Chapter Eight
Decision Making and Problem Solving
Chapter Overview …………………………………………………….. Error! Bookmark not defined.
Learning Outcomes …………………………………………………………………………………………. 1
Real-World Challenge: An Ethical Challenge ……………………………………………………. 2
Video Exercise ………………………………………………………………………………………………. 18
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.
Learning Outcomes
After studying this chapter, students should be able to:
1. Describe the nature of decision making and distinguish it from 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
Chapter Outline
I. THE NATURE OF DECISION MAKING
Decision making is choosing one alternative from among several.
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.
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.
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.
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.
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
2. Identify the Problem
The purpose of problem identification is to gather information that bears on the goal. If
3. Determine the Decision Type
Next, the decision makers must determine whether the problem represents a programmed or
a nonprogrammed decision.
4. Generate Alternatives
The next step in making a nonprogrammed decision is to generate alternatives.
5. Evaluate Alternatives
Evaluation involves assessing all possible alternatives in terms of predetermined decision
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.
7. Implement the Plan
Implementation puts the decision into action. To succeed, implementation requires the
proper use of resources and good management skills.
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
9. Strengths and Weaknesses of the Rational Approach
The rational approach has several strengths. But the rigid assumptions of this approach
often are unrealistic.
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.
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.
A. The Administrative Model
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.
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
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
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).
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.
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.
6. Prospect Theory and Decision Making
Finally, prospect theory also offers useful insights into how people make decisions.
Global Issues: Culture and Nationality Influences on Ethical Awareness
Summary: Research has found that both culture and nationality influence the recognition of ethical
issues. One study found that Taiwanese sales agents perceived ethical issues associated with their
companies’ or competitors’ agents while U.S. sales agents perceived ethical issues with their colleagues.
A study comparing the ethical awareness of Australians and Americans showed that Americans were
more likely than the Australians to identify an ethical problem in scenarios involving the withholding of
information and the misleading of an appraiser.
C. An Integrated Approach to Decision Making
Because of the unrealistic demands of the rational approach and the limited, short-term
orientation of the behavioral approach, neither is entirely satisfactory.
IV. GROUP DECISION MAKING IN ORGANIZATIONS
As we discussed in Chapter 7, people in organizations work in a variety of groups—formal and
informal, permanent and temporary, and various kinds of teams.
Therefore, we need to consider group decision making. The primary elements we will discuss are
group polarization, groupthink, and group problem solving methods.
A. Group Polarization
Members’ attitudes and opinions with respect to an issue or a solution may change during
group discussion.
B. Groupthink
Highly cohesive groups and teams often are very successful at meeting their goals, although
they sometimes have serious difficulties as well. One problem that can occur is groupthink.
1. Symptoms of Groupthink
The three primary conditions that foster the development of groupthink are cohesiveness,
the leader’s promotion of his or her preferred solution, and insulation of the group from
experts’ opinions.
Figure 8.5 outlines the revised groupthink process.
A group in which groupthink has taken hold exhibits eight well-defined symptoms:
a. An illusion of invulnerability, shared by most or all members, that creates
excessive optimism and encourages extreme risk taking
b. Collective efforts to rationalize or discount warnings that might lead members to
2. Decision-Making Defects and Decision Quality
When groupthink dominates group deliberations, the likelihood increases that decision-
making defects will occur.
The group is less likely to survey a full range of alternatives and may focus on only a few
Case Study: The Role of Groupthink in the Financial Crisis
Summary: When an organization’s leaders and members allow themselves to be captured by their own
beliefs, they see only what they want to see. Many feel that groupthink explains the excessive credit
expansion that fueled the subprime mortgage meltdown and subsequent financial crisis.
1. How were the elements of groupthink illustrated in the financial crisis?
In groupthink, striving for unanimity overrides the motivation to realistically appraise alternative
2. What could be done to reduce the effects of groupthink in the future?
Leaders could assign the role of “critical evaluator” to each group member to freely voice objections
3. Do you think that increasing the diversity of the financial companies’ leadership would reduce
groupthink? Why or why not?
3. Prevention of Groupthink
C. Participation in Decision Making
An important question in group decision making is the degree to which employees should
participate in the process.
Numerous research studies have shown that whereas employees who seek responsibility and
challenge on the job may find participation in the decision-making process to be both
motivating and enriching, other employees may regard such participation as a waste of time and
a management imposition.
D. Group Problem Solving
A typical interacting group may have difficulty with any of several steps in the decision-making
process.
1. Brainstorming
Brainstorming is most often used in the idea-generation phase of decision making and is
intended to solve problems that are new to the organization and have major consequences.
2. The Nominal Group Technique
The nominal group technique is another means of improving group decision making.
Whereas brainstorming is used primarily to generate alternatives, this technique may be
3. The Delphi Technique
The Delphi technique was originally developed by Rand Corporation as a method for
systematically gathering the judgments of experts for use in developing forecasts.
It is designed for groups that do not meet face to face. For instance, the product
development manager of a major toy manufacturer might use the Delphi technique to probe
the views of industry experts to forecast developments in the dynamic toy market.
V. CREATIVITY, PROBLEM SOLVING, AND DECISION MAKING
Creativity is an important individual difference variable that exists in everyone. We describe it here
because it plays such a central role in both decision making and problem solving.
Creativity is the ability of an individual to generate new ideas or to conceive of new perspectives on
existing ideas.
A. The Creative Individual
Numerous researchers have focused their efforts on attempting to describe the common
attributes of creative individuals. These attributes generally fall into three categories:
background experiences, personal traits, and cognitive abilities.
1. Background Experiences and Creativity
2. Personal Traits and Creativity
3. Cognitive Abilities and Creativity
Cognitive abilities are an individual’s power to think intelligently and to analyze situations
and data effectively.
B. The Creative Process
Individual creative activity actually tends to progress through a series of stages. Figure 8.6
summarizes the major stages of the creative process.
1. Preparation
The creative process normally begins with a period of preparation. To make a creative
2. Incubation
The second phase of the creative process is incubation—a period of less intense conscious
concentration during which the knowledge and ideas acquired during preparation mature
3. Insight
Usually occurring after preparation and incubation, insight is a spontaneous breakthrough
4. Verification
Once an insight has occurred, verification determines the validity or truthfulness of the
insight.
C. Enhancing Creativity in Organizations
Managers who wish to enhance and promote creativity in their organizations can do so in a
Summary and Application
Decision making is the process of choosing one alternative from among several. Problem solving is
finding the answer to a question.
Programmed decisions are well-structured, recurring decisions made according to set decision rules.
Nonprogrammed decisions involve nonroutine, poorly structured situations with unclear sources of
information; these decisions cannot be made according to existing decision rules.
Discussion Questions
1. Some have argued that people, not organizations, make decisions and that the study of
“organizational” decision making is therefore pointless. Do you agree with this argument? Why
or why not?
Students may or may not agree that the study of “organizational” decision making is pointless. Many
2. What information did you use in deciding to enter the school you now attend?
3. When your alarm goes off each morning, you have a decision to make: whether to get up and go
to school or work, or to stay in bed and sleep longer. Is this a programmed or nonprogrammed
decision? Why?
Generally, when the alarm goes off each morning and the individual must decide whether to get up or
4. Describe at least three points in the decision-making process at which information plays an
important role.
5. How does the role of information in the rational model of decision making differ from the role
of information in the behavioral model?
The rational approach to decision making assumes that the decision maker is able to gather and
6. Why does it make sense to discuss several different models of decision making?
Discussing several models of decision making is quite useful because decision-making situations
7. Can you think of a time when you satisficed when making a decision? Have you ever
suboptimized?
Most people can think of situations where they have satisficed or suboptimized. Satisficing occurs
8. Describe a situation in which you experienced escalation of commitment to an ineffective course
of action. What did you do about it? Do you wish you had handled it differently? Why or why
not?
Escalation of commitment refers to the tendency to persist in an ineffective course of action when
9. How comfortable or uncomfortable are you in making risky decisions?
Differences will appear based on the strength of the respondent’s risk-avoidance propensity. In
10. Do you consider yourself to be relatively more or less creative? Recall an instance in which you
made a discovery using the four phases of the creative process.
People vary in their assessment of their own creativity. Some may have an inflated estimate of how
Understand Yourself Exercise—Making a Rational Decision
In this exercise, students apply the rational decision-making process to a decision they are currently or
will soon be facing. Then students compare that decision’s outcome with the outcome they would have
reached by following a decision-making process that was more rational or emotional. Students then
analyze the outcomes of both decision-making processes.
Group Exercise—Superheroes
Learning Objective: Describe how managers can enhance decision-making creativity.
Summary: Each student should pick his or her favorite superhero. Now assume that a large earthquake
just hit a populated island. How could your superhero assist the island?
Task: Take five minutes to write down your ideas. Now form groups of five to six students. Share your
(We thank Professor Jim Gort of Davenport University for suggesting this exercise.)
Video Exercise
Videos and questions can be found in the eBook and MindTap video folder.
City of Greensburg Kansas
Summary: A tornado devastated Greensburg, Kansas. The mayor stated the tornado was actually an
opportunity to rebuild a “green town.” There was opposition from the town residents.
1. Cite reasons for and against rebuilding Greensburg as a “green town.” Which reasons do you
find most convincing and why?
Reasons in favor of rebuilding as a green town: a demolished town presented a once-in-a-lifetime
“blank slate” situation that allowed for unconventional thinking; long-term planning might favor
2. Do you think Greensburg’s decision-making process was effective? Explain.
Residents complained that Greensburg’s decision-making process was ineffective and unfair, and it
3. What prevented the City of Greensburg from making purely rational decisions?
Decision making is never purely rational due to time constraints, limited knowledge of possible
Now What?
Imagine being part of a group with three other coworkers trying to make a decision about whether to
discontinue funding an underperforming product. The group has been working together on the product
OB Concepts Applied: groupthink; stereotyping; conformity pressure; self-censorship; mindguards;
escalating commitment
Discussion Questions
1. Is this decision a programmed or nonprogrammed decision and what is the basis for your
answer?
This appears to be a nonprogrammed decision. However, with new products rolling out every year,
2. How is groupthink and stereotyping illustrated in these videos? Explain your answer.
Groupthink is a mode of thinking that people engage in when they are deeply involved in a cohesive
in–group, when the members’ strivings for unanimity override their motivation to realistically
3. Would a rational decision-making approach work? Why or why not?
A rational decision-making approach works for this situation and is likely the approach used by the
4. As a manager, how else might you handle this situation?
Because managers are often punished for failure, they are also more likely to persist in the face of