GRA 6820 The Psychology of Decision Making (Harrison, Chapter 6) The Psychology of Decision-Making GRA 6820 Strategic Choice 1 Overview of chapter 6 • The role of personality • Risk behavior • Perception in decision making • Subconscious influences The Psychology of Decision-Making GRA 6820 Strategic Choice 2 The disciplines of decision making Psychology The Descriptive approach Mathematics and statistics The Normative approach The Psychology of Decision-Making GRA 6820 Strategic Choice Information technology and decision support 3 Disciplinary roots of decision science DESCRIPTIVE THEORIES • Psychology • Marketing INDIVIDUAL • Psychiatry • Literature • Decision science • Economics • Operations research • Philosophy/logic • Social psychology • Organizational behavior GROUP • Anthropology • Sociology • Organization theory • Sociology ORGANIZATION • Industrial organization • Political science • Sociology SOCIETY • Anthropology • Macroeconomics The Psychology of Decision-Making PRESCRIPTIVE THEORIES GRA 6820 Strategic Choice • Game theory • Organizational behavior • Clinical psychiatry/therapy • Finance/economics • Planning/strategy • Control theory/cybernetics • Organization design • Team theory/economics • Legal philosophy • Political sciences • Social choice Kleindorfer, P.R., Kunreuther, H.C. and Schoemaker, P.J.H. (1993). Decision Sciences: An integrative perspective, Cambridge. 4 Sense-making A characteristic of humans is trying to make sense of incomprehensible things. Sense-making is described as… – Structuring the unknown, but in different ways. – Placing stimuli into some sort of framework – a “frame of reference” that guides interpretations. – A thinking process that uses retrospective accounts to explain surprises. – Reciprocal interaction of information seeking, meaning assignment and action. – An interpretive process needed for organizational members to understand and share understandings about features of the organization. – A process in which individuals develop cognitive maps of their environment. Sense may be in the eye of the beholder, but beholders vote and the majority rules. K.E. Weick The Psychology of Decision-Making GRA 6820 Strategic Choice 5 Factors influencing strategy Complexity Uncertainty Long time delays between action and reaction Conflicting objectives Multiple decision makers We seek a rational framework to help us sort through these issues The Psychology of Decision-Making GRA 6820 Strategic Choice 6 Problem structure Degree of Structure Operational Performance Operational Management Management Control Strategic Planning Structured Payroll Production Accounts Receivable Budget Management Portfolio Analysis Equipment Scheduling Inventory Control Short-term Forecasting Site Location Dispatching Maintenance Management Long-term Forecasting Mergers and Acquisitions Equipment Diagnosis Cash Management Budget Preparation Product Planning Unstructured The Psychology of Decision-Making GRA 6820 Strategic Choice 7 Sense-making: Multiple perspectives Yields choices of... Influenced by individuals’ mental models A real-world situation of concern Actions to improve the situation The Psychology of Decision-Making Comparison of descriptions with the perceived reality GRA 6820 Strategic Choice Descriptions of relevant systems of purposeful activity 8 The principle of ”bounded rationality” ”The capacity of the human mind for formulating and solving complex problems is very small compared to the size of those problems whose solution is required for objectively rational behavior in the real world or even for a reasonable approximation to such objectivity.” Simon, H.A. (1957). Administrative Behavior: A study of decision making processes in administrative organizations, 4th ed. New York: The Free Press. The Psychology of Decision-Making GRA 6820 Strategic Choice 9 The mind of the strategist • “Successful business strategies result not from rigorous analysis, but from a particular state of mind.” • Strategy making is in essence a creative and partly intuitive process, often disruptive of the status quo. • Strategists employ analysis only to stimulate the creative process, to test the ideas that emerge, to work out their strategic implications or to ensure successful execution. The Psychology of Decision-Making GRA 6820 Strategic Choice 10 The anatomy of a decision The “rational” approach to decision making 1. Define the problem. 2. Identify the criteria. 3. Weight the criteria. 4. Generate alternatives. 5. Rate each alternative on each criterion. 6. Compute the optimal decision. The Psychology of Decision-Making GRA 6820 Strategic Choice 11 Phases in the strategic decision making process INTELLIGENCE DESIGN CHOICE Subject to constraints…. IMPLEMENTATION FEEDBACK and LEARNING • Individual • Organizational • Cultural The Psychology of Decision-Making GRA 6820 Strategic Choice 12 Problem solving constraints • Cultural constraints – “Cultural Iceberg” • Organizational constraints – Contextual variables – Structural variables • Individual constraints – Cognitive – Personality The Psychology of Decision-Making GRA 6820 Strategic Choice 13 The cultural iceberg Primarily in awareness Primarily out of awareness fine arts literature drama classical music popular music folk dancing games cooking dress notions of modesty conception of beauty cosmology ideals governing childrearing rules of descent relationship to animals patterns of superior subordinate relations definition of sin courtship practices conception of justice incentives to work notions of leadership tempo of work patterns of decision making conception of cleanliness attitudes towards the dependent theory of disease approaches to problem solving conception of status mobility eye behavior roles in relation to status by age, sex, class, occupation, kinship etc.. conversational patterns in social contexts conception of past and future definition of insanity nature of friendship ordering of time conception of “self” patterns of visual perception preference for competition or cooperation body language social interaction rate notions of adolescence notions about logic and validity patterns of handling emotions facial expressions arrangement of physical space ...AND MUCH, MUCH MORE... The Psychology of Decision-Making GRA 6820 Strategic Choice 14 Problem solving constraints: Organizational factors Contextual variables • Size • Technology • Environmental uncertainty • Age • Interdependence Structural variables • Differentiation • SOP formalization • Centralization The Psychology of Decision-Making • Division of labor • Status system • Managerial GRA 6820 Strategic Choice 15 Constraints: Individual factors • Stereotypical thinking • Self imposed constraints • Risk of failure • Lack of a questioning attitude • Memory constraints • World-view constraints The Psychology of Decision-Making • Functional constraints • Problem solving language constraints GRA 6820 Strategic Choice 16 A model of cognition: The human information processing model Schema DATA ACQUISITION DATA PROCESSING Task Environment ACTION FEEDBACK The Psychology of Decision-Making GRA 6820 Strategic Choice OUTCOME Biases Assumptions: – Judgment is plagued by random error and systematic biases. – Good judgment requires mental skills exceeding our capabilities. Capacity of the mind is small relative to the size of the problems. Heuristics and rules of thumb are used to cope with problem complexity. Good news This allows us to deal with the real world. Bad news This often leads to faulty data acquisition and processing. The Psychology of Decision-Making GRA 6820 Strategic Choice 18 Biases in problem solving Acquisition biases Processing biases • Inconsistency • Availability • Selective perception • Conservatism • Frequency • Nonlinear extrapolation • Base rate Information sources • Source consistency • Illusory correlation – Consistent information sources can increase confidence in judgments, but not increase predictive accuracy. • Data presentation • Framing The Psychology of Decision-Making • Data presentation GRA 6820 Strategic Choice Biases in problem solving Decision environment Processing heuristics • Time pressure • Habits/rules of thumb • Information overload • Anchoring and adjustment • Distractions • Representativeness • Emotional stress • Justifiability • Social pressures • Law of small numbers • Regression bias • Best guess strategy The Psychology of Decision-Making GRA 6820 Strategic Choice Biases in problem solving Output bias • Question format • Scale effects • Wishful thinking • Illusion of control Feedback bias • Outcome irrelevant learning structures • Misperception of chance occurrences • Failure/success attributions • Logical fallacies in recall • Hindsight The Psychology of Decision-Making GRA 6820 Strategic Choice Feedback biases and learning Mental model Double loop learning (governing variables and relationships) Choosing Single loop learning Acting Observing consequences (match/mismatch with expectations) The Psychology of Decision-Making GRA 6820 Strategic Choice 22 Heuristics and biases in decision making - Summary Availability Selective perception Illusory correlation Conservatism Law of small numbers Regression bias Wishful thinking Illusion of control Logical reconstruction Hindsight bias The Psychology of Decision-Making Judgments distorted by easily recalled events Expectations bias observations Encourages belief that unrelated variables are correlated Ignoring full effect of new information Overestimating representativeness of small groups Failure to allow for regression to the mean Probability of desired events judged too highly Overestimating personal control over outcomes “Logical” reconstruction of inaccurately recalled events Overestimation of predictability of past events GRA 6820 Strategic Choice 23 Bias Believing chance is predictable Selective perception Anchoring and adjustment Seeing opportunities incrementally Seeking only confirming evidence Framing biases Reasoning by inappropriate analysis Teisberg, E.O. (1991). ”Why do good managers choose poor strategies?” Harvard Business School Case 9-391172. The Psychology of Decision-Making Escalating commitment irrationally 1. 2. 3. 4. 5. 1. 2. 3. 4. Use frameworks for stratgic analysis Use multiple perspectives Devil’s advocate Consider improbable or unpopular assumptions Re-evaluate over time Use frameworks for stratgic analysis Devil’s advocate Consider improbable or unpopular assumptions Re-evaluate over time 1. 2. 3. 4. 1. 2. 3. 4. 1. 2. 3. Use frameworks for stratgic analysis Use multiple perspectives Devil’s advocate Consider improbable or unpopular assumptions Use multiple perspectives Devil’s advocate Consider improbable or unpopular assumptions Re-evaluate over time Use frameworks for stratgic analysis Use multiple perspectives Consider improbable or unpopular assumptions 1. 2. 3. 4. 5. 1. 2. 3. 1. 2. 3. Use frameworks for stratgic analysis Use multiple perspectives Devil’s advocate Consider improbable or unpopular assumptions Re-evaluate over time Use multiple perspectives Devil’s advocate Re-evaluate over time Use multiple perspectives Devil’s advocate Re-evaluate over time 1. 2. 3. 4. 5. Use frameworks for stratgic analysis Use multiple perspectives Devil’s advocate Consider improbable or unpopular assumptions Re-evaluate over time GRA 6820 Strategic Choice Antidotes to counteract biases Underestimating uncertainty Antidote 24 Mental models • Personal theories of how things work – The most important factors. – The causal and correlational relationships that link them. • These models have different names: – Conceptual structures – World views – Schema – Cognitive maps – Institutional models The Psychology of Decision-Making GRA 6820 Strategic Choice 25 How do mental models affect behavior? Events Sale of a new office building. Property prices up 10% compared to last year. Patterns Annual new construction activity over the past 50 years. Structure Demand Expected earnings construction activity Supply New Demand Mental models Application of economic supply and demand models to real estate market behavior. The Psychology of Decision-Making GRA 6820 Strategic Choice 26 Reflexive loop - our beliefs affect what data we select next time The ladder of inference I take ACTION based on my beliefs I adopt BELIEFS about the world I draw CONCLUSIONS I make ASSUMPTIONS based on the meanings I add I add MEANING (cultural and personal) I select DATA from what I observe Observable “data” and EXPERIENCES (as a video recorder might capture) 27 The Psychology of Decision-Making GRA 6820 Strategic Choice Skills for working with mental models • Becoming more aware of your own thinking and reasoning. Reflection • Inquiring into others’ thinking and reasoning. Inquiry • Making your own thinking and reasoning more visible to others. Advocacy The Psychology of Decision-Making GRA 6820 Strategic Choice 28 The role of personality • • • • Jungian personality dimensions Jung’s psychological types Myers-Briggs Type Indicator test Implications for decision making The Psychology of Decision-Making GRA 6820 Strategic Choice 29 Behavior Orderly reason for personal differences Preference for… Perceiving Briggs Making decisions Jung How and where one uses these function How one deals with the world Behavior The Psychology of Decision-Making GRA 6820 Strategic Choice 30 Personality dimensions Extravert/Introvert Thinking/Feeling Sensing/Intuition Judgment/Perception – Results in four basic problems solving ”styles.” – Each style has strengths and weaknesses. – No one style is uniquely superior. – Typology can be related to different inquiry, managerial and organizational styles. The Psychology of Decision-Making GRA 6820 Strategic Choice 31 Individual cognitive style • Provides insight into yourself and your behavior… – as a manager. – as a communicator. – as a problem solver. • Provides a logical model of human behavior • Empirically verified The Psychology of Decision-Making GRA 6820 Strategic Choice 32 Jungian personality dimensions E I Relate positively to outside world Likes variety, action Open communicator Prefers the world of ideas Careful with details Dislikes sweeping statements S Works with known facts, rarely errs with facts Does not look at possibilities Likes standard solutions T Bases judgment on impersonal analysis and logic Low emotionality Has trouble dealing with others’ feelings J Prefers possibilities and relationships Enjoys new problems Reaches conclusions rapidly F Uses personal values in judgments Very aware of others’ feelings Enjoys harmony P Likes planned, orderly life style Enjoys working through a schedule The Psychology of Decision-Making N Flexible, spontaneous Adapts well to change May have trouble making decisions GRA 6820 Strategic Choice 33 Individual benefits • Communication • Career choices • Leadership style • Team building • Learning and teaching skills • Problem solving The Psychology of Decision-Making GRA 6820 Strategic Choice 34 Cognitive style – how is it measured? • Myers-Briggs Type Indicator • Based on the concepts of Jungian psychology • Time for a small test… The Psychology of Decision-Making GRA 6820 Strategic Choice 35 Why we need each other (1) • Feelers need Thinkers – To examine, analyze and organize. – To stand against opposing people, or to fire people if necessary. – To change, reform, or withdraw priviledges. – To maintain policy. • Thinkers need Feelers – – – – To convey how others feel. To persuade other to solve problems. To help people understand one another’s views. To build support for a system. The Psychology of Decision-Making GRA 6820 Strategic Choice 36 Why we need each other (2) • Intuitives need Sensers – – – – – To notice essential facts. To point out prolems. To offer illustrations based on experience. To point out assets and liabilities in the here and now. To keep track of details. • Sensers need Intuitives – – – – – To see possibilities in the future. To plan and prepare. To develop new ideas and systems. To solve problems creatively and ingeneously. To maintain enthusiasm. The Psychology of Decision-Making GRA 6820 Strategic Choice 37 Focus of the MBTI • The sources of our energy – The question of introversion and extroversion • The ways we perceive reality – Sensingly, in concrete detail, or intuitively by appreciating hunches and possibilities • The ways we act – Thinking clearly and logically, or in a more subjective way, basing decisions on personal values ahead of logic – feeling • Our propensity to act – Judging and decisiveness, or keeping options open perceiving The Psychology of Decision-Making GRA 6820 Strategic Choice 38 Myers-Briggs Type Indicator test • • • • MBTI questionnaire MBTI scoring sheet MBTI calculations Interpretation The Psychology of Decision-Making GRA 6820 Strategic Choice 39 The perfect problem-solver INTUITION: Look for patterns, inferences, relationships SENSE: Collect data with all 5 senses FEELING: Evaluate impact of solution on stakeholders inside and outside the organization THINKING: Logically analyze data, patterns, inferences to reach conclusion The Psychology of Decision-Making GRA 6820 Strategic Choice 40 Implications for decision making • Data acquisition – By Sensation or by Intuition, but not both at the same time • Sensation – information input through the senses. • Intuition – acquisition by imagination, seeing the whole of a situation, the gestalt. • Data processing – Decisions are reached by Thinking or Feeling • Thinking – decision based on impersonal analyses and analytical modes of reasoning. • Feeling – decision based on personalistic, value judgments. The Psychology of Decision-Making GRA 6820 Strategic Choice 41 The process of perception – gathering data/information • (S) Sensing function (N) Intuitive function ”The reality factor” ”The sixth sense” perceives in terms of specifics, using the five senses • perceives in terms of patterns, relations • ”sees” possibilities • ”sees” things one-at-time, in the concrete • • has a ”present” time focus; the here and now has a ”future” time focus; oriented to change, innovation • tends to estimate or approximate factual details • occupied with and attentive to facts • can be criticized for being ”set in ways” • • sometimes cannot ”see the forest for the trees” can be criticized for ”having head in the clouds”, not enjoying the present • sometimes ”cannot see the tree for the forest” The Psychology of Decision-Making GRA 6820 Strategic Choice 42 The process of judging – coming to conclusion/rational process for closure (T) Thinking function (F) Feeling function ”The analytic factor” ”The bonding factor” • comes to conclusion using established principles, logically attending to cause and effect • comes to conclusion by an associative process – by analogy,and comparison with past experience • principal concern for ”truth” and the wider principles involved • principal concern for the interpersonal and intersubjective dimensions involved • values fairness highly; particularly sensitive to injustice • values harmony highly; particularly sensitive to conflict • has an atemporal time orientation; appeals to reason, likes analysis • • consistency and validity are important; principles are applied impersonally oriented to past events; appeals to what is ”meaningful”, relies on the psychological • compassion is important values what is true • values what is good • The Psychology of Decision-Making GRA 6820 Strategic Choice 43 Attitude – observable preference, style of interacting with the world (J) Judging (P) Perceiving • • • • • • • • • • • needs closure on events, relationships, ideas wants to finish – get things done Values punctuality; sees time in terms of decision prefers advance clarity, order, structure likes schedules and working to a plan comes across as decisive interested only in essentials keys in on the conscious factors can leap to conclusion and move into action out of sheer urgency to come to closure can be stubborn or ”one track” can be vulnerable in not considering alternatives The Psychology of Decision-Making • • • • • • • • • • • needs to ”hang loose” with events, relationships, ideas prefers openness to what may come punctuality is not a high value; sees time in terms of opportunity has tolerance for ambiguity, open-endedness prefers spontaneity, is adaptable to changes tends to postpone decisions and action never has enough information keys in on the unconscious can move into action out of sheer intensity of perception can be pulled in many different directions can be vulnerable in not recognizing ”the tragedy of the excluded possibility” GRA 6820 Strategic Choice 44 Attitude – orientation/direction of energy flow (E) Extraversion (I) Introversion • the outside world captures attention; life is discovered mutually in the external forum • needs a public forum to sort out experience • tends to expand and propagate rather than conserve; is expansive, energized by interaction • the inner world is the world of most important activity; life is discovered interiorly and shared • needs time and space to process lifeexperience interiorly • tends to consolidate, defend; moderates and controls personal disclosure and interaction; energized by privacy and intimacy • engages others easily; comfortable in new groups • assumes free movement; can intrude on others unawares; can make demads for response by sheer force of presence • • ”if you don’t know where they are, you haven’t been listening” can appear withdrawn; is generally cautious of others’ ”space”; can stalemate a situation by silence • ”the unexamined life isn’t worth living” • ”the unlived life isn’t worth examining” The Psychology of Decision-Making GRA 6820 Strategic Choice 45 Problem solving styles • ST – represents concepts of the Industrial Revolution. • NT – stress conceptual analyses instead of precise quantification. • SF and NF – define different types of qualitative analyses. – ST and NF are polar opposites in preferences for information gathering and processing. – NT and SF are two forms of qualitativeness and do not conflict to the same extent as ST-NF types. The Psychology of Decision-Making GRA 6820 Strategic Choice 46 Problem solving using Type preferences (1) 1. Sensing • • • • • What are the facts? What exactly is the situation? What has been done? What am I and others doing? How would an outsider look at this situation? 2. Intuition • • • • • What are the possibilities? What other ways are there for solving this problem? What do the data imply? What are the implications beyond the facts? What is this problem analogous to? The Psychology of Decision-Making GRA 6820 Strategic Choice 47 Problem solving using Type preferences (2) 3. Thinking • What are the pros and cons of each possibility? • What are the logical consequences of each possibility? • What is the cost of each? • What are the pleasant and unpleasant outcomes of each? • What is the consequence of not acting? 4. Feeling • How much do I care about what I gain or lose in each alternative? • What are the values involved for each possibility? • How will people concerned react to the outcome? • Who is committed to carry out the solution? • Will the outcome contribute to individual or group harmony? The Psychology of Decision-Making GRA 6820 Strategic Choice 48 Problem solving using Type preferences (3) 4. Perception • Use at each step to ensure openness to all aspects of the problem. 5. Judgment • Use to set a timetable for moving on to the next step of the decision process. 6. Introversion • Use to reflect at each step along the way. 7. Extroversion • Use to discuss each step and to implement the solution. The Psychology of Decision-Making GRA 6820 Strategic Choice 49 Contributions A knowledge of ”cognitive type”… – Lessens friction. – Reveals the value of differences. – Helps to understand and appreciate the strengths of each type. – Lessens waste of potential. and… – Opposites can supplement each other in joint undertakings. – Pooling preferences offers best chance of finding a solution valid for both. The Psychology of Decision-Making GRA 6820 Strategic Choice 50 Decision traps Russo and Schoemaker, Decision Traps 1989 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Plunging in. Frame blindness. Lack of frame control. Overconfidence in your judgment. Shortsighted shortcuts. Shooting from the hip. Group failure. Fooling yourself about feedback. Not keeping track. Failure to audit your decision process. The Psychology of Decision-Making GRA 6820 Strategic Choice 51 Risk behavior – A small test Decision 1: Choose between a. A certain gain of $240 b. A 25% chance to gain $1000, and a 75% chance to gain nothing Decision 2: Choose between c. A certain loss of $750 d. A 75% chance to lose $1000, and a 25% chance to lose nothing The Psychology of Decision-Making GRA 6820 Strategic Choice 52 Risk behavior – A small test, continued Decision 2a: Choose between e. A 25% chance to win $240, and a 75% chance to lose $760 f. A 25% chance to win $250, and a 75% chance to lose $750 The Psychology of Decision-Making GRA 6820 Strategic Choice 53 Holdout slides The Psychology of Decision-Making GRA 6820 Strategic Choice 54 Risk behavior • Tversky and Kahneman work on the effect of framing on risk preference. – Risk-averse concerning gains – Risk-seeking concerning losses The Psychology of Decision-Making GRA 6820 Strategic Choice 55 Perception in decision making • Biases and heuristics • Antidotes The Psychology of Decision-Making GRA 6820 Strategic Choice 56 Definition: Problem • A formal statement of a set of assumptions about the world. • The assumptions are rarely made explicit. • Whether we see an event or situation as a ”problem” depends on our view of the world. – Problems do not exist independently of the person who sees them. – Mistaking the map for the territory. The Psychology of Decision-Making GRA 6820 Strategic Choice 57 Factors affecting strategic decisions About resources, core competencies and capabilities: Uncertainty: regarding characteristics of both the general and the industry environments, competitors’ actions and customers’ preferences. Complexity: regarding the interrelated causes shaping a firm’s environments and perceptions of the environments. Intra-organizational conflicts: among people making managerial decisions and those affected by them. The Psychology of Decision-Making GRA 6820 Strategic Choice 58