How do people make decisions? - Chapter 15

This chapter shows how people make decisions. First of all, the different types of decisions and the decision-making process are discussed. Next, 'biases' and problems in decision making are explained. Furthermore, the advantages and disadvantages of involving a group in the decision-making process and the techniques that a group can use in decision-making are explored. Finally, it discusses how a company can encourage learning in an organization to maintain and improve the quality of its decision-making.

What is decision-making?

Decision making is the process whereby members of an organization choose a specific course of action to respond to the possibilities and the problems.

Decisions in response to opportunities occur when members of an organization make choices that benefit them. An individual, group or organization can only achieve their full potential if they use every possibility to increase their effectiveness and efficiency.

Decision-making in response to problems occurs when an individual, group, organizational goals or performance are threatened.

In response to possibilities and problems, there are two types of decisions that can be made: unprogrammed decisions and programmed decisions:

• Unprogrammed decisions are made when members of an organization respond to new problems or opportunities. The members look for additional information to make the right choice.

• Programmed decisions are made in response to problems and opportunities that keep returning. A programmed decision is made using a Performance Program, a standardized sequence of actions to be followed automatically by members when encountering a specific problem or opportunity.

• Performance programs usually follow unprogrammed decisions. If a problem or possibility occurs more frequently, a programmed decision is required and a performance program is created.

Ethical decision making

A criterion of a satisfactory decision is that it is ethical. Ethical decisions promote well-being and do not cause harm to members of an organization or other people. However, it is often difficult to determine the boundary between ethical and unethical decisions. Some people make unethical decisions to improve themselves in the organization, but even people who strive for ethical decisions often suffer from ethical dilemmas.

For these dilemmas, a company can hire an ethics official who is responsible for developing ethical standards for decision making.

The official is also responsible for listening to employee complaining about unethical behavior, training employees to make ethical decisions, and preventing managers from making further unethical decisions.

How does the decision-making process work?

Two models of decision-making studied are the classical decision-making model and the administrative decision-making model of James March and Herbert Simon.

Classical decision-making model

The classical decision-making model is a prescriptive model: it describes how people should make a decision. The model is based on two assumptions:

1. People have access to all the information they need.

2. People make a decision by choosing the best solution for a problem or best reaction to an opportunity.

According to the classic model, one chooses a reaction to a problem or possibility by following four steps:

1. Make a list of all the alternative choices. These are the different reactions to problems or possibilities.

2. Make a list of all consequences for every possibility/problem. This is what happens when a reaction is chosen.

3. To arrange your own preferences for alternatives and consequences.

4. Selecting an alternative that leads to the best consequences.

However, this model is unrealistic. The assumption that one has all the information to make optimal decisions usually does not occur in organizations. Compared with how decisions are made in organizations, the first step does not correspond, because organizations often do not know all the alternatives. The second step does not match because people often do not know all of the consequences. The biggest problem with decision making is that often you do not know all the consequences of an alternative. The third step does not match because one is not always sure what he/she wants.

Due to the problems with these first three steps in the classical model, it is often not possible for members of an organization to make the best decisions. If they make a good decision, it is often not worth it the time or the costs.

Administrative decision-making model

The administrative decision-making model of March and Simon is descriptive: it explains how people actually make decisions in organizations. March and Simon emphasize that incomplete information and the cognitive skills and psychological state of members influence the decision-making process. In addition, members of an organization often make satisfactory decisions, instead of optimal ones.

According to the administrative model, one chooses a response to a problem or opportunity based on a simplified and rough idea of the situation which is the definition of the problem or opportunity of the decision maker. Decision makers can follow the steps of the classical model, but the information they use is based on their definition of the situation, which is the result of personal and situational factors.

Personal factors include the personality, skills, perceptions, experiences, and knowledge of the decision makers. Situational factors include the group, organization and the organizational and national culture that the decision maker is part of. Instead of making optimal decisions, members of an organization often engage in satisfying: they seek and choose acceptable reactions that are not necessarily the best responses.

March and Simon also recognize the limitations of decision-makers, in contrast to the classic model. Decision-makers are limited by limited rationality: the skill of reasoning that is limited by the limitations of the man himself. It is often impossible for decision-makers to simultaneously consider all the information that is relevant to a decision and at the same time use this information to make an optimal choice.

These limitations make it easier to understand why good and bad decisions are made and how decision-making can be improved. Good decisions are often made because decision-makers can identify the most important aspects. Bad decisions can be made by misjudging the situation. Decision makers need to consider how their personal preferences affect the way they see the possibilities and problems of their decisions or the potential effects of their decisions.

What are 'biases' and problems in decision-making?

Two major sources of errors in decision-making are first of all rules of thumb/shortcuts. These are practical but inaccurate rules, which people use to make decisions. Secondly, the human tendency to invest even more in bad decisions (escalation of commitment).

Rules of thumb/shortcuts

Heuristics are rules of thumb that people use to make decisions easier. People sometimes use them without being aware of it. They make matters easier and they can help in the decision-making process but they can also lead to biases: systematic errors in decision-making. Three common heuristics are availability heuristics, representative heuristics, and anchoring and adjustment heuristics.

• The availability heuristic results in thinking of an event that is easily remembered and which has occurred more often than an event that is less easily remembered. The availability heuristic can help decision making because events that occur more often are also easier to remember. Other factors may also determine availability. One such factor is the overestimation of the frequency of a lively or extreme event. Another is the overestimation of the frequency of new events.

• The representative heuristic states that similar events that took place in the past will predict the likelihood of an upcoming event. This heuristic can sometimes be a good rule of thumb because a similar event in the past is sometimes a good predictor of an event that has yet to come. However, this heuristic can also lead to ignoring important information about how often these types of events occur. A 'bias' that occurs in the representative heuristics is not taking into account the base rate. That is the actual frequency in which these events occur.

• The anchoring and adjustment heuristic reflects the tendency to make decisions based on adjustments of the initial amount. If the initial amount is reasonable, the anchored and adjusted heuristic is a good shortcut. If the initial amount is not reasonable, this leads to a bias in the decision-making process.

Escalation of commitment

The second source of errors in the decision-making process is the escalation of commitment, the tendency of decision-makers to invest more time, money or effort into something that turned out to be a bad decision. There are at least 3 reasons why this escalation occurs:

• Decision makers often do not want to admit to themselves that they have made a mistake.

• Given the scale of the money or resources that have already been lost, decision-makers believe that additional use of resources is right to compensate these losses. The costs that have already been incurred, however, are sunk costs: costs that can not be recovered.

• Decision makers take more risks if they see decisions in negative terms (for example as a way to recover money that is lost) than in positive ones (for example, to earn more money). Decision makers often use heuristics without noticing that they are doing so and escalation of commitment is also common when decision makers do not realize that they invest too much (or unnecessary) time, money and effort into a bad decision. Using IT can often help to reduce the effects of these biases and heuristics. IT systems contain a lot of information that managers can use to make decisions. For example, software programs can also produce graphs and tables, giving information more meaning. Also because IT can bind different managers to each other, it is less likely that mistakes are made. An enterprising resource planning (ERP) system is an intranet throughout the organization that allows the organization to bind and coordinate functional activities.

What are the advantages and disadvantages of group decision-making?

Groups make decisions more often in an organization than individuals. Group decision-making has advantages and disadvantages and other consequences.

Pros and cons

The benefits of group decision-making include the availability and diversity of members' skills, knowledge, and expertise. There is also an increased memory for facts, greater availability to correct errors, and a larger decision acceptance:

• Availability and diversity of skills, knowledge, and expertise of the members. If a decision requires skills, knowledge, and expertise, then group decisions have a clear advantage on an individual decision. The diversity of a group makes for thinking about different points of view. However, they can also pose a problem: various groups can often get along with each other less well. Many organizations therefore also have diversity training sessions in which members of an organization learn to understand each other.

• Increased memory for facts. Because a group can rely on the memory of all members, the problem of something being forgotten is reduced.

• Ability to recognize errors. If a group makes a decision, errors in that decision can be recognized and corrected by members of the group.

• Greater decision acceptance. The likelihood that employees will accept a decision is greater if they themselves have participated in the decision-making process.

Disadvantages of the use of groups in the decision-making process are the time it takes to make a decision and the potential for groupthink.

• Time to make a decision. For decisions with certain criteria, it takes less time for an individual to make a decision than a group and it often results in an equally good decision. Organizations must, therefore, use an individual instead of a group in the decision-making process if:

• An individual possesses all the skills necessary for making a good decision.

• An individual can gather all the information and think about it to come to a good decision.

• The acceptance of the decision of other members of the organization is not necessary or is likely to happen, whether or not they participate in the decision-making process.

• The potential for groupthink. Groupthink is a pattern of incorrect decision making that occurs in cohesive groups where members strive for agreement at the expense of accurately assessing whether the information is relevant to the decision. The unanimous support for a decision is often based on the exaggerated belief of the group members in the skills and moral status of the group. Even if the members have doubts about a decision, they often do not show it. A group leader can prevent groupthink by:

  • The group leader encouraging all group members to critically assess the alternatives, to express all doubts they have, and to accept criticism of their own ideas.

  • The group leader giving no opinion until the group members have discussed all alternatives and have formed an opinion themselves.

  • The group leader encouraging all group members to gather information that is relevant to the decision of people outside the group.

  • The group leader appointing one or two members to play the role of the 'devil's advocate'. This is a person who provides criticism and raises potential problems with every decision the group makes so that it can be determined whether this is really a problem for the decision.

• If an important decision has been made, a second meeting will be held. The second meeting can then be used to discuss doubts that have arisen in the time between the first and second meeting.

Other consequences

Three other consequences of group decision-making cannot be classified as advantages or disadvantages: diffusion of responsibility, group polarization, and the potential for conflict.

• Diffusion of responsibility. This means that the group as a whole is responsible for the decision instead of an individual. Sometimes when an important decision has to be made, it can be very stressful for an individual to bear all the responsibility. Often people are inclined to make a decision that they know will not come back to haunt them instead of making a decision that is best for the organization. Here the diffusion of responsibility is an advantage of group decision-making. Diffusion of responsibility can also be a disadvantage if group members do not take enough time or effort to make a decision because they are not individually responsible. This is related to 'social loafing'.

• Group polarization. This means that groups make more extreme decisions than individuals. Diffusion of responsibility is one explanation for why this happens. There are two other explanations for this. First, the knowledge that other members of the group have the same ideas leads to greater conviction of their position. Second, when members discuss the alternatives, some members of a group come up with convincing arguments for the favored alternative. This results in more confidence in a chosen alternative and thus the decision becomes more extreme.

• Potential for conflict. Groups differ in skills, knowledge, and expertise and these differences can lead to conflict if members opt for other alternatives. These conflicts can be an advantage if it leads to every alternative being carefully evaluated. It can also be a disadvantage if members become more interested in winning the fight than making a good decision.

The phenomenon of groupthink in decision-making mainly occurs in crisis situations when accurate information about events is missing and much is unclear. In groups where groupthink dominates, great pressure is exerted on unanimity. As a result, controversial opinions are not expressed and no questions are asked in the case of weak arguments and they avoid calling a halt to silly thinking. The top decision-makers prefer to share responsibility in crisis situations. It would be much better if techniques were applied in crisis situations like the 'devil's advocate', which criticizes the crisis plan. This can bring weaknesses to light and make better decisions.

Which techniques can be used in group decision-making?

There are various other techniques that ensure that groups make good decisions and avoid the drawbacks of group decisions. Three techniques are discussed here: brainstorming, the nominal group technique, and the Delphi technique.

Brainstorming

Brainstorming is a spontaneous, participatory, decision-making technique that groups use to produce many alternatives before a decision is made. A typical brainstorming process is according to 4 steps:

1. A member of a group describes the problem or the possibility.

2. Group members share their ideas with the rest of the group without critical evaluation.

3. Group members come up with more ideas and build on suggestions from each other.

4. A member of the group writes down all the ideas.

Yet research shows that individuals produce more ideas separately than in a brainstorming group. This is because although no criticism may be made, members of a group do not dare to express all ideas. In addition, production blockage occurs. Group members can not focus all their attention on producing ideas, because they also have to listen to ideas from others. As a result, members sometimes forget about ideas they had and because only one person can talk at a time, the number of ideas that are presented is limited. Electronic brainstorming can be a solution for a number of these problems.

Nominal group technique

The nominal group technique (NGT) can also be used to prevent production blockage and is a good way for groups to make a decision quickly.

A group member describes the problem or the possibility and all group members then get a certain time to write down all the ideas. This prevents production blockade and encourages group members to write down all ideas, no matter how bizarre they may sound. Then all ideas are discussed and each member makes a list of the most preferred ideas. This technique is useful when a decision needs to be made quickly. The technique is not useful if a decision requires a lot of information or if it is necessary that all, or most members agree with the decision.

Delphi technique

The Delphi technique is used when members never meet each other in real life.

A leader describes a problem to different experts and asks them to help them by completing a questionnaire and returning it. Then the leader summarizes all the ideas of the experts and sends them back with questions and this continues until there is an agreement between the experts about the right decision. This technique is useful because you can gather members around the world without having to meet each other. The disadvantages are that it takes a lot of time and the members can not interact with each other. All experts must also cooperate and take the time to answer all questions.

Total quality management

Total quality management (TQM) is a philosophy and a series of applications to improve the quality of the organization's goods and services and the efficiency with which they are produced.

Total quality management has two group decision-making techniques: comparative research ('benchmarking') and empowerment.

• Comparative research or benchmarking is selecting a high-performing group or organization that delivers goods or services to customers and then uses this group or organization as a model.

• Empowerment is the process of giving employees the authority to make decisions and be responsible for the outcomes.

What is organizational learning and what is the purpose of this?

Organizational learning is the process in which managers try to find ways to improve employee decision-making skills in order to increase the effectiveness and efficiency of an organization.

James March has devised two types of organizational learning strategies that can be applied to improve employee decision-making: exploration and exploitation.

• Exploration involves searching and experimenting with new types of forms of organizational behaviors and procedures to increase effectiveness.

• Exploitation includes finding ways to refine and improve existing organizational behaviors and procedures to increase effectiveness.

A learning organization is an organization that deliberately takes steps to let the learning processes of exploration and exploitation take place, by improving and maximizing the possibilities for this.

To create a learning organization, managers must encourage organizational learning at individual and group level. Principles for creating a learning organization have been developed by Peter Senge.

• Every person must develop a sense of personal mastery. This means that an organization must empower individuals to experiment and create and explore what they want.

• Part of developing personal mastery, and to give employees a clearer understanding of what's going on in a particular activity, organizations need to encourage employees to develop complex mental models that challenge them to find better or new ways to do a task. A learning organization can encourage employees to develop a complex mental model and personal mastery by giving them more responsibility for a decision. Employees can be cross-trained so that they can perform many different tasks, and the knowledge they gain from them can provide insight to improve working procedures. Also, a task that was normally done by different employees can now be done by one employee.

• At a group level, managers can promote organizational learning through the use of many different groups so that members can share their skills to solve a problem. This can also result in group routines that increase group effectiveness. This form of learning in a team is just as important or sometimes even more important than learning at an individual level because many decisions are made in a group.

• A learning organization can also be created by building a shared vision. This means that all members of an organization have the same vision or mental model to find solutions to problems or opportunities, and this binds them to the organization.

• The last principle of organizational learning is thinking systems. This principle emphasizes that in order to create a learning organization, managers must learn to recognize how individuals and groups influence each other.