What is “decision making”
The process of developing commitment to a specific course of action
What is a “problem”
A gap between your the current state and the desired state
What are “well structured problems”
- A problem in which the existing state is clear, the desired state is clear, and how to get from one state to the other is fairly obvious
- Since decision making is time consuming and prone to errors, organizations develop a simple, standard process for solving well-structured problems called programs
What are “ill structured problems”
- A problem in which the existing state is unclear, the desired state is unclear, and how to get from one state to the other is unknown
- Ill structured problems cannot be solved with a program due to their uniqueness and complexity
- Decision makers have to use rational decision making and gather information themselves and be more careful
What are the 7 steps of rational decision making?
1) Identify problem
2) Search for relevant information
3) Develop alternative solutions to the problem
4) Evaluate alternate solutions
5) Choose best solution
6) Implement chosen solution
7) Monitor and evaluate chosen solution
What is “perfect rationality”
A decision strategy where the decision maker is perfectly informed, logical, realistic, and is oriented towards economic gain
What is “bounded rationality”
- A decision strategy that relies on limited or unperfect information, and involves time constraints and political consideration
- Since little information may be available decision makers rely on framing (how the information is presented) and cognitive biases (tendencies to process information in a way that is prone to error) to make sense of the information
What are 4 common difficulties a bounded decision maker might run in to?
1) Perceptual defense: Can cause the decision maker to not “see” a problem even though it is present
2) Problem defined in terms of functional specialty: e.g. Employees with a marketing background might fixate on a marketing solution to poor sales even though the problem resides in bad design
3) Problem defined in terms of solution: “Jumping to conclusions” (e.g. The chef of a struggling restaurant assumes they need a new menu and replaces a lot of beloved dishes with ones that people don’t like)
4) Problem diagnosed in terms of symptoms: Treating “symptoms” of a problem instead of the actual root cause
What are 3 difficulties that a decision maker might face when there is too little information?
1) Availability bias: People tend to favor information that is easily accessible as opposed to actually relevant information
2) Confirmation bias: Decision makers will search for information that supports solutions they already came up with and ignore information that goes against it
3) Not-invented-here bias: Decision makers tend to have negative opinions surrounding any external ideas, causing organizations to “reinvent the wheel”
What is a common difficulty that decision makers face when they have too much information
Information overload: Decision makers try to use all the information they gathered leading to confusion
What are common statistical errors committed by bounded decision makers?
- Avoiding the incorporation of existing data into their decision
- Overvalue information from small samples more than large samples
- Overvaluing anecdotal information that plays to one’s emotions the more emotionally involved they are with the decision
- Overestimate the likelihood of chains of events that seems sensible
- Anchor effect
What is the “anchor effect”
Overemphasis on early information, keeping the decision maker from deviating too much from the initial idea
What is “satisficing”
The tendency for people with bounded rationality to come up with a solution that is “good enough” instead of one that maximizes
What is “risk culture”
An organizational understanding of how much risk is tolerated and framed
What is “cognitive dissonance”
The mental discomfort of being wrong (workers experience cognitive dissonance when they make a poor decision)
What are the 2 tactics workers use to avoid cognitive dissonance?
1) Avoidance: Simply not testing the solution to see if it works properly
2) Escalation of commitment: If the failure is obvious, they try to justify it by doubling down instead of cutting losses (irrationally treating sunk costs and pouring more resources into a decision to “prove it was right”)
What are some strategies for avoiding escalation of commitment?
- Don’t be blinded by the early positive feedback for your decision
- Ignore sunk costs
- Establish specific goals, if these goals are met more funding will be provided
- Evaluate decision maker based on how the decision was made instead of the outcome (easier for the decision maker take accountability)
- Switch decision makers periodically
What is “hindsight”
The tendency to review the decision-making process that was used to find out what was done right (in the case of success) or wrong (in the case of failure)
What role does mood play in decision making?
- If excess optimism is controlled, those in a good mood are able to make more creative decisions
- If excess pessimism is controlled, those in a bad mood are able process information more carefully and effectively
What are some advantages of group decision making?
- Decision quality
- Decision acceptance and commitment
- Diffusion of responsibility
What is “diffusion of responsibility”
The ability for group members to share the burden of negative consequences from a poor decision
What are some disadvantages of group decision making?
- Group decisions take longer
- Conflict can arise
- Sometimes an individual tends to dominate a group
- Groupthink
What is “groupthink”
Peer pressure from group members to think that a decision is correct, and to ignore any intuitions or evidence that say otherwise
Groups typically outperform individuals when…..
a) Group members differ in relevant skills and abilities (as long as the difference does not cause conflict)
b) Division of labor occurs
c) Memory for facts is an important issue
d) Individual judgements can be combined by weighting them to reflect the expertise of various group members
