PART THREE – SOCIAL AND GROUP PROCESSES IN
ORGANIZATIONS
Chapter Eight – Decision Making and Problem Solving
Chapter Overview
Managers routinely make both tough and easy decisions. Regardless of which decisions are made, though,
it is almost certain that some observers will criticize and others will applaud. Indeed, in the rough-and-
tumble world of business, there are few simple or easy decisions to make. Some managers claim to be
focused on the goal of what is good for the company in the long term and make decisions accordingly.
Others clearly focus on the here and now. Some decisions deal with employees, some with investors, and
others with dollars and cents. But all require careful thought and consideration.
This chapter describes many different perspectives of decision making. We start by examining the nature
of decision making and distinguishing it from problem solving. Next, we describe several different
approaches to understanding the decision-making process. We then identify and discuss related behavioral
aspects of decision making. Next we discuss the major elements of group decision making. Finally, we
discuss creativity, a key ingredient in many effective decisions.
Learning Outcomes
After studying this chapter, students should be able to:
1. Describe the nature of decision making and distinguish it from problem solving
2. Discuss the rational approach to decision making.
3. Identify and discuss the primary behavioral aspects of decision making.
4. Discuss group decision making in organization.
5. Discuss the nature of creativity and relate it to decision making and problem solving.
Real World Challenge: An Ethical Challenge
Summary: The CEO of an aircraft engine repair company learned that an airline has grounded jets
repaired by his company because the turbines no longer worked. The airline claims that the faulty parts
caused the problem. If lenders learn of the accusation, the company’s loans might be pulled at a time
when the company is in the middle of its annual audit.
Real World Challenge: Should the CEO disclose the information and risk the jobs of hundreds of
employees and his own financial stake in the company or should he stay quiet until he has more
information?
Real World Response: The CEO ultimately decided not to disclose the information and signed the audit
papers. Eventually, the FAA found that it was impossible to identify who was at fault for the engine
failures. The company’s name was never publicly disclosed as being a possible factor in the grounding of
the airplanes.
Chapter Outline
I. THE NATURE OF DECISION MAKING
Decision making is choosing one alternative from among several.
Consider a manager seeking a location for a new factory. The manager identifies a set of potential
locations, assesses each in terms of a number of relevant criteria. At this point the manager must
make a decision and select one.
Problem solving, on the other hand, involves finding the answer to a question.
Note that in some situations decision making and problem solving start out alike but may lead down
different paths.
Figure 8.1 shows the basic elements of decision making.
Decisions made in organizations can be classified according to frequency and to information
conditions. In a decision-making context, frequency is how often a particular decision situation
recurs, and information conditions describe how much information is available about the likelihood
of various outcomes.
A. Types of Decisions
The frequency of recurrence determines whether a decision is programmed or nonprogrammed.
A programmed decision recurs often enough for decision rules to be developed.
A decision rule tells decision makers which alternative to choose once they have predetermined
information about the decision situation.
Programmed decisions usually are highly structured; that is, the goals are clear and well known,
the decision-making procedure is already established, and the sources and channels of
information are clearly defined.
When a problem or decision situation has not been encountered before, however, a decision
maker cannot rely on previously established decision rules.
Such a decision is called a nonprogrammed decision, and it requires problem solving.
Problem solving is a special form of decision making in which the issue is unique—it often
requires developing and evaluating alternatives without the aid of a decision rule.
Nonprogrammed decisions are poorly structured because information is ambiguous, there is no
clear procedure for making the decision, and the goals are often vague. One key element of
nonprogrammed decisions is that they require good judgment on the part of leaders and
decision makers.
Table 8.1 summarizes the characteristics of programmed and nonprogrammed decisions.
Programmed decisions, then, can be made according to previously tested rules and procedures.
Nonprogrammed decisions generally require that the decision maker exercise judgment and
creativity.
In other words, all problems require a decision, but not all decisions require problem solving.
B. Decision-Making Conditions
The range of available information can be considered as a continuum whose endpoints
represent complete certainty and complete uncertainty.
Points between the two extremes create risk—the decision maker has some information about
the possible outcomes and may be able to estimate the probability of their occurrence.
Different information conditions present different challenges to the decision maker.
For simplicity, assume there are only two alternatives. Under a condition of certainty, the
manager knows the outcomes of each alternative.
Under a condition of risk, the decision maker cannot know with certainty what the outcome of
a given action will be but has enough information to estimate the probabilities of various
outcomes.
The decision maker who lacks enough information to estimate the probability of outcomes (or
perhaps even to identify the outcomes at all) faces a condition of uncertainty.
Under such circumstances, the decision maker may wait for more information to reduce
uncertainty or rely on judgment, experience, and intuition to make the decision.
Several approaches to decision making offer insights into the process by which managers arrive
at their decisions.
The rational approach is appealing because of its logic and economy. The behavioral approach,
meanwhile, attempts to account for the limits on rationality in decision making. Of course, as
we will see, many managers combine rationality with behavioral processes when making
decisions.
II. THE RATIONAL APPROACH TO DECISION MAKING
The rational decision-making approach assumes that managers follow a systematic, step-by-step
process.
It further assumes that the organization is dedicated to making logical choices and doing what
makes the most sense economically and that it is managed by decision makers who are entirely
objective and have complete information.
A. Steps in Rational Decision Making
Figure 8.3 identifies the steps of the process, starting with stating a goal and running logically
through the process until the best decision is made, implemented, and controlled.
1. State the Situational Goal
The rational decision-making process begins with the statement of a situational goal—that
is, a goal for a particular situation.
2. Identify the Problem
The purpose of problem identification is to gather information that bears on the goal. If
there is a discrepancy between the goal and the actual state, action may be needed.
Reliable information is very important in this step.
Inaccurate information can lead to an unnecessary decision or to no decision when one is
required.
3. Determine the Decision Type
Next, the decision makers must determine whether the problem represents a programmed or
a nonprogrammed decision.
If a programmed decision is needed, the appropriate decision rule is invoked, and the
process moves on to the choice among alternatives.
Choosing the wrong decision rule or assuming the problem calls for a programmed decision
when a nonprogrammed decision actually is required can result in poor decisions.
If the situation is wrongly diagnosed, the decision maker wastes time and resources seeking
a new solution to an old problem, or “reinventing the wheel.”
4. Generate Alternatives
The next step in making a nonprogrammed decision is to generate alternatives.
The rational process assumes that decision makers will generate all the possible alternative
solutions to the problem. However, this assumption is unrealistic because even simple
business problems can have scores of possible solutions.
5. Evaluate Alternatives
Evaluation involves assessing all possible alternatives in terms of predetermined decision
criteria.
The evaluation process usually includes (1) describing the anticipated outcomes (benefits)
of each alternative, (2) evaluating the anticipated costs of each alternative, and (3)
estimating the uncertainties and risks associated with each alternative.
6. Choose an Alternative
Choosing an alternative is usually the most crucial step in the decision-making process.
Choosing consists of selecting the alternative with the highest possible payoff, based on the
benefits, costs, risks, and uncertainties of all alternatives.
Even with the rational approach, however, difficulties can arise in choosing an alternative.
First, when two or more alternatives have equal payoffs, the decision maker must obtain
more information or use some other criterion to make the choice.
Second, when no single alternative will accomplish the objective, some combination of two
or three alternatives may have to be implemented.
Finally, if no alternative or combination of alternatives will solve the problem, the decision
maker must obtain more information, generate more alternatives, or change the goals.
An important part of the choice phase is the consideration of contingency plans—
alternative actions that can be taken if the primary course of action is unexpectedly
disrupted or rendered inappropriate.
In developing contingency plans, the decision maker usually asks such questions as “What
if something unexpected happens during the implementation of this alternative?”
7. Implement the Plan
Implementation puts the decision into action. To succeed, implementation requires the
proper use of resources and good management skills.
Sometimes the decision maker begins to doubt a choice already made. This doubt is called
post-decision dissonance, a form of cognitive dissonance.
To reduce the tension created by the dissonance, the decision maker may seek to rationalize
the decision further with new information.
8. Control: Measure and Adjust
In the final stage of the rational decision-making process, the outcomes of the decision are
measured and compared with the desired goal. If a discrepancy remains, the decision maker
may restart the decision-making process by setting a new goal (or reiterating the existing
one).
Changes can be made in any part of the process, as Figure 8.3 illustrates by the arrows
leading from the control step to each of the other steps.
Decision making therefore is a dynamic, self-correcting, and ongoing process in
organizations.
9. Strengths and Weaknesses of the Rational Approach
The rational approach has several strengths. But the rigid assumptions of this approach
often are unrealistic.
The amount of information available to managers usually is limited by either time or cost
constraints, and most decision makers have limited ability to process information about the
alternatives.
In addition, not all alternatives lend themselves to quantification in terms that will allow for
easy comparison.
Finally, because they cannot predict the future, it is unlikely that decision makers will know
all possible outcomes of each alternative.
B. Evidence-Based Decision Making
Evidence-based management (EBM) is defined as the commitment to identify and utilize the
best theory and data available to make decisions.
Advocates of this approach encourage the use of five basic “principles”:
a. Face the hard facts and build a culture in which people are encouraged to tell the truth,
even if it is unpleasant.
b. Be committed to “fact-based” decision making – which means being committed to
getting the best evidence and using it to guide actions.
c. Treat your organization as an unfinished prototype – encourage experimentation and
learning by doing.
d. Look for the risks and drawbacks in what people recommend (even the best medicine
has side effects).
e. Avoid basing decisions on untested but strongly held beliefs, what you have done in the
past, or uncritical “benchmarking” of what winners do.
EBM advocates are particularly persuasive when they use EBM to question the outcomes of
decisions based on “untested but strongly held beliefs” or on “uncritical ‘benchmarking.’”
III. THE BEHAVIORAL APPROACH TO DECISION MAKING
Whereas the rational approach assumes that managers operate logically and rationally, the
behavioral approach acknowledges the role and importance of human behavior in the decision-
making process.
Herbert A. Simon was one of the first experts to recognize that decisions are not always made with
rationality and logic.
Rather than prescribing how decisions should be made, his view of decision making, now called the
administrative model, describes how decisions often actually are made. (Note that Simon was not
advocating that managers use the administrative model but was instead describing how managers
actually make decisions.)
A. The Administrative Model
One crucial assumption of the administrative model is that decision makers operate with
bounded rationality rather than with the perfect rationality assumed by the rational approach.
Bounded rationality is the idea that although individuals may seek the best solution to a
problem, the demands of processing all the information bearing on the problem, generating all
possible solutions, and choosing the single best solution are beyond the capabilities of most
decision makers.
Thus, they accept less-than-ideal solutions based on a process that is neither exhaustive nor
entirely rational. Decision makers operating with bounded rationality limit the inputs to the
decision-making process and base decisions on judgment and personal biases as well as on
logic.
The administrative model is characterized by (1) the use of procedures and rules of thumb, (2)
suboptimizing, and (3) satisficing.
Uncertainty in decision making can initially be reduced by relying on procedures and rules of
thumb.
Suboptimizing is knowingly accepting less than the best possible outcome. Frequently, given
organizational constraints, it is not feasible to make the ideal decision in a real-world situation.
The decision maker often must suboptimize to avoid unintended negative effects on other
departments, product lines, or decisions.
The final feature of the behavioral approach is satisficing: examining alternatives only until a
solution that meets minimal requirements is found and then ceasing to look for a better one.
B. Other Behavioral Forces in Decision Making
These include political forces, intuition, escalation of commitment, risk propensity, and ethics.
Prospect theory is also relevant.
1. Political Forces in Decision Making
Political forces can play a major role in how decisions are made. We cover political
behavior in Chapter 13, but one major element of politics, coalitions, is especially relevant
to decision making.
A coalition is an informal alliance of individuals or groups formed to achieve a common
goal. This common goal is often a preferred decision alternative.
The impact of coalitions can be either positive or negative. They can help astute managers
get the organization on a path toward effectiveness and profitability, or they can strangle
well-conceived strategies and decisions.
Managers must recognize when to use coalitions, how to assess whether coalitions are
acting in the best interests of the organization, and how to constrain their dysfunctional
effects.
2. Intuition
Intuition is an innate belief about something without conscious consideration. This feeling
is usually not arbitrary. Rather, it is based on years of experience and practice in making
decisions in similar situations.
Of course, all managers, but most especially inexperienced ones, should be careful not to
rely on intuition too heavily. If rationality and logic are continually flouted for what “feels
right,” the odds are that disaster will strike one day.
3. Escalation of Commitment
Another important behavioral process that influences decision making is escalation of
commitment to a chosen course of action (sometimes called the sunk cost fallacy).
In particular, decision makers sometimes make decisions and then become so committed to
the course of action suggested by that decision that they stay with it or even increase their
investment in it, even when it appears to have been wrong.
Thus, decision makers must walk a fine line. On the one hand, they must guard against
sticking with an incorrect decision too long. To do so can bring about financial decline. On
the other hand, managers should not bail out of a seemingly incorrect decision too soon.
4. Risk Propensity and Decision Making
The behavioral element of risk propensity is the extent to which a decision maker is willing
to gamble when making a decision.
Some managers are cautious about every decision they make. They try to adhere to the
rational model and are extremely conservative in what they do.
Other managers are extremely aggressive in making decisions and are willing to take risks.
They rely heavily on intuition, reach decisions quickly, and often risk big investments on
their decisions.
The organization’s culture is a prime ingredient in fostering different levels of risk
propensity.
5. Ethics and Decision Making
Ethics are a person’s beliefs about what constitutes right and wrong behavior.
Ethical behavior is that which conforms to generally accepted social norms; unethical
behavior does not conform to generally accepted social norms.
In general, ethical dilemmas for managers may center on direct personal gain, indirect
personal gain, or simple personal preferences.
Managers should carefully and deliberately consider the ethical context of every one of
their decisions. The goal, of course, is for the manager to make the decision that is in the
best interest of the firm, as opposed to the best interest of the manager. Doing this requires
personal honesty and integrity.
6. Prospect Theory and Decision Making
Finally, prospect theory also offers useful insights into how people make decisions.
Essentially, prospect theory focuses on decisions under a condition of risk. The theory
argues that such decisions are influenced more by the potential value of gains or losses than
the final outcome itself. The theory further argues that, all else being equal, people are
more motivated to avoid losses than they are to seek gains.
Stated another way, people may be more motivated by the threat of losing something they
have than they are by the prospect of gaining something they do not have.