Decision Making by Individuals and Groups

1. Chapter 10 Decision Making by Individuals and Groups Michael A. Hitt C. Chet Miller Adrienne Colella

2. Knowledge Objectives • Describe the basic steps in decision making. • Discuss the four decision-making styles, emphasizing the effectiveness of each one. • Explain the role of risk-taking propensity and reference points. • Define cognitive bias and explain the effects of common types of cognitive bias on decision making.

3. Knowledge Objectives • Discuss common pitfalls of group decision making. • Describe key group decision-making techniques. • Explain the factors managers should consider in determining the level of associate involvement in managerial decisions.

4. Decisions: Choices of actions from among multiple feasible alternatives Gather and Evaluate Data Define the Problem Identify Criteria Decision-Making Process • Define the problem • Gaps between where we are today and where we would like to be tomorrow • Identify the criteria • What information is needed in order to evaluate alternatives? • Gather and evaluate data • Collect information relevant to the criteria and potential alternatives Adapted from Exhibit 10-1: The Decision-Making Process

5. Decisions: Choices of actions from among multiple feasible alternatives List and Evaluate Alternatives Gather and Evaluate Data Implement and Follow Up Select Best Alternative Define the Problem Identify Criteria Decision-Making Process • List and evaluate alternatives • Develop an complete list of possible solutions to the problem (few constraints) • Assess each alternative using each criterion from step 2 • Select best alternative • Choose the one which satisfies the criteria the best • Implement and follow up • Monitor the results Adapted from Exhibit 10-1: The Decision-Making Process

6. Optimal versus Satisfactory Decisions • Optimal decision • The maximizing decision, yielding the absolute best result • Satisficing decision • Satisfactory rather than optimal decision • Lack capability to collect and process all of the information relevant for a particular decision • Will never know if all possible alternatives have been identified • Lack of time and other necessary resources for completing all of the decision activities • Thus, a tendency to choose the first satisfactory alternative discovered

7. Decision-Making Styles • Individual’s predispositions can affect decision process at two critical stages • Gathering (Perceiving) of information • Sensing style • Intuition style • Evaluating (Judging) of alternatives • Thinking style • Feeling style

8. Define the Problem Sensing Intuition Identify Criteria Using the five senses to identify factual details Using abstractions and describing the “big picture” Gather and Evaluate Data Develop and Evaluate List of Alternatives Thinking Feeling Perceptual Influences Perceptual Influences Using objective analysis and rational procedures Using subjective values with emotional and personal factors Choose Best Alternative Implement and Follow Up Decision-Making Styles Feedback Adapted from Exhibit 10-2: Influence of Decision Styles

9. Degree of Acceptable Risk • Risk exists when the outcome of a chosen course of action is not certain • Risk-taking propensity (Willingness to take chances) • Low risk takers • May collect and evaluate more information • May become paralyzed by trying to obtain and consider too much information • High risk takers • May may decisions based on too little information • May jump to decisions too quickly

10. Degree of Acceptable Risk • Reference point • Possible level of performance used to evaluate one’s current standing, and may be • a goal • a minimum acceptable level of performance • the average performance level of others • If one’s current standing is below his reference point he may take more risk to move above it • If one’s current standing is above his reference point he may take less risk to avoid moving below it

11. Cognitive Biases Ease of recall bias Relying too much on information that is easy to recall from memory Confirmation bias Seeking information that confirms early beliefs and ideas Cognitive Biases Sunk-cost bias Not treating past investments (time, effort, money) as sunk-costs when deciding to continue an investment Anchoring bias Emphasizing too much, the first piece of information encountered

12. 14 Escalation of Commitment • A decision maker initially makes a decision that results in some kind of loss or negative outcome. • Rather than change the course of action contained in the initial decision, the decision maker commits more time, money, or effort to the course of action. • Further losses are experienced because of this escalation of commitment to a failing course of action.

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15. Legend for Chart: A - Date B - Cost Estimate C - Projected Completion and Operation A B C April 14, 1966 $65-75 million 1973 September 20, 1970 250 million 1975 December 19, 1971 271 million 1977 December 5, 1972 350 million 1977 April 1, 1973 506 million 1978 April 1, 1974 695 million 1978 April 1, 1976 969 million 1978 March 7, 1979 1.3 billion End of 1980 June 4, 1979 1.5 billion December 1981 April 15, 1980 2.2 billion Late 1982 December 27, 1981 2.5 billion 1983 November 4, 1982 3.1 billion 1983 November 28, 1983 4.0 billion Complete but not ready February 24, 1984 4.1 billion July 1985 June 1, 1985 4.3 billion October 1985 November 11, 1985 4.5 billion September 20, 1987 4.6 billion December 13, 1987 5.0 billion March 18, 1988 5.2 billion March 1, 1989 5.5 billion Agreement to abandon

17. 16 Reasons forEscalation of Commitment • Decision makers often do not want to admit to themselves or to other people that they have made a mistake. • Decision makers erroneously believe that an additional commitment of resources is justified, given how much has been spent already, and may help to recoup some of the losses. • Decision makers tend to take more risks when they frame or view decisions in negative terms rather than in positive terms.

18. Group Decision Making • Decisions often are made by groups of people • May be composed of individuals at different or at the same level in the organization • May make some decisions without managerial input • Tend to follow the same decision-making process • Will have dynamics and interpersonal processes that make group decision making very different from decisions made by an individual

19. Common Information Bias Diversity-based Infighting Risky Shift Groupthink Group Decision Making Devil’s Advocacy Brainstorming Dialectical Inquiry Nominal Group Technique Delphi Technique Decision-Making Process Adapted from Exhibit 10-3: Group Decision-Making Phenomena—Pitfalls and Techniques

20. Group Decision-Making Pitfalls • Groupthink • Group members maintain or seek consensus at the expense of identifying and debating honest disagreements • Group members like one another and therefore do not want to criticize each other’s ideas • Group members have high regard for the group’s collective wisdom and therefore yield to early ideas or the ideas of a leader • Group members derive satisfaction from membership in a group possessing a positive self-image and therefore try to prevent the group from having any serious divisions

21. Group Decision-Making Pitfalls • Groupthink • Symptoms include • Self-censorship • Pressure • Unanimity • Rationalization • Invulnerability • Mindguards • Morality • Stereotype • Common information bias • Group members overemphasize information held by a majority, failing to be mindful of information held by one or a few group members reduces • Availability of unique information ideas • Perspectives possessed by individual group members

22. Group Decision-Making Pitfalls • Diversity-based infighting • Instead of creating rich discussions and insight, diverse ideas create ill will and fractured groups • May occur when individuals feel strongly about their ideas • No mechanisms exist to channel disagreement in productive ways • Risky Shift • Groups make either riskier decisions than would have been made by individual members acting alone • Direction of shift may be affected by diffusion of responsibility

23. Group Decision-Making Techniques • Brainstorming • Large number of ideas are generated while evaluation of the ideas is deferred • Imagination is encouraged. No idea is too unique or different, and the more ideas offered the better • Using or building on the ideas of others is encouraged • There is no criticism of any idea, no matter how bad it may seem at the time • Evaluation is postponed until the group can no longer think of any new ideas

24. Group Decision-Making Techniques • Nominal group technique • Individuals silently, and without discussion, write down their ideas • Each member presents one idea at a time, until all ideas are presented, without discussion • Ideas presented on a blackboard and then discussed to clarify and evaluate • Silent and independent vote or ranking of alternative choices • Delphi technique • Highly structured survey of participants regarding their opinions or best judgments

25. Group Decision-Making Techniques • Dialectical inquiry • Debate between very different sets of recommendations and assumptions to encourage full discussion • Overcomes tendency of group to avoid conflict when evaluating alternatives • Devil’s advocacy • Individual or subgroup argues against the recommended actions and assumptions put forth by other members of the group • Also overcomes tendency of group to avoid conflict when evaluating alternatives

26. Exhibit 10-4 Managerial Approaches to Associate Involvement in Decision Making Low High Who Should Decide? (Vroom-Yetton Method) Approach AI—Manager solves problem or makes decision alone, using information to which she has current access. AII—Manager requests information or may not explain the problem to associates. Associates’ role in process is only to provide specific information requested. CI—Manager explain problem to relevant associates, one by one, requesting input as individuals. After discussion with individuals, manager makes decision along, either using or not using associate’s input. CII—Manager explains problem to associates as a group, obtaining group members’ ideas and suggestions. Later, manager makes decision alone, either using or not using associate’s input. GII—Manager explains problem to associates as a group, working together with them to generate and evaluate alternatives and agree on a solution. Manager acts as facilitator, does not force group to accept his solution, and will accept and implement a solution supported by the group. Level of Associate Involvement in Decision Adapted from Exhibit 10-4: Managerial Approaches to Associate Involvement in Decision Making

27. Who Should Decide? (Vroom-Yetton Method) • Questions asked to determine level of associate involvement in decision making • Is there a quality requirement such that one solution is likely to be more rational than solution, or will any number of solutions work reasonably well)? • Do I have sufficient information to make a high-quality decision? • Is the problem structured (do I know the question to ask and where to look for relevant information? • Is acceptance of the decision by associates critical to effective implementation? • If I were to make the decision by myself, is it reasonably certain that it would be accepted by my associates? • Do the associates share the organizational goals to be attained in solving this problem? • Is conflict among associates likely in preferred solutions?

28. 1-AI 2-AI Yes No Yes No 3-GII No 4-AI 7-CII No 6-GII Yes 5-AI Yes Yes Problem Yes No No No Yes No Yes Yes Yes 8-CI 9-AII Yes No No 10-AII No 11-CII Yes Yes 12-GII Yes No No Decision points No 13-CII Recommended strategies 14-CII Who Should Decide? (Vroom-Yetton Method) A B C D E F G

29. Value of Individual vs. Group Decision Making • Important considerations for judging the overall value of group decision vs. individual decision making • Time • Cost • Nature of the problem • Satisfaction and commitment • Personal growth

30. Exhibit 10-6 Advantages and Disadvantages of Group Decision Making Value of Individual vs. Group Decision Making Communication In the United States Elsewhere Groups can accumulate more knowledge and facts and thus generate more and better alternatives. Groups take more time to reach decisions than do individuals. Groups often display superior judgment when evaluating alternatives, especially for complex problems. Group social interactions may lead to premature compromise and failure to consider all alternatives fully. Group involvement in decisions leads to a higher level of acceptance of the decisions and satisfaction. Groups are often dominated by one or two “decision leaders” which may reduce acceptance, satisfaction and quality. Group decision making can result in growth for members of the group. Managers may rely too much on group decisions, leading to loss of their own decision and implementation skills. Adapted from Exhibit 10-6: Advantages and Disadvantages of Group Decision Making