Chapter 12 – Individual and Group Decision Making
12-1
CHAPTER TWELVE: Individual and Group Decision Making
LEARNING OJBECTIVES
See Slides 12-2, 12-3
When you finish studying the material in this chapter, you should be able to:
• Compare and contrast the rational model of decision making, Simon’s normative
model, and the garbage can model.
• Discuss eight decision-making biases.
• Discuss the thrust of evidence-based decision making and its implementation
principles.
• Explain the model of decision-making styles.
• Explain the model of intuition and the ethical decision tree.
• Summarize the pros and cons of involving groups in the decision-making
process.
• Contrast brainstorming, the nominal group technique, the Delphi technique, and
computer-aided decision making.
• Describe the stages of the creative process.
• Discuss the practical recommendations for increasing creativity.
CHAPTER SUMMARY
Chapter 12 defines decision making and focuses on ways managers can make better
decisions. The rational model of decision making is described and contrasted with
nonrational models, including Simon’s normative model and the garbage can model.
Judgmental heuristics are described and the eight biases that can affect decision
making are explained. Figure 12-2 presents a model of evidence-based decision
making (EBDM) and seven implementation principles for using EBDM are presented.
Dynamics of decision making are described, including decision-making styles, intuition,
and a decision tree for making ethical decisions. This chapter discusses the
advantages and disadvantages of group decision making and group problem-solving
techniques. Finally, creativity is defined, the five stages of the creative process
explained, and practical recommendations for fostering creativity are provided.
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Decision making involves identifying and choosing alternative solutions that lead to a
desired state of affairs. Three models of decision making are the rational model,
Simon’s normative model, and the garbage can model. The rational model assumes
managers use a rational, four-step sequence: identifying the problem, generating
alternative solutions, evaluating and selecting a solution, and implementing and
evaluating the solution. The rational model assumes that managers optimize (produce
the best possible solution) when they make decisions. The rational model of decision
making attempts to explain how decisions should be made, while nonrational models,
including the normative model and the garbage can model, attempt to explain how
decisions are actually made.
The normative model is based on the assumption of bounded rationality—the idea that
decision makers are restricted by a variety of constraints. According to the normative
model, decision making is characterized by the tendency to acquire manageable rather
than optimal amounts of information and contends that decision makers will satisfice.
Satisficing consists of choosing a solution that meets a minimum qualification or is
“good enough” rather than searching for the one optimal solution. The garbage can
model is based on the assumption that decision making is sloppy and haphazard.
Decisions result from an interaction between four independent streams of events:
problems, solutions, participants, and choice opportunities. Consultants David
Snowden and Mary Boone developed their own approach to decision making that
combines elements of rational and nonrational models. With this approach, they
describe simple, complicated, complex and chaotic decision environments and identify
an effective method of decision making for each decision environment.
Decision making is prone to biases when people rely on judgmental heuristics—
shortcuts that people use to reduce information-processing demands. Heuristics can
help decision makers reduce the uncertainty in the decision-making process, but they
can lead to systematic errors that erode the quality of decisions. Eight decision-making
biases are discussed in this chapter: availability heuristic, representativeness heuristic,
confirmation bias, anchoring bias, overconfidence bias, hindsight bias, framing bias, and
escalation of commitment bias. The availability heuristic occurs when decisions are
based on readily available data. The representativeness heuristic is the tendency to
assess the likelihood of an event occurring based on one’s impressions about similar
occurrences. With the confirmation bias, we seek information that confirms our
expectations and discount information that does not. With the anchoring bias, our
estimates are biased by relevant or irrelevant anchors. The overconfidence bias
represents a tendency to overestimate our accuracy. The hindsight bias occurs when
knowledge of an outcome influences our belief about the probability that we could have
predicted the outcome earlier. The way information is presented impacts how it is
perceived with framing effects. Finally, escalation of commitment bias occurs when we
continue to irrationally invest in an ineffective course of action due to sunk costs.
Chapter 12 – Individual and Group Decision Making
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Evidence-based decision making (EBDM) is a process of conscientiously using the best
available data and evidence when making managerial decisions. Figure 12-2 illustrates
a five-step model of EBDM. Step 1 is to identify the problem or opportunity. Step 2 is to
gather internal data about problem while Step 3 is to gather external data. In Step 4,
this information is integrated with views from stakeholders and ethical implications are
considered. Finally in Step 5, the information is integrated and critically appraised to
make a final decision. This process helps ensure managers use relevant and reliable
data from different sources and avoid their personal biases when making decisions.
Jeffrey Pfeffer and Robert Sutton offer implementation principles to help companies
integrate EBDM into an organization’s culture, including the need to treat the
organization as an unfinished prototype and the need to see the organization as
outsiders do, but there are reasons why it is challenging to use EBDM, including the fact
there may be too much evidence or not enough good evidence.
Decision-making styles reflect the combination of how an individual perceives and
comprehends stimuli and the general manner in which he or she chooses to respond to
such information. The model of decision-making styles presented in Figure 12-3 is
based on the idea that styles vary along two different dimensions: value orientation and
tolerance for ambiguity. When these two dimensions are combined, they form four
styles of decision making: directive, analytical, conceptual, and behavioral. Each style
is associated with its own set of advantages and disadvantages. Knowledge of these
decision-making styles can help you understand your own strengths and weaknesses
as a decision maker and increase your ability to influence others by being aware of style
differences.
Intuition represents judgments, insights, or decisions that come to mind on their own,
without explicit awareness of the evoking cues and without explicit evaluation of the
validity of these cues. There are two types of intuition: holistic hunches and automated
experiences. There are two sources of intuition: expertise and feelings. Intuition can
speed up the decision process, but it can also lead to judgmental biases.
A decision tree is a graphical representation of the process underlying decision making
and a decision tree can be used as an aid in decision making. The decision tree
presented in Figure 12-5 can help managers to make more ethical decisions. The first
branch in the tree is to decide if the proposed action is legal. If it is, then the decision
maker must consider if it maximizes shareholder value. It is does, the decision maker
must determine if the proposed action is ethical by considering the effect of the decision
on other stakeholders. If a proposed action does not maximize shareholder value, the
decision maker must consider if it would be ethical not to take the action. If costs to
other constituents exceed the cost to the firm’s shareholders, the action should be
taken, but the effect of the action should be disclosed to the shareholders.
In order to maximize the value of group decision making, it is important to create an
environment in which group members feel free to participate and to express their
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opinions. Group decision making is enhanced if there are high levels of minority dissent
and participation in decision making. It is important that group members feel
comfortable disagreeing with other group members and that there is discussion among
the group members. Table 12-1 describes the advantages and disadvantages of group-
aided decision making. Groups contain a greater pool of knowledge, provide varied
perspectives, create greater comprehension of decisions, increase decision
acceptance, and provide a training ground for less experienced employees. Research
supports the notion that group performance is qualitatively and quantitatively superior to
that of the average individual. However, groups are prone to social pressure,
domination by a vocal few and can suffer from groupthink. Politics and goal
displacement can also negatively impact the effectiveness of group decision making.
Group decision-making generally requires that a consensus is reached. Consensus
does not require unanimous agreement because group members may still disagree with
the final decision as long as dissenters feel that their concerns were “heard” and are
willing to work toward its success. Three group problem-solving techniques are
brainstorming, the nominal group technique (NGT), and the Delphi technique. The goal
of the brainstorming technique is to generate a large quantity of ideas and alternatives.
However, it is not appropriate for evaluating alternatives or selecting solutions. The
NGT technique emphasizes both idea generation and solution evaluation. By
separating brainstorming from evaluation and promoting balanced participation among
group members, the NGT reduces the roadblocks to group decision making. The
Delphi technique anonymously generates ideas from physically dispersed experts.
Experts’ ideas are obtained from questionnaires or via the Internet as opposed to face-
to-face group discussions. Finally, computer-aided decision making includes chauffeur-
driven systems and group-electronic meetings. Research indicates that computer-aided
decision making produces greater quality and quantity of ideas than either the
brainstorming or nominal group techniques.
Creativity is the process of using intelligence, imagination, and skill to develop a new or
novel product, object, process, or thought. Creativity involves making remote
associations between unconnected events, ideas, information, or physical objects.
There are five stages of the creative process: preparation, concentration, incubation,
illumination, and verification. Creativity starts from a base of tacit and explicit
knowledge and trying to focus too much on trying to come up with creative solutions can
actually block creativity. Creativity can be enhanced by effectively managing the
creative process and by fostering a positive and supportive work environment.
Managers are encouraged to establish an organizational culture that emphasizes
innovation, to establish innovation goals, and to allocate rewards and resources to
innovative activities.
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LECTURE OUTLINE
I. Models of Decision Making
i) Decision Making Overview
(1) Decision making: identifying and choosing solutions that lead to a
desired end result. See Slide 12-4
ii) The Rational Model See Slides 12-5, 12-6, 12-7, 12-8
(1) Overview of the Rational Model
(a) Rational model: logical four-step approach to decision-making.
(b) Figure 12-1: The Four Stages in Rational Decision Making
identifies the stages in this model of decision making. See Slide
12-5
(c) The rational model assumes managers are completely objective and
possess complete information to make a decision.
(d) The rational model is instructive because it analytically breaks down
the decision-making process and serves as a conceptual anchor for
newer models.
(2) Stage 1: Identify the Problem or Opportunity—Determining the
Actual versus the Desirable
(a) Problem: gap between actual and desired situations.
(b) Opportunity: a situation in which there are possibilities to do things
that lead to results that exceed goals and expectations.
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(c) The goal in Stage 1 is to make improvements that change conditions
from their current state to more desirable ones.
(d) The Real World/Real People: Reed Hastings Seizes Opportunities
to Grow Netflix profiles the actions of one CEO to take advantage of
an opportunity.
(3) Stage 2: Generate Alternative Solutions—Both the Obvious and the
Creative
(a) Managers may struggle during this stage if they rush to judgment,
select readily available ideas or solutions, or make poor allocations of
resources to study alternative solutions.
(b) Decision makers are encouraged to slow down when making
decisions, to evaluate a broader set of alternatives, and to invest in
studying a greater number of potential solutions.
(4) Stage 3: Evaluate Alternatives and Select a Solution—Ethics,
Feasibility, and Effectiveness
(a) Alternatives need to be evaluated not only on costs and quality criteria,
but also on whether or not an alternative is ethical, feasible and if it
would solve the problem.
(5) Stage 4: Implement and Evaluate the Solution Chosen
(a) After a solution is implemented, the evaluation phase is used to assess
its effectiveness.
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(b) If the solution is effective, it should reduce the difference between the
actual and desired states that created the problem.
(c) If the gap is not closed, either the problem was incorrectly identified, or
the solution was inappropriate.
(6) Summarizing the Rational Model See Slide 12-9
(a) The rational model is based on the premise that managers optimize
when they make decisions.
(b) Optimizing: solving problems by producing the best possible solution.
(c) The rational model does not describe how decisions are made by real-
world decision makers.
(d) The benefits of trying to follow a rational process as much as
realistically possible are:
(i) The quality of decisions may be enhanced, in the sense that they
follow more logically from all available knowledge and expertise.
(ii) It makes the reasoning behind a decision transparent and available
to scrutiny.
(iii)If made public, it discourages the decider from acting on suspect
considerations (such as personal advancement or avoiding
bureaucratic embarrassment).
iii) Nonrational Models of Decision Making See Slide 12-10
(1) Overview of the Nonrational Models
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(a) Nonrational models attempt to explain how decisions actually are
made.
(b) They are based on the assumption that decision making is uncertain,
that decision makers do not possess complete information, and that it
is difficult for managers to make optimal decisions.
(2) Simon’s Normative Model See Slides 12-11, 12–12
(a) Bounded rationality: constraints that restrict rational decision making.
(b) This model purports that decision makers are “bounded” or restricted
by a variety of constraints when making decisions.
(c) Decision-making constraints include any personal characteristics or
internal and external resources that reduce rational decision making.
(d) Personal characteristics include the limited capacity of the human
mind, personality and time constraints.
(e) These limitations result in the tendency to acquire manageable rather
than optimal amounts of information and therefore people satisfice
when making decisions.
(f) Satisficing: choosing a solution that meets that meets a minimum
standard of acceptance.
(3) The Garbage Can Model See Slide 12-13
(a) This model assumes that organizational decision making is a sloppy
and haphazard process and that decision making does not follow an
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orderly series of steps.
(b) Garbage can model: purports that decisions result from a complex
interaction between four independent streams of events: problems,
solutions, participants, and choice opportunities.
(c) This model of decision making thus attempts to explain how problems,
solutions, participants, and choice opportunities interact and lead to a
decision.
(d) The practical implications of the garbage can model: See Slide
12-14
(i) This model of decision making is more pronounced in industries
that rely on science-based innovations such as pharmaceutical
companies.
(ii) Many decisions are made by oversight or by the presence of a
salient opportunity.
(iii)Political motives frequently guide the process by which participants
make decisions.
(iv)Important problems are more likely to be solved than unimportant
ones because they are more salient to organizational participants.
iv) Integrating Rational and Nonrational Models See Slides 12–15, 12–
16
(1) David Snowden and Mary Boone have come up with their own approach
to decision making that is not as haphazard as the garbage can model but
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acknowledges the challenges facing today’s organizations.
(2) They identify four kinds of decision environments and an effective method
of decision making for each.
(a) Simple
(i) A simple context is stable, and clear cause-and-effect relationships
can be discerned, so the best answer can be agreed on.
(ii) The rational model can be used.
(b) Complicated
(i) In a complicated context, there is a clear relationship between
cause and effect, but some people may not see it, and more than
one solution may be effective.
(ii) The rational model applies, but it requires the investigation of
options, along with analysis of them.
(c) Complex
(i) In a complex context, there is one right answer, but there are so
many unknowns that decision makers don’t understand cause–and–
effect relationships.
(ii) Decision makers must look for a creative solution.
(d) Chaotic
(i) In a chaotic context, cause-and-effect relationships are changing so
fast that no pattern emerges.
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(ii) Decision makers have to act first to establish order and then find
areas where it is possible to identify patterns so that aspects of the
problem can be managed.
II. Decision-Making Biases
i) People make a variety of systematic mistakes when making decisions when
using judgmental heuristics.
ii) Judgmental heuristics: rules of thumb or shortcuts that people use to
reduce information-processing demands. See Slide 12-17
iii) We use heuristics without conscious awareness, as they help us reduce the
uncertainty inherent in the decision-making process.
iv) Decision-making biases include: See Slide 12-18
(1) Availability heuristic: tendency to base decisions on information readily
available in memory.
(2) Representativeness heuristic: tendency to assess the likelihood of an
event occurring based on impressions about similar occurrences.
(3) Confirmation bias: the tendency to subconsciously decide something
before investigating why it is the right decision or to seek information that
supports our point of view and to discount information that does not.
(4) Anchoring bias: occurs when decision makers are influenced by the first
information received about a decision, even if it is irrelevant.
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(5) Overconfidence bias: our tendency to be overconfident about estimates
or forecasts.
(6) Hindsight bias: when knowledge of an outcome influences our belief
about the probability that we could have predicted the outcome earlier.
(7) Framing bias: tendency to consider risks about gains differently than
risks pertaining to losses.
(8) Escalation of commitment bias: tendency to stick to an ineffective
course of action when it is unlikely that the bad situation can be reversed.
v) The Real World/Real People: Overconfidence Bias Partly to Blame for
Oil-Rig Disaster profiles the influence of the overconfidence bias in the
decisions that led to the Deepwater Horizon oil rig explosion.
III. Evidence-Based Decision Making
i) Overview of Evidence-Based Decision Making
(1) OB researchers have taken the framework of evidence-based medicine
and applied it to the context of managerial decision making.
(2) Evidence-based decision making (EBDM): a process of conscientiously
using the best available data and evidence when making managerial
decisions. See Slide 12–20
ii) A Model of Evidence-Based Decision Making (EBDM)
(1) Figure 12-2: Evidence-Based Decision-Making Model illustrates a five-
step model of EBDM. See Slide 12-21
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(a) Step 1 is to identify the problem or opportunity while Steps 2 and 3 are
to gather internal and external data about problem.
(b) In Step 4, this information is integrated with views from stakeholders
and ethical implications are considered.
(c) Finally in Step 5, the information is integrated and critically appraised
to make a final decision.
(2) The process shown in Figure 12-2 helps managers to face hard facts and
avoid their personal biases when making decisions.
(3) EBDM’s use of relevant and reliable data from different sources is clearly
intended to make any decision-making context more explicit, critical,
systematic, and fact-based.
(4) Evidence is used in three different ways within the process depicted in
Figure 12–2: evidence is used to make a decision, to inform a decision,
and to support a decision.
(5) Using evidence to support a decision by using the evidence to lend
legitimacy to a decision that has already been made can create external
audience support for an organization’s actions, but it can also stifle
employee involvement if employees feel management will twist evidence
to do whatever it wants.
iii) Seven Implementation Principles See Slides 12–22, 12–23
(1) Treat your organization as an unfinished prototype.
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(a) The Real World/Real People: A Retailer Experiments with
Discount Promotions profiles how one retailer used experiments to
modify its pricing strategy.
(2) No brag, just facts.
(3) See yourself and your organization as outsiders do.
(4) Evidence-based management is not just for senior executives.
(5) Like everything else, you still need to sell it.
(6) If all else fails, slow the spread of bad practice.
(7) The best diagnostic question: what happens when people fail?
iv) Why Is It Hard to be Evidenced Based? See Slide 12–24
(1) There’s too much evidence.
(2) There’s not enough good evidence.
(3) The evidence doesn’t quite apply.
(4) People are trying to mislead you.
(5) You are trying to mislead you.
(6) The side effects outweigh the cure.
(7) Stories are more persuasive.
IV. Dynamics of Decision Making
i) General Decision-Making Styles See Slide 12-25
(1) Decision-Making Styles Overview
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(a) Decision-making style: combination of how an individual perceives
and comprehends stimuli and the general manner in which he or she
chooses to respond to such information.
(b) Decision-making styles vary along two different dimensions: value
orientation and tolerance for ambiguity.
(i) Value orientation reflects the extent to which an individual focuses
on either task and technical concerns or people and social
concerns when making decisions.
(ii) Tolerance for ambiguity represents the extent to which a person
has a high need for structure or control in his or her life.
(c) Figure 12-3: Decision-Making Styles shows the four styles of
decision making when the dimensions of value orientation and
tolerance for ambiguity are combined. See Slide 12-26
(2) Directive
(a) People with this style have low tolerance for ambiguity and are
oriented toward task and technical concerns when making decisions.
(b) People with this style are action oriented and decisive and like to focus
on facts.
(c) These individuals tend to be autocratic, exercise power and control,
and focus on the short run.