UGBA105: UGBA105: Organizational BehaviorOrganizational Behavior

Professor Jim LincolnProfessor Jim Lincoln

Week 8: Week 8:

Decision-making in OrganizationsDecision-making in Organizations

Walter A. Haas School of BusinessUniversity of California, Berkeley

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What is a “decision?”What is a “decision?”

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Some everyday decisionsSome everyday decisions

-OR-

-OR-

-OR-

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Some business decisionsSome business decisions

• I’ve got three great candidates. Who should I hire?

• This person’s performance has been mediocre but not awful. Do I fire him?

• Should we bet the company on that new product idea?

• Do we enter that market or stay out of it?

• Should we acquire that hot new start-up?

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In previous weeks, we discussed:In previous weeks, we discussed:Models of Models of organizationalorganizational decision-making decision-making 1. The classical rational model

• Managers devise programs (“standard operating procedures”) so that decisions are made “by the book”

– Such routine or programmed decisions are delegated down the hierarchy; exceptions are managed by higher-ups

• Higher level decisions are uncertain and require problem-solving search

– Modern decision tools can help

2. The political model Decision-making is unplanned and disorderly. It can occur

without clear rules and behind the scenes. It is the outcome of conflicts in which one side prevails over others

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This week: This week: • Individual decision-making

– Decision-making and management roles– Models of individual decision-making

• Rational• Rational under uncertainty• Behavioral

Are you a rational decision-maker?

• Group decision-making– Pros and cons– Consensus decision-making

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Manager as decision-maker: Manager as decision-maker: engineer or leader?engineer or leader?

• As a leadership role – Clear vision enables quick, consistent decision-making – Intelligence, intuition, and commitment enables superior

“search” for best alternative– Risk tolerance and self-confidence enable fast choice– Charisma ensures wide acceptance of decisions

• As an engineering role – Careful analysis of decision alternatives & consequences – Design and implement decision-making tools and

programs– Train others in use of those tools

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Contrasts in Presidential Decision-Making:Contrasts in Presidential Decision-Making:Carter and ReaganCarter and Reagan

Thirty-Ninth President, 1977-1981 Born: October 1, 1924

Fortieth President, 1981-1989 Born: February 6, 1911Died: June 5, 2004

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George W. Bush is “The Decider”George W. Bush is “The Decider”

"I hear the voices and I read the front page and I know the speculation. But I'm the decider and I decide what's best.” White House Press Conference, April 18, 2002

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Models of decision-making:Models of decision-making:The classical rational modelThe classical rational model

Assumptions• You know all the choices in advance• You know all the outcomes of the choices• You have a utility function that rates the

outcomes from least- to most-preferred Decision• You make the choice that maximizes

(optimizes) your utility function

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A tool for rational decision-making: A tool for rational decision-making: Multi-attribute utility analysisMulti-attribute utility analysis

i = EXP PAY LOC WORK TRA

(1) Assign preference weights (wi) to attributes (i) 0.38 0.26 0.16 0.12 0.08 = 1.00

(2) Score (sij) choice alternatives on each attribute:

UTILITY*Big 5 0.9 0.8 0.7 0.2 0.3 0.710Dot.com 1.0 0.7 0.9 0.8 1.0 0.826Local bank 0.3 0.5 0.1 0.1 0.4 0.304

(3) Calculate utilities of choice alternatives as follows: *Uj = iwi sij

Decision: take the Dot.com job

EXP=Quality of experience; PAY=Level of Pay; LOC=Location; WORK=Workload; TRA=Travel required

See W. Edwards & J.R. Newman (1982). Multiattribute Evaluation.

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The model of rational decision making The model of rational decision making under uncertaintyunder uncertainty

Assumptions• You know all the choices in advance • You know the risks (probabilities) of all the

outcomes of the choicesDecision

• Maximize expected utility jpjUj

A decision-tree analysis of the expected A decision-tree analysis of the expected utility of buying computer insuranceutility of buying computer insurance

Choice Outcome Prob. of Value of Outcome Outcome

stolen (-3500)

not stolen ($0)

not stolen ($0)

stolen (-$3500+3450)-$100

-$50

-$3500

$0

.01

.99

.01

.99

-$50.50

-$35.00

Computer cost = $3500.00Insurance cost = $ 50.00Deductible = $ 50.00

Expected Value or Utility

BUY

DON’T BUY

-$1.00

$0.0

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Do you act like a rational decision-maker? Do you act like a rational decision-maker? Barry Schwartz: “The tyranny of choice”Barry Schwartz: “The tyranny of choice”

Scientific American, April 2004 Scientific American, April 2004

Optimizing scaleOptimizing scale1. Whenever I’m faced with a choice, I try to imagine what all the

other possibilities are, even ones that aren't present at the moment2. No matter how satisfied I am with my job, it’s only right for me to

be on the look out for better opportunities3. When I watch TV, I channel surf, often scanning through the

available options even while attempting to watch one program.4. I often find it difficult to shop for a gift for a friend5. I’m a big fan of lists that attempt to rank things (the best movies,

the best singers, the best athletes, etc.).6. I never settle for second best.7. I often fantasize about living in ways that are quite different from

my actual life

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When people When people act act like rational like rational decision-makers, how do they feel? decision-makers, how do they feel?

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Are you decision-averse?Are you decision-averse?

• Do you rely on “heuristics” (programs, routines) in order to avoid thinking through decisions?– E.g., go to the same restaurant; order the same dish

– Are you a creature of habit?

• Are you content to let others make your decisions, such as order in a restaurant?

• Are you inclined to flip a coin when you are faced with a choice?

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The behavioral model The behavioral model James G. March James G. March and and Herbert SimonHerbert SimonDaniel Kahneman and Amos TverskyDaniel Kahneman and Amos Tversky

People are “boundedly rational.” They have:– Limited time and resources

– Limited awareness of decision alternatives

– Limited awareness of consequences/outcomes

– Limited information-processing capabilities• Cognitive biases distort information gathering and processing

– Even limited awareness of their own preferences

People therefore rely on heuristics (cognitive rules of thumb) to guide or simplify or routinize decision-making– Over- or improperly-used heuristics bias or distort decision-making

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Daniel Kahneman – 2002 Nobel Daniel Kahneman – 2002 Nobel Prize in EconomicsPrize in Economics

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Heuristics are learned responses to Heuristics are learned responses to decision situationsdecision situations

• A decision is a response to an environmental stimulus (e.g., competitive threat, customer complaint)

• There are two types of response:

– Routinized or programmed response:• Stimulus evokes previously learned response (or performance program)

– Problem-solving response (search)• Stimulus evokes search (problem-solving activity) resulting in a new

performance program

– Which is easier? What would people rather do?

Decision-making heuristicsDecision-making heuristics

• The availability heuristic: People assess the frequency, probability, or likely causes of an event by the degree to which instances or occurrences of that event are readily “available” in memory.

• The representativeness heuristic: People assess the likelihood of an event’s occurrence by the similarity of that occurrence to their stereotypes of similar occurrences.

• Anchoring and adjustment: People make assessments by starting from an initial value and adjusting to yield a final decision. The initial value, or starting point, may be suggested from historical precedent, from the way in which a problem is presented or from random information.

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The availability heuristic and The availability heuristic and managerial decision-makingmanagerial decision-making

(1) A purchasing agent had to select one of several possible suppliers. He chose the firm whose name was most familiar to him. He later found out that the salience of the name resulted from recent adverse publicity concerning the firm’s extortion of funds from client companies.

(2) Managers conducting performance appraisals often fall victim to the availability heuristic. Working from memory, the vivid instances relating to an employee are more easily recalled from memory will appear more numerous and will therefore be weighted more heavily

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The representativeness heuristic: The representativeness heuristic: neglecting base ratesneglecting base rates

Mark is finishing his MBA at a prestigious university. He is very interested in the arts and at one time considered a career as a musician. Is Mark more likely to take a job:– In the management of the arts? – With a management consulting firm?

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Stereotyping and the Stereotyping and the representativeness heuristicrepresentativeness heuristic

Over a period of about five years, Reagan told the story of the "Chicago welfare queen" who had 80 names, 30 addresses, 12 Social Security cards, and collected benefits for "four nonexisting deceased husbands," bilking the government out of "over $150,000." The real welfare recipient to whom Reagan referred was actually convicted for using two different aliases to collect $8,000. Reagan continued to use his version of the story even after the press pointed out the actual facts of the case to him.

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Confirmation and hindsight biasConfirmation and hindsight bias

• Confirmation bias– People seek confirmatory information for what

they think is true and neglect the search for disconfirmatory evidence

• Hindsight bias– After finding out whether or not an event

occurred, people tend to overestimate the degree to which they would have predicted that outcome

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Criticism of the war in Iraq: Criticism of the war in Iraq: A case of hindsight bias?A case of hindsight bias?

One of the most systematic errors in human perception is what psychologists call hindsight bias -- the feeling, after an event happens, that we knew all along it was going to happen.

"Liberals' assertion that they 'knew all along' that the war in Iraq would go badly are guilty of the hindsight bias," agreed Hal Arkes, a psychologist at Ohio State University, who has studied the hindsight bias and how to overcome it.

"This is not to say that they didn't always think that the war was a bad idea. It is to say that after it was apparent that the war was going badly, they assert that they would have assigned a higher probability to that outcome than they really would have assigned beforehand.“

Washington Post, October 2, 2006

More biases: More biases: Risk aversion or toleranceRisk aversion or tolerance

People are risk averse with respect to maintaining gains but risk seeking with respect to avoiding losses.

In other words, losses loom larger than equivalent gains

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Risk tolerance/intoleranceRisk tolerance/intolerancePeople adapt to or become tolerant of risk. But one People adapt to or become tolerant of risk. But one

realization of downside risk will increase risk aversionrealization of downside risk will increase risk aversion

Soon after shuttle flights resumed in 1988 (two years after the Challenger disaster), Adams moved on to unmanned missions, passing up a promotion:

I just didn’t think I could face the potential risk any more of going through something like Challenger. And that risk is there...The odds will sooner or later get us.”

Frank AdamsMarshall Space Flight Center’s Deputy Manager for Boosters

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Another bias:Another bias:Escalation of commitmentEscalation of commitment

The tendency to persist in an unsuccessful course of action because of sunk costs.

• A bad decision results in a negative outcome– E.g., investment loss

• Rather than changing course of action, more is invested to try to recoup sunk costs

– The process continues...

– What are the psychological mechanisms?• Risk-seeking after losses (prospect theory)

• Cognitive dissonance

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Biases lead to unethical behaviorBiases lead to unethical behavior Most of us believe that we’re ethical and unbiased. We assume that we…reach fair and

rational conclusions that are in our organization’s best interests.

But .. we harbor many unconscious– and unethical—biases that derail our decisions and undermine our work as managers.

(1) Hidden biases prevent us from recognizing high-potential workers and retaining talented managers.

(2) They stop us from collaborating effectively with partners. (3) They erode our teams’ performance. (4) They can also lead to costly lawsuits.

Fortunately, as a manager, you can take deliberate actions to counteract the pull..of these unconscious biases..

(1) Regularly audit your decisions.(2) Expose yourself to non-stereotypical environments that challenge your biases.(3) Consider counterintuitive options when making decisions.

Mahzarin Banaji, Max H. Bazerman, and Dolly Chugh: “How (un)ethical are you?” Harvard Business Review, December 2003

GROUP DECISION-MAKINGGROUP DECISION-MAKING

Pros and consConsensus decision-making

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The pros of group (team) decision-making The pros of group (team) decision-making

• Teams make more accurate decisions than their average member – Greater detection of error– Greater memory of facts – Greater probability that someone will know the right answer

• Teams bring together a greater diversity of skills, information, knowledge, points of view– Brainstorming

• Teams, especially diverse teams, are more creative• Decision acceptance is greater when people are involved in the

decision-making process– “Production teams” at NUMMI

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The cons of group decision makingThe cons of group decision making

– Takes time – The potential for conflict is high– Responsibility is diffused – Group shift/polarization (“risky shift”)– Reduced learning?

• An audience enhances performance but lowers learning

– Groupthink

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Beware of groupthink!Beware of groupthink! (Janis, 1972) (Janis, 1972) Definition: when members fail to disagree, to bring up doubts and fears, or

to bring up information that contradicts the team’s decision. Suddenly, they are going in a direction that makes no one happy simply because no one wants to cause conflict.

Components:– Illusion of invulnerability– Rationalizations collectively devised to discount negative feedback– Unquestioning belief by members in team’s inherent morality and stereotyped negative views of

external detractors– Direct pressure on any individual who expresses doubts about the team’s shared illusions or

questions validity of the majority view– Reluctance to deviate from what appears to be team consensus despite misgivings, and tendency to

minimize personal doubts– Escalation of commitment

President John F. Kennedy after the Bay of Pigs invasion: “How could we have been so stupid?”

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The “risky shift”The “risky shift”When people are in groups, they are likely to make riskier (more extreme) decisions, as the shared risk makes the individual risk less

– Myers and Bishop (1970) put highly prejudiced students together to discuss racial issues. They became even more prejudiced. The reverse happened with unprejudiced students, who became even more unprejudiced.

– Entire football teams sometime get into aggressive or defensive moods as they either throw caution to the winds trying to score or desperately try to avoid being caught out.

– Juries given weak evidence will become very lenient after discussion, whilst when given strong evidence they are likely to give harsh judgment.

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Consensus decision-making Consensus decision-making • Upsides: everyone is on board; fast & thorough implementation

• Downsides: Very slow to arrive at decisions; consensus may not be reached or is unreal; risk of groupthink

• Examples:

– American juries 根回し and 稟議 – nemawashi and ringi system of Japanese decision-making

• The Delphi technique: a consensus-building tool– Identify a panel of experts– Have each solve the problem individually– Compile all these comments– Have each expert give feedback on all other comments– Repeat the last 2 steps until consensus is reached

Temple of Delphi in Greece

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Google practices Google practices consensus decision-makingconsensus decision-making

Rule #8: Strive to reach consensus. Modern corporate mythology has the unique decision maker as hero. We adhere to the view that the "many are smarter than the few," and solicit a broad base of views before reaching any decision. At Google, the role of the manager is that of an aggregator of viewpoints, not the dictator of decisions. Building a consensus sometimes takes longer, but always produces a more committed team and better decisions

“Google: 10 Golden Rules,” by Eric Schmidt, CEO of Google and Hal Varian, Haas Professor and consultant to Google, Newsweek, Dec. 2, 2005

(Which suggests what kind of leadership?)

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In summary …In summary …

• Decision-making is hard• Lots of things can get in the way of making good

individual decisions• Even more things get in the way of making good

decisions in groups

WEDNESDAY: “The collapse of Barings”– Consider individual- and organization-level conditions