Perception and Decision Making Learning Objectives – Define perception and explain the factors that influence it. – Explain attribute theory and list the three determinants of attribution. – Identify the shortcuts individuals use in making judgments about others. – Explain the link between perception and decision making. – Apply the rational model of decision making and contrast it with bounded rationality and intuition. – List and explain the common decision biases or errors. – Explain how individual differences and organizational constraints affect decision making. What is Perception? A process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. People’s behavior is based on their perception of what reality is, not on reality itself. The world as it is perceived is the world that is behaviorally important. Why Perception is So Important in O.B. “If men (and women) define situations as real, they are real in their consequences.” William Isaac Thomas 1863- 1947 Factors that Influence Perception Who’s to blame? Bob has been assigned to fix a widget on the production line. After 2 hours, it remains unfixed. When confronted, Bob claims it’s because he has the wrong tools and never got the necessary training. The tools required are in the tool shed. Bob trained for 2 years. 5-5 Attribution Theory: Judging Others Our perception and judgment of others is significantly influenced by our assumptions of the other person’s internal state. – When individuals observe behavior, they attempt to determine whether it is internally or externally caused. • Internal causes are under that person’s control • External causes are not under the person’s control Causation judged through: – Distinctiveness • The individual shows different behaviors in different situations – Consensus • The individual’s response to the situation is identical to that of others in same situation – Consistency • The individual always responds in the same way (consistent response to same situation over over time) How we attribute cause to behavior Attribution Theory Example Errors and Biases in Attributions Fundamental Attribution Error – The tendency to underweight the influence of external factors and overweight the influence of internal factors when making judgments about the behavior of others – We blame people first, not the situation Self-Serving Bias – The tendency for individuals to attribute their own successes to internal factors while putting the blame for failures on external factors – It is “our” success but “their” failure Frequently Used Shortcuts in Judging Others Selective Perception – People selectively interpret what they see on the basis of their interests, background, experience, and attitudes Halo/Horn Effect – Drawing a general impression about an individual on the basis of a single characteristic Contrast Effects – Evaluation of a person’s characteristics that are affected by comparisons with other people recently encountered who rank higher or lower on the same characteristics Don’t volunteer to be interviewed after Einstein! Another Shortcut: Stereotyping (Attribute Substitution) Judging someone on the basis of one’s perception of the group to which that person belongs – a prevalent and often useful, if not always accurate, generalization Profiling – A form of stereotyping in which members of a group are singled out for intense scrutiny based on a single, typically “surface”, trait (e.g., gender, race, etc..) Specific Shortcut Applications in Organizations Employment Interview – Perceptual biases of raters affect the accuracy of interviewers’ judgments of applicants – Formed in a single glance – 1/10 of a second! Performance Evaluations – Appraisals are often the subjective (judgmental) perceptions of appraisers of another employee’s job performance – Critical impact on employees Performance Expectations – Self-fulfilling prophecy (Pygmalion effect): The lower or higher performance of employees reflects preconceived leader expectations about employee capabilities Linking Perception and Decision Making Problem – A perceived discrepancy between the current state of affairs and a desired state Decisions – Choices made from among alternatives developed from data Perception Linkage: – All elements of problem identification and the decision-making process are influenced by perception. • Problems must be recognized • Data must be selected, interpreted and evaluated CARTER RACING -- SMALL GROUPS Speed Ventures 6-14 Performance Data Racing Record – 24 Races Entered – 15 finished (63%); 9 not finished (37%) Races Finished – 12 in Top 5 (50%) – 3 not in Top 5 (13%) Races Not Finished – 7 with blown engine (29%) – 2 for other reasons (8%) 2015, 2012 by Jack W. Brittain and Sim B. Sitkin and distributed under license by the Dispute Resolution Research Center at Northwestern University. All rights reserved. Not to be reproduced, modified, stored, or transmitted without prior written permission of the copyright holder or agent. 15 Relationship Between Temperature and Gasket Failures 4 3 Breaks in Head Gasket During Each 2 Race 1 0 45 50 55 60 65 70 75 80 85 Ambient Air Temperature 16 Relationship Between Temperature and Gasket Failures 4 Relationship is “not significant,” i.e., not different from zero 3 Breaks in Head Gasket During Each 2 Race 1 0 45 50 55 60 65 70 75 80 Ambient Air Temperature (in degrees Fahrenheit) 85 17 Expected Value Calculation Decision $30,000 entry fee is not included here because it has already been paid under all conditions and, thus, does not affect the probability of each outcome. Goodstone Tire money is also excluded for the same reasons. 1 Probability Current Season Next Season Value of Expected Value3 Revenues and Revenues Outcome2 Expenses RACE Finish in the Money (Top five) 0.50 $2,000,000 tire $800,000 oil $2,800,000 $1,400,000 Finish Out of Money (Lower than fifth 0.13 $800,000 oil $800,000 $104,000 Not finish (Blown engine) 0.29 –$50,000 –$14,500 Not finish (Other reason) 0.08 $800,000 $64,000 –$50,000 engine $800,000 oil Expected Value of Racing $1,553,500 NOT RACE Expected Value of Not Racing 1.00 –$25,000 tire4 +$15,000 refund5 $800,000 oil $790,000 $790,000 1 Probabilities are based on Robin Burns’ report on the team’s rate of success in the previous 24 races. The information in the case indicates the team finished in the top five in 12 races, below fifth in 3, did not finish because of a blown engine in 7 races, and did not finish for other reasons in 2 races. 2 Computed as revenues minus expenses. 3 Computed as value of outcome times probability. 18 4 Portion of Goodstone funding that must be returned if team withdraws from race. 5 Half of entry fee is returned if team withdraws from race. Speed Ventures Decision Tree Finish, Top 5 $1,400,000 Finish, other $104,000 Blown engine - $14,500 Other $64,000 p = .50 p = .13 EV = $1,553,500 p = .29 Race p = .08 Not Race EV = $790,000 19 Before we go farther: • Is there any information you would like? • I will do my best to answer any questions. 20 Models of Decision-Making Models in Organizations - 1 Rational Decision Making – The “perfect world” model: assumes complete information, all options known, and maximum payoff – Six-step decision-making process • Define the problem • Identify decision criteria • Allocate weights to the criteria • Identify alternatives/options • Evaluate each alternative/option along the weighted criteria • Select best alternative Models of Decision-Making Models in Organizations - 2 Bounded Reality – The “real world” model: seeks satisfactory and sufficient solutions from limited data and alternatives. Reliance on System 1 (Kahneman) Intuition – A non-conscious process created from distilled experience that results in quick decisions • Relies on holistic associations & experience-based pattern recognition • Affectively charged. As emotion precedes cognition, EQ helps. – How much experience should a manager have before relying on his/her “gut”? • Depends on complexity of decision, but it is likely years (not weeks or months) of domain-specific experience. • Depends on reflection – what the manager learns from own experience and that of others. Non-reflective experience provides little basis for pattern recognition. Common Biases and Errors in Decision Making Overconfidence Bias – Believing too much in our own ability to make good decisions – especially when outside of own expertise Anchoring Bias – Using early, first received information as the basis for making subsequent judgments – Example: Restaurant Menus Confirmation Bias – Selecting and using only facts (or sources of facts) that support (or generally support) our decision Availability Bias & Certainty Effect – Overweighting information that is most readily at hand • Recent • Vivid (and can’t be dismissed) More Common Decision-Making Errors Escalation of Commitment – Increasing commitment to a decision in spite of evidence that it is wrong – especially if responsible for the decision! – Examples: March of Folly & Vietnam, etc… (B. Tuchman), Challenger Randomness Error – Creating meaning out of random events – superstitions Winner’s Curse (Bidding of Football teams for young players) – Highest bidder pays too much due to value overestimation – Likelihood increases with the number of people in auction Hindsight Bias – After an outcome is already known, believing it could have been accurately predicted beforehand Egocentric Bias – Individuals rely on their own experiences more than that of others. From Bounded Rationality to Decision Error: The Role of Sensemaking and Mindfulness Sensemaking: – A typically social process of creating situational awareness and understanding in situations of high complexity or uncertainty in order to make decisions. – We experience and then give meaning to that experience, often through existing frames. Mindfulness – The combination of ongoing scrutiny of existing expectations, continuous refinement and differentiation of expectations based on newer experiences, willingness and capability to invent new expectations that make sense of unprecedented events in a more nuanced and context-aware manner. How Mindfulness Allows for Detection, Containment & Resilience Mindfulness allows one to better able to notice the unexpected in the making and halt its development. Mindfulness allows for the early recognition that the development of the unexpected may not be stopped, and thus allows for an early focus on containment. Mindfulness allows for the early recognition of breaks in containment, allowing for the adoption of actions aimed at resilience and swift system restoration. But mindfulness is resource-demanding. System 2 tends to be lazy! Perception and Signal Detection as Basis of Decision Error Unexpected events often give off only weak signals We tend to be sensitive only to usual signals. Unusual signals are often beyond our ability to detect until they are moderately strong. Sensemaking results in misinterpretation of weak signals if perceived at all. Small moments of inattention and misperception can escalate swiftly into unmanageable trouble. Mindfulness preserves the capability to see the significant meaning of weak signals and to give strong responses to weak signals. Expectations & Taken-for-Granted Assumptions as Basis for Decision Error Expectancies about how the world operates serve as implicit assumptions that guide behavioral choices. Allows us to predict reaction to action. We actively seek out evidence that confirms our expectations and avoid evidence that disconfirms them. We tend to overestimate the validity of expectations currently held. The continuing search for confirming evidence postpones your realization that something unexpected is developing. Mindfulness demands constant questioning of assumptions and expectations. Organizational Constraints - 1 Performance Evaluation – Managerial evaluation criteria influence actions and over- and underweighting of decision criteria Reward Systems – Managers will make the decision with the greatest personal payoff for them and lowest possible pecuniary costs – If compensation system loads too much risk on managers, managers will tend to become more risk averse and stay with status quo Relative Position – Kahneman & Tversky -- Prospect Theory: Risks are likely to be underweighted in underperforming situations (and potential for gain overweighed), and vice-versa in over-performing situations. Formal Regulations – Limit the alternative choices of decision makers Organizational Constraints - 2 System-Imposed Time Constraints – Restrict ability/time to gather or evaluate information Cognitive Distraction and Attention to Detail – Rudeness & Incivility – Cognitive Processing is adversely affected Historical Precedents – Past decisions influence current decisions Emotion as the Mechanism: Person + Situation Affect The Basic Emotions While not universally accepted, there appear to be six basic emotions: 1. 2. 3. 4. 5. 6. Anger Fear Sadness Happiness Disgust Surprise All other emotions are subsumed under these six May even be placed in a spectrum of emotion: – Happiness – surprise – fear – sadness – anger – disgust Basic Moods: Positive and Negative Affect Emotions cannot be neutral. Emotions (“markers”) are grouped into general mood states. Low Negative Affect Low Positive Affect Mood states affect perception and therefore perceived reality. Often need to control for situational or trait mood state when capturing employees’ perceptions of reality. Neil Ashkenazi: Affective Events Theory (AET) An event in the work environment triggers positive or negative emotional reactions – Personality and mood determine response intensity – Emotions can influence a broad range of work variables OB Applications of Emotions and Moods Selection – EI should be a hiring factor, especially for social jobs. BUT NOTE POOR VALIDITY OF MEASURES! Decision Making – Positive emotions can lead to better, faster decisions (faster processing speeds; greater attention to detail). Creativity – Activating mood (anger, fear, elation) increases flexibility & openness creativity. Deactivating moods (depression, sorrow, serenity) likely motivate retention of status quo. Motivation – Positive mood affects expectations of success – Pay-related Threat, Joy, Hostility impact cognitive function Leadership – Emotions are important to acceptance of messages from organizational leaders. Helps leaders energize followers. Summary and Managerial Implications Perception: – People act based on how they view their world – What exists is not as important as what is believed – Managers must also manage perception Individual Decision Making – Most managers use bounded rationality: They satisfice – Combine traditional methods with intuition and mindfullness for better decisions • Be aware of, and minimize, biases • Recognize limitations and risks of sensemaking, particularly when it breaks down (as in the case of Mann Gulch) • Follow Kahneman et al’s checklist…. Kahneman et al’s Checklist for Avoiding Decision Errors: 12 Questions 1. Check for self-interested bias: Evidence of interestmotivated over-optimism? 2. Check for affect heuristic: Has the team fallen in love with its own proposal? 3. Check for groupthink: Were there dissenting opinions? Adequately explored? 4. Check for saliency bias: Could the diagnosis be overly influenced by an analogy to a memorable success? 5. Check for confirmation bias: Are credible alternatives included along with the recommendation? List of unintended negative consequences included? 6. Check for availability bias: If you had to make the decision again in a year’s time, what kind of information would you try to secure in advance? Kahneman et al’s Checklist for Avoiding Decision Errors: 12 Questions 7. Check for anchoring bias: Where did data come from? Substantiated? Motivation to use certain data over other? 8. Check for halo effect: False inferences? Evidence of attribute substitution? 9. Check for escalation of commitment (sunk cost fallacy): Is recommendation guided by attachment to history of past decisions? Get outside opinion. 10.Check for overconfidence: Team self-efficacy is good, but are assumptions and inferences overly optimistic? Get outside opinion. Wargames. 11.Check for disaster effect: What are unintended negative consequences? Do a “pre-mortem”. Wargames. 12.Check for loss eversion/under-confidence: Are recommendations overly cautious? Paralysis by analysis?
