptions, even after contrary evidence arises
➢ Sunk-Cost Bias: maladaptive eco behaviour whereby $ → $$ → $$$ → broke and sad
➢ Anchoring / Adjustment Bias: losing sight of objective facts/figures, making decisions based off the assumption that an ‘initial’ figure is a reasonable starting point
➢ Overconfidence Bias: 99% of people think they’re an above average driver 😮
➢ Hindsight Bias: perceptions ‘in the moment’ vs. benefit of hindsight
➢ Framing Bias: the way a situation is framed (+ve or -ve) influences the receiver’s interpretation, and thus, decision making
➢ Escalation of Commitment Bias: desire to behave in a consistent manner (esp.
publicly); once an investment is made in to a project, further and repeated
investment is likely to be made, regardless of whether it is rational in the long term Group Decision Making: INCREASED VARIETY OF IDEAS
HOWEVER: → Groupthink, Social loafing, Satisficing behaviour, Side-tracking
➢ Participative Management → increased satisfaction among group members, even if the final decision isn’t necessarily aligned with originally held perspectives
➢ Consensus requires that all group members have the opportunity to express their opinions and are willing to work towards the final decision’s success
➢ As a result of advances in technology, traditional methods of structured IRL
brainstorming → ELECTRONIC brainstorming; remote communication, globalisation
➢ Delphi technique: experts asked to make market forecasts (individually); anonymous information distributed to all; process repeated with revision and negotiation before consensually reaching a final decision → evidence based + ethical decision-making
Aka rules-of-thumb
INDIVIDUAL AND GROUP DECISION MAKING
Computer-aided Decision Making
➢ Increase speed of info collection and reduce roadblocks to group consensus
➢ Chauffeur-driven
o Participants answer predetermined questions on electronic keypads / dials o Responses can be tabulated instantly for purposes such as polling
➢ Group-driven
o Participants gather in a single room, expressing their ideas anonymously by typing their comments, reactions, and evaluations on individual keyboards o Results are projected on a large screen visible to the whole room
CASE STUDY: Radical Transparency and Algorithmic Decision-Making Ray Dalio, founder of Bridgewater Associates
➢ In order to be an effective investor and entrepreneur, one has to bet against the consensus and be right
o Consensus is built into the price
➢ Mistakes = puzzles; solving → gems
o What would I do in the future so that I won’t make that painful mistake?
o Principles to help in future decision making developed and clearly recorded (later embedded into algorithms – algorithms unemotional, rational DMP)
➢ Idea meritocracy – best ideas win out; not based on legitimate power within org
➢ Uses computer-aided decision making systems: group-driven o ‘Dot collector’ – big data program used
o Quantitative and qualitative feedback provided o Multi-dimensional understanding → objective criteria
for determining what is best – believability level + raw stats considered
➢ Radical truthfulness and transparency → best results
Business analytics: sophisticated quantitative forms of business data evaluations, used to:
➢ Test for new business opportunities
➢ Identify customer behaviour
➢ Identify potential customer defections (leaving the brand)
Participative Management addresses productivity issues by:
➢ Involving employees in setting goals, making decisions, solving problems, and making organisational changes
➢ Leading to a greater sense of autonomy, work meaningfulness, and interpersonal contact, fundamental to fulfilling employee engagement needs
Prospect Theory suggests that decision makers find the notion of an actual loss is more painful than giving up the possibility of a gain. DMs are incredibly loss-averse.
How do I know that I’m right? I don’t.
