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Chapter 9
DECISION MAKING
Learning Objectives
After studying this chapter, you should be able to:
2. analyze current decision-making concerns, including decision heuristics and
biases including loss framing and escalating commitment.
4. recognize group decision making and the problem of groupthink
General Teaching Suggestions
Divide the class into teams. For each team, give situations that require complicated
decision-making. Discuss how the teams arrived at their decisions. Trace the tendencies
that are relevant to the theories of decision-making.
Opening Case Discussion Guide
The case describes how Allan Zeman, a Canadian-born businessman and developer, used
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CHAPTER OUTLINE: KEY CONCEPTS AND TERMS
Sections I through VIII of Chapter 9
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I. RATIONAL MODEL OF DECISION MAKING
1. Key Concepts
A central tenet of the rational decision-making model is that there is logical
consistency across decisions, regardless of the manner in which available choices
are presented.
• Problem Identification: The first step. The decision process is directed toward
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• Mobilize Resources: Firms must consider the motivation, ability, and role
• Problems with Rational Decision Model: People’s decisions are strongly affected
2. Key Terms
• Problem – Arises when there is a discrepancy between the present situation and
the optimal outcome.
• Programmed decision – A decision that follows standard operating procedures.
II. POSITIVE MODEL OF DECISION MAKING
1. Key Concepts
• Problem Identification: Herbert Simon describes the process that managers use to
make decisions as bounded rationality, according to which, managers make
choices based on simplified and subjective sets of choices. A bounded rational
approach to decision making is convenient under some circumstances but for
major decisions, particularly ones involving risk and strategizing about the
future, boundedly rational decision making can lead to suboptimal decisions.
2. Key Terms
• Bounded rationality – According to Herbert Simon, people do not have the
ability to process all of the information and solutions that face them. This
inability leads them to limit their problems and solutions.
• Satisficing – Alternatives that are acceptable or ‘‘good enough,’’ rather than the
best possible solutions.
III. BETTER DECISION MAKING
1. Key Concepts
• Early Warning Systems: The firm can institute an early warning system to
identify a problem if it starts to occur. Some firms engage in wide data search
and data mining to help identify potential issues, using computer programs to
search through large databases and organize this information into meaningful
trends.
• Systems for Systematic Evaluation: Firms can create processes to ensure
IV. CURRENT CONCERNS IN DECISION MAKING
1. Key Concepts:
• Heuristics and Biases: The cognitive shortcuts individuals use to cope with the
complexity inherent in many decisions and their application in the world of
business and finance are called heuristics. As the world has become more
complicated, heuristics or decision shortcuts are increasingly helpful in
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• Escalation of Commitment: Sunk-cost trap is the deep-seated bias to make
present decisions in order to justify past choices. Even when the past choices no
longer seem valid, individuals are too often unwilling to give them up. Factors
that lead to the sunk-cost trap and, in turn, an escalating commitment include:
i. self-justification,
ii. the gambler’s fallacy,
iii. perceptual blinders, and
iv. closing costs
• Groupthink: Psychologist Irving Janis identified eight groupthink symptoms.
i. Illusion of invulnerability
ii. Belief in inherent morality of the group
iii. Collective rationalization
iv. Out-group stereotypes
There are ways that firms can overcome groupthink:
i. Take the time to recognize and understand the vastly different ways that
people’s minds work.
ii. People also interact and process data in a variety of ways. Creating space
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2. Key Terms
• Prospect Theory – Examines risk assessment, loss aversion, and dependence on
a reference or starting point. Explains why individuals consistently behave in
ways different from what traditional economic and decision theory would
predict.
• Anchoring – When a manager relies on one piece of information as the key to his
or her decision making.
• Availability – The availability heuristic leads to a bias whereby people base their
V. GROUP DECISION MAKING
1. Key Concepts:
Group decisions are more effective than individually directed decisions under
certain specific, though commonly occurring circumstances:
VI. EVALUATING DECISION MAKING IN INTERNATIONAL BUSINESS
1. Key Concepts:
After making a choice, decision makers tend to inflate the quality of the selected
alternative and deflate the quality of the discarded alternatives. This perceptual
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2. Key Terms
VII. DEALING WITH CULTURE AND DECISION MAKING
1. Key Concepts:
Culture is an important consideration for those doing business internationally. A
VIII. SUMMARY
1. Key Concepts:
• There are strong psychological forces at work in decision making that affect
everyone.
• Decision makers must be sure to conduct earnest information searches for
important decisions.
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END-OF-CHAPTER GUIDE
MANAGERIAL GUIDELINES
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What can be done to improve decisions?
1. Analyze the situation carefully, and do not rush into major decisions.
3. Be aware of the common heuristics that lead to biases, both for individuals and
groups, and try to avoid them.
4. Combine rational analysis with intuition, but understand that ‘‘common sense’’
6. Use group decision making for unstructured, predictive, ambiguous, or otherwise
OPENING VIGNETTE DISCUSSION QUESTIONS
1. Recall Chapter 5 in which global and multi-domestic strategies were discussed.
Which strategy would Disney represent? How can a firm like Disney still adapt to
a local market but also maintain the strong brand image that is so critical to its
success around the world?
Student responses will vary. Cultural approaches to leisure and entertainment
2. Do you think it’s important for executives like Allan Zeman to be familiar with a
firm or its products before becoming that firm’s leader? Give the pros and cons.
Student opinions will vary. Familiarity with the firm or products is a definite
3. Tourists from mainland China are critical of both Ocean Park and Disney in Hong
Kong. Do you think the people of Hong Kong would automatically understand
customers from China? How should both firms ensure they are able to meet those
customers’ needs?
Cultural preferences and attitudes affect customer perceptions. Examine the
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DISCUSSION QUESTIONS
1. Think about the eight symptoms of groupthink as discussed in the text. Have you
experienced these symptoms in groups that you are a part of or are aware of? How
was the decision affected?
Student observations will vary.
2. In this and other classes you have had to conduct projects in teams or groups.
3. Suppose you are a government official of a small but fast growing emerging
economy. You have been asked to allow a commonplace recreational product—
swimming pools—to be installed in your country for the first time by an
American multinational corporation. You have been told that swimming pools
directly lead to the death of 600 Americans every year—many of them children—
and also cause brain damage in several thousand more children. Should you allow
that product into your country? Discuss the pros and cons.
4. Once again, suppose you are a government official of a small but fast growing
emerging economy. A company wants to come to your country to start selling a
clean fuel that has previously been unavailable there, and it wants to pump the
fuel directly into your country’s homes. Although it can be burned for heat or
energy, the fuel has been known to explode occasionally if improperly handled. It
is odorless, colorless, and poisonous; you can not see it escaping from a
malfunctioning valve and filling your house. Not surprisingly, this fuel kills about
400 Americans per year. Will you allow companies to sell this potentially
dangerous gas in your country? What fuel do you think this is? What decision
making heuristic is implied here that might bias your decision?
5. Think of a time when you conducted an informational search to help you make a
major decision, such as to which universities to apply. How did you gather
information and finally come to a decision? Did you practice evidence-based or
verdict-based decision making?
Student answers will vary.
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6. Is there a time you used verdict-based information search that helped to limit your
information search but produced a sub-optimal decision? What decision was it
and how could that decision have been better made?
Student answers will vary. Methods to avoid mistakes in decision-making should
IN-CLASS EXERCISES
1. A software developer in Hong Kong is experiencing an increasing number of
customer complaints and a general trend toward lower sales. Describe three
reasons why senior executives in this organization might be slow to realize that a
problem exists or to identify the main cause(s) of these symptoms.
Students should consider the following concerns influencing decision-making:
2. A manufacturing company hires a management consultancy to determine the best
site for its next production facility. The consultancy has had several meetings with
the company’s senior executives regarding the factors to consider when making
its recommendation. Discuss three decision-making problems that might prevent
the consultancy from choosing the best site location.
3. A developer in realizes late that his plans of attracting tenants and investors to a
new proposed business financial center does not materialize as expected, and
reconsiders his projects only after the funds are withdrawn. Using your
knowledge of escalation of commitment, discuss three possible reasons why the
developer was motivated to continue with the project despite its escalating losses.
Student responses may vary. Several factors that lead to the sunk-cost trap and, in
4. Ancient Book Company has been investing resources in less promising projects as
a result of not being able to terminate contracts that are behind schedule and may
not have public interest. As a form of escalation of commitment, describe two
methods that the company can use to minimize this problem.
Some of the ways to minimize escalation of commitment decision problems are:
i. Separate decision choosers from decision evaluators.
ii. Publicly establish a preset threshold.
iii. Seek to avoid creating a failure-fearing culture that leads employees to
that we were correct.
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5. When a large law firm needed to create a task force to make some significant
strategic decisions, it put together what it considered a diverse group. The group
consisted of three men and three women, all in their late thirties, representing
different racial and ethnic backgrounds. The individuals had been active together
in a recent political campaign for a certain candidate in that state and would all
describe themselves as ‘‘progressive.’’ Each person in the group was a lawyer.
Though they came from different parts of the U.S., they all went to either Harvard
or Yale Law School and graduated around the same time. Is this a diverse group?
Comment on the pros and cons of this group and the possibility for groupthink.
TAKE-HOME EXERCISES
1. Research both the Cuban Missile Crisis and the Challenger space shuttle crash on
the Internet. Develop your own list of advice on how to avoid groupthink.
Students may form teams to work on these issues.
2. Using your knowledge of culture, research the cultural dimensions of the Arab
countries of the Middle East. What aspects of this culture and society do you
think would affect your decision making if you were sent there as a manager for a
multinational firm?
3. In relation to Take-Home Exercise 2, do you think the decision making in Israel
will be different from that in other Middle Eastern countries? Explain why and
how. If necessary, select one particular country from the Middle East to discuss
SHORT CASE QUESTIONS
1. How could Alcatel-Lucent improve their decision making in the future?
Considerations of cultural differences among merging partners is a critical factor
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2. Do you think such difficulty is one of the key issues that face most mergers and
acquisitions?
3. Do you think that these decision-making problems would have been present in a
Swedish-U.S. merger?
Student responses will vary. Students need to discuss the similarities and