Chapter 9 Review
Vocabulary
 Problem: Arises when there is a discrepancy between the present situation and the optimal outcome
 Programmed decision: A decision that follows standard operating procedures. There is no need to explore
alternative solutions because the optimal solution has already been identified and documented
 Normative model of decision making: Decision making using a rational model (i.e. how things ought to
be)
 Positive model of decision making: Actual, day-to-day decision making model, not idealized
 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
 Evidence based information search: A process of information search and decision making that does not
start with a presumed decision and seeks to evaluate a range of evidence and challenge the emerging
solution as it is gradually shaped
 Verdict based information search: A process of information search and decision making that starts with
the presumed answer to the decision and proceeds to only seek out information that confirms the initial
verdict or decision
 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 decisions heavily on an
example that can be easily be brought to mind.
 Representativeness: The representativeness heuristic is when seeming patterns of data are assumed
(incorrectly) to represent something that the data do not warrant
 Escalation of commitment: The tendency to repeat an apparently bad decision or allocate more resources
to a failing course of action. (In poker, this is “throwing good money after bad.”)
 Suck cost trap: Making decisions in order to justify past choices
 Groupthink: A mode of thought whereby individuals intentionally and prematurely conform to what they
perceive to be the consensus of the group and preference of the leader
 Cognitive diversity: The ability of members of the group to think differently and to express their opinions
and findings
Rational Model of Decision Making
 Dominated thinking from 1800s – mid-1950s
 Make decisions based on weighted criteria
 “Decisions under this model are seen as being logically sound, uninfluenced by emotion or other nonrational factors.”
 Main assumption is that there is logic consistently throughout decisions
 Game theory is used to evaluate how different competitors may act and which will survive or thrive.
 The decision process is directed toward changing the root cause of difficulties
Define the
problem
Identify the key
decision criteria
Allocate relative
weights to the
criteria
Determine the
decision style


Problem Identification
o Arguably the most important step
o See “Problem” in vocab section
Appropriate Decision Style
List solutions
and develop
any alternatives
Evaluate the
alternatives
Select the
choice that
maximizes
utility based on
the weighted
criteria of all
the feasible
alternatives
Mobilize
resources
Must decide between a programmed and non-programmed decision (See “Programmed decision”
in vocab section)
o New, complex or abstract problems require non-programmed decisions.
o Non-programmed decisions are where decision makers have to come up with new alternatives or
make up new solutions all together
o Programmed decisions come from non-programmed decisions
o Programmed decisions are faster and more predictable and routine and usually lowers costs and
allows a company to serve more customers
List of Solutions
o Begins by looking for already proven solutions for existing problems.
o A decision maker can use these pre-selected solutions, alter these solutions or come up with
custom ones
Choose Best Alternative
o Identify all the main criteria in which to make a selection of a solution (like price or quality)
o The criteria is then ranked by importance and given a weighted rating
o Each alternative is then calculated from the ratings and weights
Mobilize Resources
o Rally employees and resources need to make and implement the decision
o Decision makers must take into consideration motivation, ability and the perception of a given role
for the employees
o Evaluate the gap between “what is” and “what ought to be”
Problems with Rational Decision Model
o Research shows people’s decisions are affected by their environment which means the rational
decision model is considered by many to be an insufficient determinant of people’s behavior
o This model has become more an exception rather than the rule
o While this model still taught as how things ought to be, it is now recognized that it is not reality
o
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


Positive Model of Decision Making
 Problem Identification
o Key issue with identifying problems is bounded rationality
o See “Bounded rationality” in vocab section
o Herbert Simon says: managers make choices based on simplified and subjective sets of choices
o People can’t process a bunch of information all at once so they end up narrowing problems and
possible choices down to something they can process
o This is why if you give someone a lot of choices they will end up not making a decision at all
o The problem with this, though, is managers end up making decisions based on limited information
o A bounded rational approach is really only good in circumstances with minor decisions
o Bounded rationality affects the identification of a problem and solutions to that problem as well
 Appropriate Decision Making
o Because programmed decisions are based on a formula and non-programmed decisions are not, the
greatest affect of bounded rationality is done on non-programmed decisions
o If a decision must follow a certain set of rules, bounded rational is limited
o If a decision is open to a particular situation, bounded rational is greater
 This is because decision-making processes that are non-programmed are based on values,
beliefs, attitudes, etc.
 This type of decision making (non-programmed) can be problematic in firms with divers
international settings.
o Most firms us both programmed and non-programmed
 List of Solutions
o Carl Jung suggests people have two ways to gather information: sensing and intuition
o “Sensors”: use their five senses to gather information, rely on facts and practical evidence, and
more inductive
o “Intuitors”: use judgment to gather information, rely less on practicality, rely on images, emotion
and logic, and are more deductive, use principles to make decisions
o Bounded rational decision makers make decisions that are “good enough” rather than the best
See “Satisficing” in vocab section
Satisficing happens because it is difficult to identify all of the possible alternatives and because
information about alternatives are not perfect
o “Good enough” depends on the number of alternatives
 Standards rise when there are more acceptable alternatives
o Important to know that different societies vary in how they process information
o People from low-context societies (USA and Canada) rely more on facts and practical information.
If a firm has operations in USA and the Middle East generating a list of potential useful solutions
can be difficult.
 Choose Best Alternative
o See “Evidence based information search” and “Verdict based information search” in vocab section
o Verdict based creates a confirming-evidence bias, which means they only pay attention to things
that support their idea.
o This bias leads people to put too much emphasis on supporting information rather than main idea
information
o It is easy to understand why people utilize verdict based: if you are looking for something in
particular you already have something in mind of what it is supposed to be, rather than being open
to a new turn
o Although evidence based leads to better decisions, verdict based is more common
o This can be bad in international situations where people might get otherwise good information
from a source they feel is inadequate
o Things to do to overcome verdict based problems
 Check to ensure people are examining a range of evidence with equal rigor
 Don’t lock out otherwise reliable information simply because you don’t like it’s source.
Check the information’s validity
 Avoid the tendency to accept confirming evidence without question, particularly when it
is from a source you like
 Seek evidence that challenges your ideas, particularly initial points of view and key
assumptions
 Try to build counterarguments yourself and ask for challenges and comments
 Give someone in the group charged with making a decision or evaluating a proposal the
role of devil’s advocate, to argue against the decision you are contemplating and
challenge its assumptions.
Better Decision Making
 Early Warming Systems
o Example: customer satisfaction ratings falling below a threshold, or a drop in repeat business
o Effectiveness is only as good as their development
o If carefully planned, alerts can spur an organization into action and prevent any major
consequences
 Systems for Systematic Evaluation
o Create process to ensure systematic evaluation of certain critical information
o Human driven
o Tends to minimize satisficing
o Aids in information processing because evaluations are systematic rather than intuitive
 Decision Support Structures
o Computer-based programs that guide people through the decision making process
o Helps employees identify problems systematically and search out past solutions that then point to
a ready-made solution
 Scenario Planning
o What if…
o Advantage is importance of key criteria can be clearly identified and properly dealt with
Current Concerns in Decision Making
 Heuristics and Biases
o Anchoring: See “Anchoring” in vocab section; when a person is anchored by an initial impression
or relies on one piece of information as the key to decision making
o
o
 Similar to the verdict based approach
Availability: See “Availability” in vocab section; leads to a bias where people base their decisions
on how easily an example can be brought to mind
 An example of when people think “China is taking over the world because they make
everything.” This assumption is made because we can so easily bring to mind things we
have seen that say, “made in China.”
 Media coverage helps fuel people’s availability bias
o Representativeness: See “Representativeness” in vocab section; when objects of similar
appearance or patterns are assumed to represent something that the data do not warrant
 For example, in the US people think all Latin Americans want/act the same as Mexicans.
In reality this is far from true.
o Heuristics simplify the decision making process by providing certain types of mental shortcuts that
decision makers can use to make decisions more quickly
o Overcoming Heuristics/Biases:
 Always view a problem from different perspectives. Try using alternative starting points
and approaches rather than sticking with the first line of thought that occurs to you or that
comes up in a meeting
 Think about the problem on your own before consulting others in order to avoid
becoming anchored by their ideas
 Be open-minded. Seek information and opinions from a variety of people to widen your
frame of reference and to push you mind in fresh directions. Do no reject ideas out of
hand based only on their source. People with a different background or political point of
view may have something useful to add to the decision process. Diversity can improve
group decision-making.
 Be careful when using advisers, consultants and others. Tell them as little as possible
about your own ideas, estimates and tentative decision. If you reveal too much, you own
preconceptions may simply anchor the discussion prematurely.
Escalation of Commitment
o See “Escalation of Commitment” and “Sunk cost trap” in vocab section
o Sunk cost traps lead to the escalation of commitment
o Causes of escalating commitment:
 Self-justification: people want to present themselves in a positive light; people who are
personally identified with a decision want to keep it going; basically saving face
 Gamblers fallacy: underestimate the risk and overestimate their probability of success;
having inflated expectations of their ability to control problems
 Perceptual blinders: unconsciously screen out or explain away negative information;
information that defines major problems is downplayed and problems are ignored
 Closing costs: ending a decision is more costly than persisting; this can mean financial
penalties, bad public image, or personal/political costs
o Overcoming these problems
 Separate decision choosers from decision evaluators
 Publicly establish a preset threshold
 Avoid creating a culture where employees believe decisions and judgments are evaluated
based on its loyalty to top management rather than accuracy
 Recognize that the source of escalation of commitment has deep psychological roots to
“save face”
 In rewarding people, look at the quality of their process as well as outcomes
o Loss Framing
 AKA Loss aversion
 Means most people feel worse about a loss of a given amount than they would feel good
about a gain of a similar amount
 People tend to focus on losses in making decisions
 Scarcity principle-items and opportunities are seen to be more valuable as they become
less available
 Adverse effects of framing can be limited by:
o
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
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Don’t automatically accept the initial frame. Always try to reframe a problem in
various ways
Be aware of being overly sensitive to losses

Groupthink
o See “Groupthink” in vocab section
o Can cause the group to make poorly supported, too-fast decisions which are likely to prove subpar
or even catastrophic
o 8 Symptoms of Groupthink
 Category 1: Over confidence in the Group’s abilities
 Symptom 1-Illusion of Invulnerability: people are more risk-seeking in a group
 Symptom 2-Belief in Inherent Morality of the Group: group members think they
are right and everyone else is unethical
 Category 2: Closed-mindedness of the Group
 Symptom 3-Rationalization: Ignoring contrary evidence and basing decsions
only on past experience
 Symptom 4-Stereotyping of Out-groups:
 Category 3: Group Pressure to Conform
 Symptom 5-Self-Censorship: “We don’t do that around here”; Not Invented
Here syndrome
 Symptom 6-Direct Pressure: Subtle threats to those who aren’t on your side
 Symptom 7-Mindguards: Keep dissenting opinions away from leaders
 Symptom 8-Illusion of Unanimity: Overlook quiet dissent and the leader makes
his/her opinion clearly known
o Avoiding Groupthink
 Take time to recognize and understand that people’s minds work differently
 Create a space for a variety of cognitive approaches
 Avoid putting too much value on consensus and harmony
 Create partnerships with people from diverse disciplines, departments or backgrounds
 Make sure there is a process for data with deadlines
 Use voting sparingly
 Explore with debate and dialogue
 Let the group actually make decisions
Managerial Guidelines
 Analyze the situation carefully and do not rush into major decisions. The “just do it” attitude that the
popular culture tends to promote can lead to poorly thought-out decisions, prematurely arrived at.
 Avoid strict dogma. Be open to contrary evidence and publications from a different point of view than your
own. Assess the evidence presented rather than dismissing it by criticizing the messenger’s background,
politics or training, which are not relevant to the accuracy and applicability of the evidence itself.
 Be aware of the common heuristics that lead to biases, both for individuals and groups, and try to avoid
them. For example, do not be overly influence by available or vivid information. Just because there were
three terrorist bombings in India last year, for example, does not mean that such bombings are “always
happing,” nor does it mean that traveling to India is particularly unsafe. Try to gather as much data as is
feasible to make your decision and do not let any one piece of data dominate the decision.
 Combine rational analysis with intuition but understand that “common sense” or intuition is often flawed
and affected by common cognitive biases.
 When possible, treat decisions as part of a series of decisions. That is, do not be too risk averse to avoid a
single mistake. Successful decisions cannot occur if you do not make any.
 Use group decision making for unstructured, predictive, ambiguous or otherwise difficult decisions,
particularly where no one is the expert. But beware of groupthink or premature conclusions, which can lead
to catastrophic decision errors.