Decision-making in organizations

1. Decision-making in organizations Alexander Styhre Dept. of Business Administration School of Business, Economics, and Law University of Gothenburg Science in Management GS Management Course, HT 2012

2. Instrumental and rationalviews of decision-making • “Decision-making has five distinct phases: Defining the problem; analysing the problem; developing alternate solutions; deciding upon the best solution; converting the decisoon into effective action”. (Drucker, 1955: 312) • Decision-support systems, ”rationalmodels” for decisionmaking etc.

3. Behavioraltheories of decision (I) • Herbert Simon and the Carnegie-Mellon school of research. • The “cognitive revolution in psychology” in the 1940s and 1950a. • Simon was awarded the Nobel Prize in Economics in 1978. • “How decisions are made in practice rather than in theory?” is the overarching research question. • “[Herbert Simon’s] model of bounded rationality has been influential in arguing that empirical relevance of new elements from the psychology of decision making: e.g., memory, learning, information processing, selective attention, adaptation, socialization. Economists, given their interests in markets, generally find it easy to dismiss these sorts of factors as unnecessary complications. But organization theorists, including economists now doing work on organizations, are directly concerned with individual behavior and interaction among individuals, and they often find the psychological aspects of decision making impossible to ignore.” (Moe, 1984: 744) • “In a society based on reason, rationality, and a conception of intellectual human control over destiny, decision making is a sacred activity. The world is imagined to be produced by deliberate human action and responsive to human intention” (March, 1994: 216) • “Ideas of willful, rational choice are the standard terms of discourse for answering the generic questions: Why did it happen? Why did you do it?” (March, 1991: 97) • “Rationality has become a compelling creation myth for decisions.” (Carruthers and Espeland, 1991: 57)

4. Behavioraltheories of decision (II) • For psychologists Jean Piaget and Lev Vygotsky, intelligence is no onesinglestructurebut is the integration of individualcognitiveprocesses. • Three “main systems” in intelligence: (1) “organic hereditary structures” (“instinct”), (2) “sensori-motor structures” (“which may be learned”), (3) “symbolic structures” (“Which constitute thought”). (Piaget (1950/2001:132) • “[T]he mind is not a complex network of general capabilities such as observation, attention, memory, judgment, and so forth, but a set of specific capabilities, each of which is, to some extent, independent of the others and is developed independently. Learning is more than the acquisition of the ability to think: it is the acquisition of many specialized abilities for thinking about a variety of things. Learning does not alter our overall ability to focus attention but rather develops various abilities to focus attention on a variety of things.” (Vygotsky, 1978: 83) • As a consequence, human behaviour is not exclusively located in the cognitive faculties of human beings; decision making is a matter of choice and preferences.

5. Behavioraltheories of decision (III) • Boundedrationality “The capacity of the human mind for formulating and solving complex problems is very small compared to the size of the problems whose solutions is required for objective rational behavior in the real world — or even for a reasonable approximation to such objective rationality” (Simon, 1957: 198. Original in italics) “The first consequence of the principle of bounded rationality is that the intended rationality of an actor requires him to construct a simplified model of the real situation in order to deal with it” (Simon, 1957: 199) • Satificing “Most human decision-making, whether individual or organizational, is concerned with the discovery and selection of satisfactory alternatives; only in exceptional cases it is concerned with the discovery and selection of optimal alternatives” (March and Simon, 1958: 162) “[A] decision may be called ‘objectively’ rational if in fact it is the correct behaviour for maximizing given values in a given situation. It is ‘subjectively’ rational if it maximizes attainment relative to the actual knowledge of the subject”. (Simon, 1976: 76) • Sequentialattention to goals Organizationsalmembers, e.g., managers payattention to issues in a piecemealfashion, beginning with what is considered to be mostimportant.

6. Behavioraltheories of decision (IV) • The concept of attention • “Attention is a scarce resource; theories of limited rationality are, for the most part, theories of allocation of attention.”(March, 1991: 98) • Early industry psychologists (Hugo Münsterberg, 1913, at Harvard) examined how and when workers pay attention to things. • The attention economy: “In information society, the scarstes resource for people on the supply side of the economy is neither iron ore nor sacks of grain, but the attention of others. Eveyone who works in the information field—from weather broadcasters to professors—compete over the same seconds, minutes, and hours of other people’s lives” (Eriksen, 2001: 21)

7. Garbage-can decision making (I) • Decisions are not always preceded by perceived problems but instead solutions “may look for problems”; a non-linear model of decision-making. • “Tossed into a garbage can is a loosely coupled mix of (1) problems or issues looking for solutions; (2) solutions looking for problems to resolve; (3) participants with different amounts of time and energy; (4) choice situations waiting to be actualized”. (Powell, 1985: 96)

8. Garbage-can decision making (II) • “In a garbage-can process, it is assumed that there are exogenous, time-dependent Arrivals of choice opportunities, problems, solutions, and decision makers. Problems and solutions are attached to choices, and thus to each other, not because of means-ends linkages but because of their temporal proximity. The logic of ordering is temporal rather than hierarchical and consequential.”(March, 1991: 109) • In summary • “Decisions in organizations involve an ecology of actors trying to act rationally with limited knowledge and preference coherence; trying to discover and execute proper behavior in ambiguous situations; and trying to discover, construct, and communicate interpretations of a confusing world.”(March, 1991: 111) • In other words, decisions are commonly not made in the orderly, neat and transparent manner as is prescribed in manuals and documents. At times, the behaviourally correct ways to make decisions violates other professional standards or formalized rules.

9. ”Decisionrationality” vs ”Action rationality” • Brunsson (1982): A choicebetween to followprescribeddecisionmakingroutines (Decisionrationality) or to • accomplishobjectives (Action rationality). • “Much of the behaviour in an organization is specified by standard operating procedures, professional standards, cultural norms and institutional structures. The terminology is one of duties and roles rather than anticipatory, consequential choice.” (March, 1991: 105) • The case of decisions in accordance with the Swedish municipality law prohibiting nepotism and opportunistic behaviour. In many ways such regulations inhibits actions and creates a sense of bureaucratic inertia.

10. Legitimizingdecisions: The collection of information • “(1) Much of the information that is gathered and communicated by individuals and organizations has little decision relevance. • (2) Much of the information that is used to justify a decision is collected and interpreted after the decision is made, or substantially made. • (3) Much of the information gathered in response to requests for information is not considered in the making of the decisions for which it was requested. • (4) Regardless of the information available at the time a decision is first considered, more information is requested. (5) Complaints that an organization does not have enough information to make a decision occur while available information is ignored. (6) The relevance of the information provided in the decision-making process to the decision being made is less conspicuous than is the insistence on information, in short, most organizations and individuals often collect information that they use or can reasonably expect to use in the making of decisions. At the same time, they appear to be constantly needing or requesting more information, or complaining about inadequacies in information” (Feldman and March, 1981: 174) - Organizations collect much more information and data than can be cognitively processes; the cost of making decisions increases.

11. Institutional logic • “Institutional logics define the norms, values, and beliefs that structure the cognition of actors in organizations and provide a collective understanding of how strategic interests and decisions are formulated.” (Thornton, 2002: 82) • Shiftinginstitutionallogicsenables new ways for makingdecisions.

12. Three models for political decision-making • “[W]e are assuming [that] governmental behavior can be most satisfactorily understood by analogy with the purposive acts of individuals. In many cases this is a fruitful assumption. Treating national governments as if they were centrally coordinated, purposive individuals provide a useful shorthand for understanding problems of policy. But this simplification—like all simplifications—obscures as well as reveals. In particular, it obscures the persistently neglected fact of bureaucracy: The ‘maker’ of government policy is not one calculating decision maker but is rather a conglomerate of large organizations and political actors”. (Allison, 1971: 3) • “Most analysts explain (and predict) the behavior of national governments in terms of one basic conceptual model, here entitled Rational Actor or ‘Classical’ Model”. (Allison, 1971: 4. The original in italics) • “Two alternative conceptual models, here labeled an Organization Process Model (Model II) and a Governmental (Bureaucratic ) Politics Model (Model III), provide a base for unproved explanations and predictions”. (Allison, 1971: 5. The original in italics)

13. Decision-making in practice (1) • “Organizations absorb uncertainty that results from their interpretations of the environments through decisions . . . Their decision style is most often not that of a reflective analyst. They prefer ‘acting to abstract thinking’ (Isenberg, 1984) and basing their actions on subjective models which contain principles that reflect their experience, they do not consider intuitive decision-making inferior to scientific-rational decision-making.” (Kieser and Leiner, 2009: 521) • “Organizations interpret present states as outcomes of past decision. They base decisions on causality assumptions . . . Since an organization is unable to operate on the basis of knowledge containing many contingencies it has to keep its picture of the world—its assumptions concerning means and ends—simple (which might explain managers’ aversion to scientific knowledge pointing to many contingencies and their preference for consulting knowledge).” (Kieser and Leiner, 2009: 522)

14. In financialtrading (2) • “Traders often said they did a trade because it felt right or felt good . . . Intuitive processes are built up through trial and error experience, independent of any conscious effort to learn. Intuitive judgment is most often contrasted with analytical thinking, and is considered a critical decision tool by bond traders.“ (Abolafia, 2001: 26) • “A feel for the market” important (Abolafia, 2001: 27) • “The first thing traders learn is that numbers tell very little.” (Zaloom, 2003: 261) • “‛Market chatter’ as I call it, is an important device or forming interpretation about market fluctuations.” (Zaloom, 2003: 266) • Financial traders are informational entrepreneurs. • “Traders know that market numbers carry social content that cannot be computed. Searching for the hidden values and phantom figures that lurks behind the numbers is the anchor in a global marketplace where the only certainty is instability.” (Zaloom, 2003: 269)

15. In nursing (3) • “To assume that it is possible to capture all the steps in nursing practice is to assume that nursing is procedural rather than holistic . . . Attempts may be made to model or make explicit all the elements that go into a nursing decision, but experts do not actually make decisions in this elemental, procedural way. They do not build up their conclusions, elements by elements; rather, they grasp the whole. Even when they went into their decisions, essential elements are left out.” (Benner, 1984: 42-43)

16. Learnings from management training programs (4) • “In the beginning of the program, my vision of leadership was secret formula: known to a few, sword-waving, ‘over the top of victory, lads’ out-the-front leaders. I believed that somehow it could all be destilled to a few formulas, heuristics, or algorithms, that one could make the perfect leadership decision for any team in any situation, given sufficient knowledge and expertise.” (leadership training program participant, cited in Carroll and Levy, 2010: 223)

17. In politicalprocesses (5) • “Rule-based calculation” in political decision processes: the case of the US Homeland Secturity Department • “Through their apparent scientific rigor and universal applicability, these decision tools potentially provide a form of objectivity that will be resilient against external critique . . . These decision instruments share the characteristics of quantifying diverse entities, in order to make them comparable and thus to make decisions ‛calculable.’”(Lakoff and Klinenberg, 2010: 507) • The Department of Homeland Security allocated $61 per person to Wyomming but only $14 per person to California. Densely populated states such as New York and New Jersey received less than North Dakota and Montana. (Lakoff and Klinenberg, 2010: 508) • Democratic senators arguedtheywerebeingpunished by the Republican Administration; still ” • “There were no impersonal means to adjudicate such a dispute: without agreed-upon standards of measurement, it was impossible to compare the relative level of threat and vulnerability of various cities and regions, and so there was no definitive way to determine whether homeland security funds were being allocated objectively, that is, independent of ‛political’ considerations.” (Lakoff and Klinenberg, 2010: 512. Emphasis added) • Behaviour (politics) is not separated from ”rationality” • “From this case, we can see that in contemporary struggles over security resources, the distinction between ‛rationality’ and ‛politics’ does not exists a priori, but rather is defined in the concrete political and technical struggle over the creation of a decision tool.” (Lakoff and Klinenberg, 2010: 523)

18. In summary • Decision-making are key processes in organizations. Managerial work is the work to particpate in ongoingdecision-making. • Ratherthanbeinginherentlyrational and linearprocedures, they are anchored in situatedpractices, cultures, traditions, and cognitive limitations. • Organizationsstruggle to maintain that they make decisions ”rationally” (e.g., decisionrationality) at the expense of theireffectiveness (e.g., the collection of excessive information makinglittledifference).

19. References • Allison, Graham T., (1971) Essence of decision : Explaining the Cuban missile crises, New York: Harper Collins. • Benner, Patricia, (1984), From novice to expert: Excellence and power in clinical nursing practice, San Francisco:Addison-Wesley. • Abolafia, Michael, (2001), Making markets Opportunism and restraints on Wall Street, Cambridge: Harvard University Press. • Carroll, Brigid & Levy, Lester (2010), Leadership development as identity construction, Management Communication Quarterly, 24(2): 211-231. • Carruthers, Bruce & Espeland, Wendy, (1991), Accounting for rationality; Double-entry book-keeping and the rhetoric of economic rationality, American Journal of Sociology, 97(1): 31-69. • Drucker, Peter F., (1955), The practice of management, Melbourne, London & Toronto: Heineman. • Feldman, Martha S., & March, James G., (1981), Information in organizations as signal and symbol, Administrative Science Quarterly, 26: 171-186. • Kieser, Alfred and Leiner, Lars (2009), Why the rigour-relevance gap in managemetn research is unbridgeable, Journal of Management Studies, 46(3): 516-533. • Luhmann, Niklas, (2003) Organization, inBakken, Tore & Hernes, Tor, Eds., (2003), Autopoetic organization theory: Drawing on Niklas Luhmann’s social systems perspective; Oslo: Abstrakt; Malmö: Liber; Copenhagen: Copenhagen Business School Press. • March, J.G., (1994), A Primer on Decision Making, Free Press, New York. • Lakoff, Andrew and Klinenberg, Eric, (2010), of risk and pork;: urban secutiryasndf the politics of objectivity, Theory and Society, 39: 502-525. • Powell, Walter W., (1985), Getting into print: The decision process in schalarly publishing, Chicago & London: The University of Chicago Press. • Simon, H.A., ([1947] 1976), Administrative behavior, 3rd. ed., Free Press, New York. • Simon, H.A., (1957), Models of Man, Wiley, New York. • Thornton, Patricia H., (2002), The rise of the corporation in a craft industry: Conflict and conformity in institutional logics, Academy of Management Journal, 45: 81-101.