Overview

1. GSBS 6001 Managing Under UncertaintyDecision making processesDr Sharon AysonSenior Lecturer in ManagementNewcastle Business School

2. Overview • Lecture 3: Decision making processes • Reading: • Essential (Text pages 51-69) source: McKee (2010), Ch.6 ‘ The Human Side of Planning: Decision making and critical thinking’, pp176-209 • Additional (Text pages 75-89) source:  Robbins et al (2012), Ch.7 ‘Decision making: The essence of a manager’s job’, pp259-289 • Main themes: • Approaches to decision making • Decision making models • Decision making style and critical thinking skills • Decision making process • Structure of Session: • Part One: Lecture • Part Two: In Class Activity

3. Introduction • Recapping from last week: • We understood the ‘who’ ‘what’ ‘why’ ‘where’ ‘how’ of a decision • We understood the origins and different approaches to decision making reflected in ‘decision theory’ • We recognised that, as a result of the multiple number of variables in a decision; the range of empirical studies undertaken in decision making; and the different theoretical approaches possible, there are potentially an infinite number of decision making models from which we can choose • The only constant is change

4. Typology of decision making approaches • Teale’stypology (Teale et al 2003): • Normative • Descriptive • Harrison’s typology (Harrison 1999): • Classical • Organisational • Political • Process • Our approach: • Rational model • Bounded rational model • Other ieIncrementalism, garbage can and process models

5. Rationality in decision making Rational v Non rational behaviour • Rationality in decision making is interpreted: • widely • subjectively • disciplinarily • Relative

6. Rationality in decision making Rational v Non rational behaviour • Rationality in the decision maker needs to be viewed as a continuum of rationality rather than a dichotomous rational-irrational classification • Indeed, because of the medical connotations, we should use the term ‘non-rational’ rather than ‘irrational’ • Non-rational accepts that a person has all of their cognitive faculties but they do not use them to some degree in making a decision • There are many sources of non-rational decisions Commitment to dogma or theory • Narrow training, education preventing a more holistic view • Distorted or limited perspectives resulting from bureaucratic narrow-mindedness (Snyder in Harrison, 1999:77) • Belief (Lukes in Harrison 1999: 77)

7. Two dominant models Our two dominant models are: • Normative / rational / classical • Descriptive / bounded rational / organisational • Note: The normative model assumes a rational person The descriptive model assumes a non-rational person • Given there is a ‘continuum of rationality’ we can have rational behaviour involving some non-rational behaviour

8. The rational model • Normative in nature / prescriptive / mechanistic • Foundations are in the quantitative disciplines Assumptions: • All available information is available • Decision maker has : • only one objective • Objectives that align with those of the organisation • A clear well ordered and stable set of preferences of alternative from which to choose • the ability to process information, calculate a ‘subjective expected utility’ and make a choice • the ‘best’ option is the one with highest quantifiable ‘utility’ ie optimal output

9. The rational model Subjective Expected The probability of an outcome occurring eg. chance that outcome 3 will occur is 90% if choice ‘A’ is chosen, 30% if choice ‘B’ is chosen Utility The value or happiness produced by each option from value of expected outcomes, determined quantitatively The Optimal or ‘Maximising’ Outcome Choice ‘B’ has higher utility (value) than choice ‘A’ Choice ‘B’ expected utility is(.8x7)+(.2x-2)+(.3x1)=6.4 Outcome 1 (+7) .2 Choice A .5 Outcome 2 (-2) .9 Outcome 3 (+1) Outcome 1 (+7) .8 Choice B .2 Outcome 2 (-2) .3 Outcome 3 (+1) Utility (expected happiness) Probability of outcome occurring

10. The rational model Advantages: • It permits a rigorous, intellectual reasoning process • Consistent with drive for ‘resources’ in most organisations • It can make other models better eg process model • Applicable to certain, routine-type decisions Limitations: • It ignores reality of most business eg objective is to survive rather than maximise utility – ignores social responsibility • The concept of ‘utility’ is subjective • Objectives are seldom fixed (managers change their minds) • Complete and unlimited information is unachievable, particularly given time and cost constraints • Managers have cognitive limitations … they are not fully objective and logical • Variables cannot be controlled completely and concepts of ‘utility’ and outcomes are rarely completely quantifiable • Focused on ‘maximising’ behaviours ie obtaining the optimal output and this is often short-term

11. The bounded rational model • Foundations are with qualitative approaches • Acknowledges that there are environmental and behavioural constraints that affect a decision Simon articulates 5 differences from the rational model (Simon in Harrison 1999:154) • Factored problems • Due to the complexity of real life problems, humans factor (divide) problems into small pieces and deal with them one by one • Satisficing • Since complete information cannot be obtained, humans seek a course of action that is ‘good enough’ rather than ‘maximising utility’ • Search • Alternatives are generated sequentially and the search is aborted once the first ‘good enough’ alternative is identified • Uncertainty avoidance • To avoid uncertainty, short term feedback is sought to enable change with any emerging outcomes • Repertoires • Organisations tend to have 2nd, 3rd alternatives should the identified ‘satisficing’ alternative not give the intended outcome Herbert Simon

12. The bounded rational model Advantages • It allows for limited information, limited decision maker cognition, limited time, cost, precedent, poor communication and other constraints • It is a particularly useful approach for uncertain, non-routine decisions • It recognises that ‘optimal’ decisions are only useful at a given point in time and cannot accommodate the ever changing ‘real-world’ where variable change • It avoids the potential of ‘cognitive strain’ ie when the human thought process is unable to process the volume of information and as a survival strategy the information is broken down into small chunks and the mind will filter out incompatible information (Right: Richard Cyert and James G March: authors of some seminal works on behavioural aspects of organisations and decision making)

13. The bounded rational model Limitations • Tends to be constrained by ‘internal policies and procedures’ and short term results • Tends to be limited by the decision maker’s aspiration levels in setting the objectives • It does not have a planning orientation or long term/range ‘optimal’ outcome view • Ultimately, because of its ‘bounded nature’ ‘trade offs’ occur and there is a risk of a better choice being missed • It is often perceived as a 2nd best option because it is a choice based on the first ‘acceptable’ alternative (Right: Daniel Kahneman and Amos Tversky authors of some seminal articles in the general field of judgment and decision-making, culminating in the publication of their prospect theory in 1979 Kahneman was awarded the Nobel Memorial Prize in Economics in 2002 for his work on the theory)

14. Other models Incrementalism • It is a model that employs a ‘compromise or bargaining decision making strategy’ that aims for an outcome that is acceptable to the many external stakeholders • It is based on a notion of ‘muddling through’ which is Lindblom’s view of how decisions are made • The criterion is that the decision will be as close to the original decision and existing course of action i.e. It is not an ‘outcome’ model but a ‘process’ model (Right: Charles B Lindblom (disjointed incrementalism) (1963) and James Brian Quinn (logical incrementalism) (1978))

15. Other models Incrementalism Advantages: • It is based upon experience • It minimises significant risk • Used typically for certain, programmed, routine decisions Disadvantages • It fails to challenge the robustness of the original decision , but merely changes it incrementally • It can be used by decision makers who need psychological safety in times of great uncertainty eg used as a ‘safety crutch’ in times of change

16. Other models Garbage Can Model • Asserts that ‘cause and effect’ is unclear in decision making • Suggests that four independent factors shape decisions in this instance: • perceptions of current problems facing the organisation • potential solutions, ideas and actions that individuals wish to challenge • decision making opportunities, meetings or committees that are assigned to make a recommendation for action • participants, individuals who are present at decision making opportunities • Decisions take place as a result of a random combination of these four factors (Right: Michael D Cohen, James D March & Johan P. Olsen, authors of the seminal article ‘A Garbage Can Model of Organisational Choice’ in 1972)

17. Other models Process Model • Harrison argues that a hybrid approach that takes the best out of the rest and takes a strategic long term view is a type of decision making process for the modern era • He termed it a ‘process model’ • Similar in nature to the ‘bounded rationality’ model but is longer term; involves a planning stage; and is not bound by policy and procedure but uses it as a guide, thus enabling innovation • It is the epitome of an interdisciplinary decision making model (Harrison 1999)

18. The Queensland Floods (January 2010) Class Task Background Information • Over Dec 2009-January 2010, a tropical cyclone combined with a trough during the peak of a La Nina event, causing significant flooding in the State of Queensland • In Toowoomba and the Lockyer valley, there was flash flooding when over 160mm rain fell in 36 hours and because of the super saturated ground, the rain rapidly ran off creating a devistating ‘inland tsunami’ reaching heights of 7-8 metres • Homes were crushed and people drowned, with one body recovered 80km from where they died; many bodies were never recovered • In the State’s capital city, Brisbane, it thought it had the benefit of the Wivenhoe Dam, which was built as a flood management strategy to prevent a repeat of the devastating Brisbane floods which occurred in 1974 • During this storm, levels at the dam reached 191% of its supply capacity and the risk management protocol demanded the water be released down the valley • It was and homes and lives were lost in Brisbane • The Queensland floods cost an estimated $10billion and over 35 lives

19. The Queensland Floods (January 2010) Class Task Consider the news report: http://www.youtube.com/watch?v=95JxEDm-LoE Thinking in terms of the type of decisions made (structured, programmed, etc) and the decision making approach made (rational, bounded rational, incrementalism, garbage can), what are your perceptions in respect of: • the decisions relating to disaster prevention to the Lockyer Valley and to Brisbane • the decisions relating to response to the emerging disaster • the decision to hold an inquiry Consider the findings of the Commission’s Interim report into the disaster: http://www.abc.net.au/news/2011-08-01/dam-level-reduction-recommended-in-flood-inquiry-report/2819452

20. Decision making thinking styles and critical thinking skills Linear and nonlinear thinking styles • Research indicates that the way a person approaches decision making is likely to be affected by their ‘thinking style’ Vance, Groves, Paik & Kindler in Robbins et al (2012) • ‘Thinking style’ reflects two things: • Source of information (external data and facts or internal sources such as experience and intuition) • How information is processed (linear ie rational, logical, analytical or nonlinear ie intuitive, creative, insightful) • When viewed as a 2 x 2 matrix, four thinking styles are possible • Different managers and stakeholders think differently – none is ‘correct’ but people need to be conscious of style when making decisions personally or with others or dealing with someone making a decision

21. Decision making thinking styles and critical thinking skills Linear and nonlinear thinking styles • Intuitive decision making • Intuition is ‘tacit knowledge or knowledge that we have access to at a subconscious level’ eg ‘gut feeling • Research supports its use: • Simon has found that highly rational individuals (he used chess players) use intuition in making decisions (Simon in McKee 2010) • Miller & Ireland found that 50% of business decisions were made intuitively without formal process (Miller & Ireland in McKee 2010) • It can help decision making by drawing upon past experience and accumulated judgment • It can hinder decision making because it is subconscious and therefore lends itself to perceptual and other filtering (see later) • Intuitive decision making compliments the other models eg rational, bounded rational

22. Decision making thinking styles and critical thinking skills Critical thinking skills in decision making • Critical thinking is “a disciplined intellectual process of evaluating situations or ideas and making appropriate judgments or taking certain actions” (McKee 2010:197) • Quality thinking promotes quality decision making • It is a dynamic process that can be learnt and improved • Research suggests there are five critical skill sets linked to critical thinking: • Inference • Recognition of assumptions • Deduction • Interpretation • Evaluation (The ‘Watson-Glaser Critical Thinking Appraisal’ in McKee 2010: 197)

23. Decision making thinking styles and critical thinking skills Critical thinking skills in decision making • Common errors in critical thinking include (1) concluding too quickly; (ii) incomplete process due to avoidance of confrontation; (iii) self belief. • Research has indicated a range of ‘critical thinking’ traps: • Anchoring • Status Quo • Sunk Costs • Confirming Evidence • Estimating and Forecasting • Framing (Hammond, Keeney & Raifa in McKee 2010:200)

24. Decision making thinking styles and critical thinking skills Critical thinking skills in decision making • Mindfulness • This is an important Improvement strategy in critical thinking • It can learnt and it improves choices and decision making Langer & Kabat-Zinn in McKee (2010:203) • Effective improvement needs to address (i) a change in behaviour; and (ii) a change in underlying belief ie a move from ‘single loop learning’ to ‘double loop learning’ McKee (2010:204)

25. Decision Making Process • Decision making is a process, not an event • By understanding it, decision makers can self-evaluate and evaluate others • In doing so, we acknowledge that it is a dynamic and inter-related process, taking place over time, is continuous and can direct and control the nature, degree and pace of change in organisations • For our purposes, we will adopt the most commonly used eight stage model

26. The Eight Stage Decision Making Process Model

27. Decision Making Process Model The inter-relatedness of the process • It identifies ‘stages’ to the process • ‘individual functions’ of the process – identifies six in total (see next slide) • Different types of decisions will need a greater or fewer number of stages eg programmed, non-programmed • It acknowledges the inter-relatedness of the functions • They are sequential • They rely on the success of the previous stage for the next stage to succeed • It recognisesthe dynamics of the process centred on the ‘interrelationships’ between the functions

28. Decision Making Process Model Sub process 3 If sub processes 1 & 2 fail, revise objectives The dynamics of the process Sub process 1 After ‘follow up and control’ corrective action may be necessary back into the implementation stage Sub process 2 If sub process 1 cannot remedy the issue, stage 2 is re-activated and search activity commences from the 2nd, 3rd choice alternatives in the original choice (Diagram adapted from Fig. 2.1, Harrison 1999: 40)

29. The Eight Stage Decision Making Process Model • Consider the three states of ‘reality’ facing a decision maker when undertaking this process • ‘certainty’ – the ideal state of affairs, where the decision maker knows for certain the outcomes • ‘risky’ – often reflective of the ‘real’ situation facing a decision maker, it is a less desirable state but one in which they can estimate the likelihood of certain outcomes, based on subjective judgment or secondary information • ‘uncertainty’ - the least desirable state of affairs, where the decision maker has neither certainty nor a reasonable probability estimates available. Various approaches have been devised to manage the situation eg ‘payoff and regret matrices’ described by Robbins (Robbins 2012: 275)

30. The Eight Stage Decision Making Process Model Stage 1: Identify the problem • The ‘problem’ is the discrepancy between the ‘current state of affairs’ and the ‘desired state of affairs’ • It is a subjective exercise • Be careful to distinguish ‘problems’ from ‘symptoms of problems’ • It involves the setting of ‘objectives’ ie a set of end-points towards which the decision maker directs their decision making • The objectives are often more than one and need to be prioritised

31. The Eight Stage Decision Making Process Model Stage 2: Establish decision criteria • These are the criteria that will be used in determining choice (relevance; practicability; challenge; measurability; scheduled ability; balance; flexibility; timeliness; state of the art; growth; cost effectiveness; accountability) (Harrison, 1999: 44) Stage 3: Allocate weights to decision criteria

32. The Eight Stage Decision Making Process Model Stage 4 Develop and List Alternatives • The search activity will always be ‘bounded’ by constraints eg time and money • Various approaches have been designed to ‘optimise’ search activity, knowing that complete information is not possible eg use of ‘cost curves’ ‘average and marginal value curves’ and ‘zones of cost effectiveness’ (Harrison 1999: 49) • Research has found that search activity is complex • It involves searching for alternatives ‘in parallel’ rather than ‘in sequence’; it involves multi-layered and multi-staged processes for evaluating the attributes of alternatives’; it excludes alternatives on the basis of ‘attributes’ rather than as ‘alternatives’ • It is subjective and decision maker bias is present • Search activity can be constrained by organisational structure (Wildavsky in Harrison 1999: 48)

33. The Eight Stage Decision Making Process Model Stage 5: Analyse the alternatives • It involves reference to the identification and weightings of the objectives and criteria • A combination of ‘comparing and evaluating’ modes take place: • Judgment mode - decision makers makes a judgment based upon experience, values, perception, intuition – popular choice for non-routine and uncertain decisions • Bargaining mode - decision maker bargains – popular when decision controversial or other stakeholders dominate • Analytical mode - decision maker carefully and objectively evaluates the alternatives – most represented in the research literature but equally least mode used by decision makers unless decisions are routine and certain (Mintzberg, Raisinghani & Theoret in Harrison 1999:52)

34. The Eight Stage Decision Making Process Model Stage 6: Choose Alternatives • Problems typically arise where: • One or more alternatives are equally attractive • No single alternative will meet the objectives/satisfy the decision criteria • There are undesired consequences attached to a preferred alternative • The choice of alternatives is too great • No combination of alternatives will meet the objectives/satisfy the decision criteria • Certain characteristics of the decision repeatedly have an affect on the decision maker’s choice: • It is known as the ‘contingency model of choice’ • The characteristics are: unfamiliarity; ambiguity; complexity; instability; reversibility; significance; accountability; time/money constraints (Beach & Mitchell in Harrison 1999:60)

35. The Eight Stage Decision Making Process Model Stages 4, 5 and 6 Challenges for these stages include: • Decision maker’s ‘bounded rationality’ • Decision heuristics / bias eg ‘rule of thumb’, intuitive judgement, common sense, educated guess • Decision maker’s emotions Our emotional brain influences choice in three respects: • Formation of early preferences • Influencing choice of alternatives • Use of emotion as ‘information’

36. The Eight Stage Decision Making Process Model Stage 6: Choose Alternatives • Different ‘choice’ models exist but popular approaches are: (see Hogarth): • Linear model of choice – it is a measurable compensatory model in which every characteristic/attribute within an alternative is quantified and ranked - a computation identifies the choice • Conjunctive model – it is a non compensatory model in which the decision maker sets a standard/cut off point for all characteristics/attributes within an alternative – the best alternative is chosen by identifying and comparing all such characteristics/attributes within each alternative that meet/exceed the standard/cut off point

37. The Eight Stage Decision Making Process Model Stage 7: Implementing decision • The real value of a decision is only seen after it is implemented • Success is seen as a good decision made and successfully implemented: • It is subjective • It is said to have three characteristics: The decision (i) remains viable following implementation; (ii) manifests an acceptable degree of congruency between the actual and the expected outcomes; and (iii) elicits enthusiasm and skill from those implementing it (Shell, Delbecq & Cummings in Harrison 1999:62)

38. The Eight Stage Decision Making Process Model Stage 8: Evaluate decision • A system of control and follow up is critical • Effective control systems need: • The establishment of standards/benchmarks against which performance can be assessed • Effective measurement of performance against the standards/benchmarks • Ability to correct deviations from the standards/benchmarks (Koonz & Weihrich in Harrison 1999: 64)

39. The Eight Stage Decision Making Process Model Stage 8: Evaluate decision Challenges include: • Confirmation bias ‘the unwitting selectivity in the acquisition and selection of evidence post-decision to justify the decision made” • Escalation of commitment “The natural tendency to repeat an apparently bad decision or allocate more resources to a failing course of action” Causes of escalation of commitment include: • Self justification • Perceptual filtering • Closing costs

40. Summary Today: • Decision making processes • Main themes: • Approaches to decision making • Decision making style and critical thinking skills • Decision making process Next Session: • Lecture 4: Uncertainty and risk • Reading and Preparation: Posted on blackboard under ‘Course Materials’