Decision-making in organizations
Alexander Styhre
Dept. of Business Administration
School of Business, Economics, and Law
University of Gothenburg
Science in Management, GS Management Course, HT 2014
Decision-making in organizations
• Decisions are made on all levels of the organization on
the strategic, tactic, and operative levels, within
different planning horizons.
• Organizations (e.g., firms) have elaborated mechanisms
for making decisions and for handling disputes and
emerging problems (e.g., the case of Wikipedia and
the issue of what are ”factual knowledge”).
• While decision-making is a practical activity, it is also
based on behavioural theories and social theory.
Instrumental and rational views of
decision-making
• “Decision-making has five distinct phases:
Defining the problem; analysing the problem;
developing alternate solutions; deciding upon
the best solution; converting the decisoon into
effective action”. (Drucker, 1955: 312)
• Decision-support systems, ”rational models”
for decision making etc.
Beyond rational choice view of
decisions
•
Rational choice theory:
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“RTC can be described by a set of postulates . . . The first postulate, P1, states that any social phenomenon is the
effect of individual decisions, actions, attitudes, etc. (individualism). The second postulate, P2, states that, in
principle at least, an action can be understood (understanding). As some actions can be understood without being
rational, a third postulate, P3, states that any action is caused by reasons in the mind of the individual (rationality).
A fourth postulate, P4, assumes that these reasons derive from consideration by the actor of the consequences of
his or her actions as he or she sees them (consequentialism, instrumentalism). A fifth postulate, P5, states that
actors are concerned mainly with the consequences to themselves of their own action (egoism). A sixth postulate,
P6, maintains that actors are able to distinguish the costs and benefits alternative lines of action and that they
choose the line of action with the most favourable balance (maximization, optimization).” (Boudon, 2003: 3-4)
•
Decision-making is based on individual choices and preferences.
•
Assumption: A set of very few mechanisms can explain a variety of empirical phenomena.
•
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Exemplary case: Neoclassical economic theory and Gary Becker on the “economics of criminality:
“Some persons become ‘criminals’ . . . not because their basic motivation differs from that of other
persons, but because their benefits and costs differ.” (Becker, 1968: 178)
•
Compare the criminology and social theory view of crime as being “socially embedded.”
Behavioral theories of decision (I)
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Herbert Simon and the Carnegie-Mellon school of research.
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The “cognitive revolution in psychology” in the 1940s and 1950a.
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Simon was awarded the Nobel Prize in Economic Sciences in 1978.
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“How decisions are made in practice rather than in theory?” is the overarching research question.
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“[Herbert Simon’s] model of bounded rationality has been influential in arguing that empirical relevance of new
elements from the psychology of decision making: e.g., memory, learning, information processing, selective
attention, adaptation, socialization. Economists, given their interests in markets, generally find it easy to dismiss
these sorts of factors as unnecessary complications. But organization theorists, including economists now doing
work on organizations, are directly concerned with individual behavior and interaction among individuals, and
they often find the psychological aspects of decision making impossible to ignore.” (Moe, 1984: 744. Emphasis
added)
•
“In a society based on reason, rationality, and a conception of intellectual human control over destiny, decision
making is a sacred activity. The world is imagined to be produced by deliberate human action and responsive to
human intention” (March, 1994: 216)
•
“Ideas of willful, rational choice are the standard terms of discourse for answering the generic questions: Why did
it happen? Why did you do it?” (March, 1991: 97)
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“Rationality has become a compelling creation myth for decisions.” (Carruthers and Espeland, 1991: 57)
Behavioral theories of decision (II)
• For psychologists Jean Piaget and Lev Vygotsky, intelligence is no one
single structure but is the integration of individual cognitive processes.
• Three “main systems” in intelligence: (1) “organic hereditary structures”
(“instinct”), (2) “sensori-motor structures” (“which may be learned”), (3)
“symbolic structures” (“which constitute thought”). (Piaget (1950/2001:
132)
• “[T]he mind is not a complex network of general capabilities such as
observation, attention, memory, judgment, and so forth, but a set of
specific capabilities, each of which is, to some extent, independent of the
others and is developed independently. Learning is more than the
acquisition of the ability to think: it is the acquisition of many specialized
abilities for thinking about a variety of things. Learning does not alter our
overall ability to focus attention but rather develops various abilities to
focus attention on a variety of things.” (Vygotsky, 1978: 83)
• As a consequence, human behaviour is not exclusively located in the
cognitive faculties of human beings; decision making is a matter of choice
and preferences.
Behavioral theories of decision (III)
•
Bounded rationality
“The capacity of the human mind for formulating and solving complex problems is very small compared to the size of
the problems whose solutions is required for objective rational behavior in the real world — or even for a reasonable
approximation to such objective rationality” (Simon, 1957: 198. Original in italics)
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“The first consequence of the principle of bounded rationality is that the intended rationality of an actor requires him
to construct a simplified model of the real situation in order to deal with it” (Simon, 1957: 199)
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Satificing
“Most human decision-making, whether individual or organizational, is concerned with the discovery and selection of
satisfactory alternatives; only in exceptional cases it is concerned with the discovery and selection of optimal
alternatives” (March and Simon, 1958: 162)
“[A] decision may be called ‘objectively’ rational if in fact it is the correct behaviour for maximizing given values in a
given situation. It is ‘subjectively’ rational if it maximizes attainment relative to the actual knowledge of the subject”.
(Simon, 1976: 76)
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Sequential attention to goals
Organizationsal members, e.g., managers pay attention to issues in a piecemeal fashion, beginning with what is
considered to be most important.
Behavioral theories of decision (IV)
• The concept of attention
• “Attention is a scarce resource; theories of limited rationality are,
for the most part, theories of allocation of attention.” (March, 1991:
98)
• Early industry psychologists (Hugo Münsterberg, 1913, at Harvard)
examined how and when workers pay attention to things.
• The attention economy:
“In information society, the scarcest resource for people on the
supply side of the economy is neither iron ore nor sacks of grain,
but the attention of others. Everyone who works in the information
field—from weather broadcasters to professors—compete over the
same seconds, minutes, and hours of other people’s lives” (Eriksen,
2001: 21)
Garbage-can decision making (I)
• Decisions are not always preceded by perceived
problems but instead solutions “may look for
problems”; a non-linear model of decisionmaking.
• “Tossed into a garbage can is a loosely coupled
mix of (1) problems or issues looking for
solutions; (2) solutions looking for problems to
resolve; (3) participants with different amounts of
time and energy; (4) choice situations waiting to
be actualized”. (Powell, 1985: 96)
Garbage-can decision making (II)
•
“In a garbage-can process, it is assumed that there are exogenous, timedependent Arrivals of choice opportunities, problems, solutions, and decision
makers. Problems and solutions are attached to choices, and thus to each other,
not because of means-ends linkages but because of their temporal proximity. The
logic of ordering is temporal rather than hierarchical and consequential.” (March,
1991: 109)
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In summary
“Decisions in organizations involve an ecology of actors trying to act rationally with
limited knowledge and preference coherence; trying to discover and execute
proper behavior in ambiguous situations; and trying to discover, construct, and
communicate interpretations of a confusing world.” (March, 1991: 111)
•
In other words, decisions are commonly not made in the orderly, neat and
transparent manner as is prescribed in manuals and documents. At times, the
behaviourally correct ways to make decisions violates other professional standards
or formalized rules.
”Decision rationality” vs ”Action
rationality”
• Dilemmas in organizations: Brunsson (1982): A choice
between to follow prescribed decision making routines
(Decision rationality) or to
• accomplish objectives (Action rationality).
• “Much of the behaviour in an organization is specified by
standard operating procedures, professional standards,
cultural norms and institutional structures. The terminology
is one of duties and roles rather than anticipatory,
consequential choice.” (March, 1991: 105)
• The case of decisions in accordance with the Swedish
municipality law prohibiting nepotism and opportunistic
behaviour. In many ways such regulations inhibits actions
and creates a sense of bureaucratic inertia.
Legitimizing decisions: The collection
of information
•
“(1) Much of the information that is gathered and communicated by individuals and organizations has
little decision relevance.
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(2) Much of the information that is used to justify a decision is collected and interpreted after the decision
is made, or substantially made.
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(3) Much of the information gathered in response to requests for information is not considered in the
making of the decisions for which it was requested.
•
(4) Regardless of the information available at the time a decision is first considered, more information is
requested.
(5) Complaints that an organization does not have enough information to make a decision occur while
available information is ignored.
(6) The relevance of the information provided in the decision-making process to the decision being made
is less conspicuous than is the insistence on information, in short, most organizations and individuals often
collect information that they use or can reasonably expect to use in the making of decisions. At the same
time, they appear to be constantly needing or requesting more information, or complaining about
inadequacies in information” (Feldman and March, 1981: 174)
- Organizations collect much more information and data than can be cognitively processes; the cost of
making decisions increases.
Decision theory today:
Institutional logic
• “Institutional logics define the norms, values,
and beliefs that structure the cognition of
actors in organizations and provide a collective
understanding of how strategic interests and
decisions are formulated.” (Thornton, 2002:
82)
• Shifting institutional logics enables new ways
for making decisions.
Three models for political decisionmaking
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“[W]e are assuming [that] governmental behavior can be most satisfactorily
understood by analogy with the purposive acts of individuals. In many cases this is
a fruitful assumption. Treating national governments as if they were centrally
coordinated, purposive individuals provide a useful shorthand for understanding
problems of policy. But this simplification—like all simplifications—obscures as
well as reveals. In particular, it obscures the persistently neglected fact of
bureaucracy: The ‘maker’ of government policy is not one calculating decision
maker but is rather a conglomerate of large organizations and political actors”.
(Allison, 1971: 3)
“Most analysts explain (and predict) the behavior of national governments in
terms of one basic conceptual model, here entitled Rational Actor or ‘Classical’
Model”. (Allison, 1971: 4. The original in italics)
“Two alternative conceptual models, here labeled an Organization Process Model
(Model II) and a Governmental (Bureaucratic ) Politics Model (Model III), provide
a base for unproved explanations and predictions”. (Allison, 1971: 5. The original in
italics)
Decision-making in practice (1)
• “Organizations absorb uncertainty that results from their interpretations
of the environments through decisions . . . Their decision style is most
often not that of a reflective analyst. They prefer ‘acting to abstract
thinking’ (Isenberg, 1984) and basing their actions on subjective models
which contain principles that reflect their experience, they do not consider
intuitive decision-making inferior to scientific-rational decision-making.”
(Kieser and Leiner, 2009: 521)
• “Organizations interpret present states as outcomes of past decision. They
base decisions on causality assumptions . . . Since an organization is
unable to operate on the basis of knowledge containing many
contingencies it has to keep its picture of the world—its assumptions
concerning means and ends—simple (which might explain managers’
aversion to scientific knowledge pointing to many contingencies and their
preference for consulting knowledge).” (Kieser and Leiner, 2009: 522)
In financial trading (2)
• “Traders often said they did a trade because it felt right or felt good . . .
Intuitive processes are built up through trial and error experience,
independent of any conscious effort to learn. Intuitive judgment is most
often contrasted with analytical thinking, and is considered a critical
decision tool by bond traders.“ (Abolafia, 2001: 26)
• “A feel for the market” important (Abolafia, 2001: 27)
• “The first thing traders learn is that numbers tell very little.” (Zaloom,
2003: 261)
• “‛Market chatter’ as I call it, is an important device or forming
interpretation about market fluctuations.” (Zaloom, 2003: 266)
• Financial traders are informational entrepreneurs.
• “Traders know that market numbers carry social content that cannot be
computed. Searching for the hidden values and phantom figures that lurks
behind the numbers is the anchor in a global marketplace where the only
certainty is instability.” (Zaloom, 2003: 269)
In nursing (3)
• “To assume that it is possible to capture all the
steps in nursing practice is to assume that nursing
is procedural rather than holistic . . . Attempts
may be made to model or make explicit all the
elements that go into a nursing decision, but
experts do not actually make decisions in this
elemental, procedural way. They do not build up
their conclusions, elements by elements; rather,
they grasp the whole. Even when they went into
their decisions, essential elements are left out.”
(Benner, 1984: 42-43)
In political processes (4)
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“Rule-based calculation” in political decision processes: the case of the US Homeland Security Department
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“Through their apparent scientific rigor and universal applicability, these decision tools potentially provide
a form of objectivity that will be resilient against external critique . . . These decision instruments share
the characteristics of quantifying diverse entities, in order to make them comparable and thus to make
decisions ‛calculable.’” (Lakoff and Klinenberg, 2010: 507. Emphasisi added)
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The Department of Homeland Security allocated $61 per person to Wyomming but only $14 per person to
California. Densely populated states such as New York and New Jersey received less than North Dakota
and Montana. (Lakoff and Klinenberg, 2010: 508)
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Democratic senators argued they were being punished by the Republican Administration; still ”
“There were no impersonal means to adjudicate such a dispute: without agreed-upon standards of
measurement, it was impossible to compare the relative level of threat and vulnerability of various cities
and regions, and so there was no definitive way to determine whether homeland security funds were
being allocated objectively, that is, independent of ‛political’ considerations.” (Lakoff and Klinenberg,
2010: 512. Emphasis added)
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Behaviour and politics is not separated from ”rationality”
“From this case, we can see that in contemporary struggles over security resources, the distinction
between ‛rationality’ and ‛politics’ does not exists a priori, but rather is defined in the concrete political
and technical struggle over the creation of a decision tool.” (Lakoff and Klinenberg, 2010: 523)
Mechanisms intervening with
decisions
• Group-thinking (Janis, 1982)
• Cognitive dissonance (Festinger, 1957)
• Misconceived decision heuristics (Kahneman,
2011)
“[H]uman aren’t constantly calculating statistical means, but they
aren’t idiots either. They follow shortcuts and rules of thumb that
sometimes work, and sometimes don’t.” (Fox, 2009: 178)
In summary
• Decision-making are key processes in organizations.
Managerial work is the work to particpate in ongoing
decision-making.
• Rather than being inherently rational and linear
procedures, they are anchored in situated practices,
cultures, traditions, and cognitive limitations.
• Organizations struggle to maintain that they make
decisions ”rationally” (e.g., decision rationality) at the
expense of their effectiveness (e.g., the collection of
excessive information making little difference).
References
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Allison, Graham T., (1971) Essence of decision : Explaining the Cuban missile crises, New York: Harper Collins.
Benner, Patricia, (1984), From novice to expert: Excellence and power in clinical nursing practice, San Francisco:AddisonWesley.
Abolafia, Michael, (2001), Making markets Opportunism and restraints on Wall Street, Cambridge: Harvard University Press.
Carroll, Brigid & Levy, Lester (2010), Leadership development as identity construction, Management Communication
Quarterly, 24(2): 211-231.
Carruthers, Bruce & Espeland, Wendy, (1991), Accounting for rationality; Double-entry book-keeping and the rhetoric of
economic rationality, American Journal of Sociology, 97(1): 31-69.
Drucker, Peter F., (1955), The practice of management, Melbourne, London & Toronto: Heineman.
Feldman, Martha S., & March, James G., (1981), Information in organizations as signal and symbol, Administrative Science
Quarterly, 26: 171-186.
Festinger, Leon, (1957), A theory of cognitive dissonance, Stanford. Stanford University Press.
Janis, Irving L., (1982), Groupthink: Psychological studies of policy decisions and fiascoes, 2nd edition, Boston: Houghton
Mifflin.
Kahneman, Daniel, (2011), Thinking, fast and slow, New York: Farrar, Straus, and Giroux.
Kieser, Alfred and Leiner, Lars (2009), Why the rigour-relevance gap in managemetn research is unbridgeable, Journal of
Management Studies, 46(3): 516-533.
Luhmann, Niklas, (2003) Organization, in Bakken, Tore & Hernes, Tor, Eds., (2003), Autopoetic organization theory: Drawing
on Niklas Luhmann’s social systems perspective; Oslo: Abstrakt; Malmö: Liber; Copenhagen: Copenhagen Business School
Press.
March, J.G., (1994), A Primer on Decision Making, Free Press, New York.
Lakoff, Andrew and Klinenberg, Eric, (2010), of risk and pork;: urban secutiry asndf the politics of objectivity, Theory and
Society, 39: 502-525.
Powell, Walter W., (1985), Getting into print: The decision process in schalarly publishing, Chicago & London: The University
of Chicago Press.
Simon, H.A., ([1947] 1976), Administrative behavior, 3rd. ed., Free Press, New York.
Simon, H.A., (1957), Models of Man, Wiley, New York.
Thornton, Patricia H., (2002), The rise of the corporation in a craft industry: Conflict and conformity in institutional logics,
Academy of Management Journal, 45: 81-101.
Learnings from management training
programs (4)
• “In the beginning of the program, my vision of
leadership was secret formula: known to a few,
sword-waving, ‘over the top of victory, lads’ outthe-front leaders. I believed that somehow it
could all be destilled to a few formulas, heuristics,
or algorithms, that one could make the perfect
leadership decision for any team in any situation,
given sufficient knowledge and expertise.”
(leadership training program participant, cited in
Carroll and Levy, 2010: 223)