CHAPTER 9
DECISION MAKING
Learning Objectives
• After studying this chapter, you should be
able to explain:
– Models of decision making, including the
rational decision-making model and the
positive decision-making model
– Current decision-making concerns, including
decision heuristics and biases including loss
framing and escalating commitment
Learning Objectives
• After studying this chapter, you should be
able to explain (cont.):
– Effective decision-making in international
business
– Group decision making and the problem of
groupthink
Decision making - Introduction
• Decisions are made everyday
• Many of the decisions managers make will
be routine, but others will not.
• Examples of routine decisions and nonroutine decisions.
Rational Model of Decision Making
• The historical foundation for the examination of decision
making is called the rational model of decision
making.
– Decisions are logically sound, uninfluenced by
emotion or other non-rational factors.
– This model provides a useful basis of decision
making, as it is still used in practice when data are
available, and also allows contrasting other decision
models with it.
– Central tenet of this model is that there is logical
consistency across decisions, regardless of the
manner in which available choices are presented.
Rational Model of Decision Making
• Problem identification
– A problem arises when there is a discrepancy between the
present situation and the optimal outcome.
• Appropriate decision style
– Determine the most appropriate decision style
– A programmed decision follows standard operating procedures.
– No need to explore alternative solutions because optimal
decision has already been identified and documented
– New, complex, or abstract problems require non-programmed
decisions.
– Decision makers must search for alternatives and possibly craft
a unique solution.
Rational Model of Decision Making
• List of solutions
– If an acceptable ready-made solution is
unavailable, then a custom-made solution is
designed or an existing one is modified.
• Choose best alternative
– The main selection criteria is identified,
ranked by importance, and given a weighted
rating from 1 to 10 or some other scale; each
alternative’s total value is calculated from the
ratings and criteria weights.
Rational Model of Decision Making
• Mobilize resources
– Decision makers must rally employees and
prepare sufficient resources to make and
implement the decision.
Rational Model of Decision Making
• Problems with rational decision model
– Insufficient in describing people’s behavior
under many conditions.
– Normative model of decision making Decision making using a rational model.
– Positive model of decision making - Actual,
day-to-day decision making model, not
idealized.
Positive Model of Decision Making
• Problem identification
– Herbert Simon describes the process that
managers use to make decisions as bounded
rationality.
– Bounded rationality - People do not have
the ability to process all the information and
solutions that face them, leading to limiting
their problems and solutions.
Positive Model of Decision Making
• Appropriate decision style
– In programmed decisions, impact of bounded
rationality is limited, while the impact is
greatest in making non-programmed
decisions.
– In non-programmed decisions, the decisionmaking procedure is based on the values,
beliefs, attitudes, and behavioral patterns.
– Most firms will have a mixture of both
programmed and non-programmed decisions.
Positive Model of Decision Making
• List of solutions
– Psychologist Carl Jung suggested two
primary modes of gathering information sensing and intuition.
– ‘‘Sensors’’ rely on facts and empirical
evidence and are often more inductive.
– Intuitive people rely more heavily on images,
emotion and logic and are often more
deductive.
Positive Model of Decision Making
• List of solutions (cont.):
– In providing potential solutions, bounded
rational decision makers engage in satisficing.
– Satisficing - Alternatives that are acceptable
or ‘‘good enough,’’ rather than the best
possible solutions.
– Different societies vary in how they process
information.
Positive Model of Decision Making
• Choose best alternative
– The manager relies on an evidence-based
information search or a verdict-based
information search for decision making.
– 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.
Positive Model of Decision Making
• Choose best alternative (cont.):
– 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.
– This approach to information gathering and
decision making creates a confirmingevidence bias, and can lead to groupthink.
Positive Model of Decision Making
• Choose best alternative - A few aspects
that can help overcome decision problems
are:
– Examine a range of evidence with equal rigor.
– Do not lock out reliable information; check the
information itself for its validity.
– Avoid the tendency to accept confirming
evidence without question, particularly when it
is from a source that you like.
Positive Model of Decision Making
• Choose best alternative - A few aspects
that can help overcome decision problems
are (cont.):
– Seek evidence that challenges your ideas,
particularly initial points of view and key
assumptions.
– Try to build counter arguments yourself and
ask for challenges and comments.
– Allocate responsibility for making a decision
or evaluating a proposal.
Better Decision Making
• Early warning systems
– A manager can identify in advance any critical
issues that could potentially confront the firm.
• Systems for systematic evaluation
– Firms can create processes to ensure
systematic evaluation of certain critical
information and key forecasts.
– This process tends to minimize satisficing
limitations in the decision process.
– It also aids information processing.
Better Decision Making
• Decision support structures
– Computer-based programs that guide people
through the decision-making process.
– Helps employees identify the problem
systematically and search ready-made
solutions without the need to evaluate
alternatives.
Better Decision Making
• Scenario planning
– Explores potential problems and opportunities
and asks firms to think about difficult
circumstances and competitive challenges.
– Advantage being, the importance of one or
two key criteria can be clearly identified and
properly dealt with.
Current Concerns in Decision
Making
• Heuristics and biases
– Heuristics are shortcuts used to make
decisions more quickly.
– Prospect theory examines risk assessment,
loss aversion, and dependence on a
reference or starting point.
– The theory explains why individuals
consistently behave in ways different from
what traditional economic and decision theory
would predict.
Current Concerns in Decision
Making
• Heuristics and biases (cont.):
– Heuristics create unperceived biases.
– Loss aversion is a common decision-making
bias, in which people will forgo a superior
choice (a potential benefit) to avoid a loss.
Current Concerns in Decision
Making
• Reducing impact of heuristics and biases:
– Always view a problem from different
perspectives.
– Think about the problem on your own before
consulting others.
– Seek information from people to widen frame
of reference and get fresh directions.
– Do not reveal much about your own ideas,
estimates, and tentative decisions.
Current Concerns in Decision
Making
• Escalation of commitment
– Escalation of commitment - The tendency to
repeat an apparently bad decision or allocate
more resources to a failing course of action.
– It is also referred to as the ‘‘Concorde fallacy.’’
– Sunk-cost trap - Making decisions in order to
justify past choices.
Current Concerns in Decision
Making
• Causes of escalating commitment
– People want to create self-justification for their
actions.
– Decision makers commit the gambler’s
fallacy, whereby they underestimate the risk
and overestimate their probability of success.
– The information necessary to pinpoint and
define major problems is downplayed; so the
problems are ignored and remain unsolved.
Current Concerns in Decision
Making
• Overcoming escalating commitment
problems
– Separate decision choosers from decision
evaluators.
– Publicly establish a preset threshold.
– Avoid creating a failure-fearing culture that
leads employees to perpetuate their mistakes.
Current Concerns in Decision
Making
• Overcoming escalating commitment
problems (cont.):
– Recognize that the source of escalation of
commitment has deep psychological roots in
the desire to protect egos or prove to others
that one is correct.
– In rewarding people, look at the quality of
decision making and decision process, taking
into account what was known at the time
decisions were made, not just the quality of
the outcomes.
Current Concerns in Decision
Making
• Limiting adverse effect of loss framing:
– Do no automatically accept the initial frame.
– Be aware of being overly sensitive to losses,
which can also lead to risk aversion.
Current Concerns in Decision
Making
• 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.
– Groupthink can cause the decision-making
group to make poorly supported, hasty, and
suboptimal decisions.
Current Concerns in Decision
Making
• Symptoms of groupthink:
– Illusion of invulnerability
– Belief in inherent morality of the group.
– Collective rationalization.
– Out-group stereotypes.
– Self-censorship.
– Illusion of unanimity.
– Direct pressure on dissenters.
– Self-appointed mindguards.
Group Decision Making
• Group decisions are more effective than
individually directed decisions under the
following circumstances:
– The decision involves a long-range forecast or
prediction.
– The situation is strategic.
– The situation is complex, requiring multiple
skills.
– The situation is such that no one person is an
expert on that topic.
Evaluating Decision Making in
International Business
• Most often, decision makers resort to
perceptual distortion, known as post-hoc
justification, to maintain a positive selfidentity.
• Post-hoc justification gives decisionmakers an excessively optimistic
evaluation of their decisions, until they
receive clear and undeniable information
to the contrary.
Evaluating Decision Making in
International Business
• Post-decisional justification also inflates
the decision maker’s initial evaluation of
the decision.
• The primary element in effective teams is
cognitive diversity.
• Cognitive diversity - The ability of
members of the group to think differently,
and to express their opinions and findings.
Dealing with Culture and Decision
Making
• Situation-accepting managers believe that
they neither can nor should alter every
situation that confronts them.
• Problem-solving managers believe that
they can and should change situations to
their own benefit.
Dealing with Culture and Decision
Making
• Based on a culture’s view of the
relationships among people, either
individuals or groups will hold primary
decision-making responsibility.
• In traditional collective cultures, wishes of
the senior people are respected, whereas
in an Anglo-American context, individual
choices are more recognized and
expected.
Dealing with Culture and Decision
Making
• The cultural perception of time and other
values is a crucial dimension in
understanding decision-making behavior
cross-culturally.