Foundations for Business Successes (PDF)

Chapter 11: Decision Making ​ Decision-making - making choices among alternative courses of action, including inaction. ​ Decisions can be classified into three categories: ○​ Strategic decisions - these decisions set the course of an organisation. ○​ Tactical Decisi...

Chapter 11: Decision Making ​ Decision-making - making choices among alternative courses of action, including inaction. ​ Decisions can be classified into three categories: ○​ Strategic decisions - these decisions set the course of an organisation. ○​ Tactical Decisions - decisions about how things will get done. ○​ Operational Decisions - decisions that employees make each day to run the organisation. ​ There are two main types of decisions: ○​ Programmed decisions - these occur frequently enough that an automated response is developed. The automated response used for these decisions is called the decision rule. ○​ Non-programmed decisions - decisions that are unique and important require conscious thinking, information gathering, and careful consideration of alternatives. ​ Four decision-making approaches: ○​ Rational Decision-Making Model - describes a series of steps that decision-makers should consider if their goal is to maximize the quality of their outcomes. The steps in this model are: 1.​ Identify the decision to be made. 2.​ Establish decision criteria. 3.​ Weigh decision criteria. 4.​ Generate alternatives. 5.​ Evaluate the alternatives. 6.​ Choose the best alternative. 7.​ Implement the decision. 8.​ Evaluate the decision. ○​ Bounded Rationality Decision-Making Model - this model recognises the limitations of decision-making processes. With this model, individuals knowingly limit their options to a manageable set and choose the best alternative without conducting an exhaustive search for alternatives. An important part of this approach is the tendency to satisfice, which means accepting the first alternative that meets your minimum criteria. ○​ Intuitive Decision-Making Model - this model refers to arriving at decisions without conscious reasoning. The model argues that in a given situation, experts making decisions scan the environment for cues to recognise patterns. They can then play a potential course of action through to its outcome, based on their prior experience.  ○​ Creative Decision-Making Model - this model argues that creativity is the generation of new, imaginative ideas, and this is a vital part of being an effective decision-maker. The five steps to creative decision-making include: 1.​ Problem Identification - the need for problem-solving becomes apparent. 2.​ Immersion - the decision-maker thinks about the problem consciously and gathers information. 3.​ Incubation - the individual sets the problem aside and does not think about it for a while, although their brain is actually working on the problem unconsciously. 4.​ Illumination - the "eureka" moment when the solution becomes apparent, usually when least expected. 5.​ Verification and Application - the decision-maker consciously verifies the feasibility of the solution and implements the decision. Faulty Decision-Making ​ Overconfidence bias occurs when individuals overestimate their ability to predict future events. For example, 82% of drivers surveyed believe they are in the top 30% of safe drivers. To avoid overconfidence bias, it is important to stop and ask yourself whether you are being realistic in your judgements.​ ​ Hindsight bias occurs when looking backward in time, mistakes made seem obvious after they have already occurred. This can be problematic when judging someone else's decisions, as it is important to remember that they may not have had all the information available that you now have.​ ​ Anchoring is the tendency for individuals to rely too heavily on a single piece of information. For example, when making a purchase, customers may anchor on the price of an item while ignoring other important factors, such as quality and features.​ ​ Framing bias occurs when decision-makers are influenced by the way a situation or problem is presented. For example, individuals are more likely to buy meat that is described as "85% lean" than meat described as "15% fat".​ ​ Escalation of commitment happens when individuals continue on a failing course of action after information reveals it may be a poor path to follow. This is sometimes called the sunk costs fallacy because continuing is often based on the idea that they have already invested in this course of action. For example, someone may continue to put money into repairing a used car in the hopes of justifying their initial investment, even though it may be more cost-effective to sell or donate the car.​  There are several reasons why escalation of commitment occurs:​ ○​ Decision-makers do not want to admit they were wrong. ○​ Decision-makers may incorrectly believe that spending more time and energy might help them recover their losses. ​ Decision-makers can avoid escalation of commitment by:​ Setting strict turning back points. ○​ Assigning separate decision-makers for the initial buying and subsequent selling decisions. ○​ Periodically evaluating an initially sound decision to see whether the decision still makes sense. ○​ Creating an organisational climate where individuals do not fear admitting their initial decision no longer makes economic sense. ​ Group Decision-Making Advantages: ○​ Groups can draw from a larger number of individual experiences and perspectives. ○​ Groups can be more creative, leading to more effective decisions. ○​ Groups can make the task more enjoyable. ○​ Implementation of the decision will be easier because group members are invested in the decision. ○​ Diverse groups can make better decisions because different group members may have different ideas based on their backgrounds and experiences. ​ Group Decision-Making Disadvantages: ○​ Groups rarely outperform their best member. ○​ Groups often suffer from process losses, such as coordination problems. ○​ Groups can suffer from social loafing. ○​ Groups can suffer from groupthink. ○​ Group decisions take longer than individual decisions. ​ Groupthink is a phenomenon where group pressure increases the risk of the group making flawed decisions, leading to reduced mental efficiency, reality testing and moral judgement. The eight characteristics of groupthink are: ○​ Illusion of Invulnerability - shared by most or all members of the group, creating excessive optimism and encouraging them to take extreme risks. ○​ Collective Rationalisations - downplaying negative information or warnings that might cause them to reconsider their assumptions. ○​ Unquestioned Belief in Inherent Morality - ignoring ethical or moral consequences of their actions.  ○​ Stereotyped Views of Out-Groups - discounting rivals' abilities to make effective responses. ○​ Direct Pressure - placed on any member who expresses strong arguments against the group's stereotypes, illusions, or commitments. ○​ Self-Censorship - group members minimise their own doubts and counter-arguments. ○​ Illusions of Unanimity - the lack of dissent is viewed as unanimity. ○​ Self-Appointed Mindguards - one or more members protect the group from information that runs counter to the group's assumptions and course of action. ​ Avoiding Groupthink - The sources offer several recommendations for avoiding groupthink, including: ○​ Groups should: ​ Discuss the symptoms of groupthink. ​ Assign a rotating devil's advocate. ​ Invite experts or qualified colleagues to attend meetings. ​ Encourage a culture of difference. ​ Debate ethical implications. ○​ Individuals should: ​ Monitor their own behaviour. ​ Check themselves for self-censorship. ​ Avoid mindguard behaviours. ​ Avoid putting pressure on other members to conform. ​ Remind members of the ground rules for avoiding groupthink. ○​ Group Leaders should: ​ Break the group into sub-groups. ​ Have more than one group work on the same problem. ​ Remain impartial. ​ Encourage critical evaluations. ​ Create an anonymous feedback channel. ​ Tools and Techniques for Better Group Decisions ○​ Nominal Group Technique - all members participate fully by independently and silently writing down ideas, sharing them in turn, discussing and clarifying each idea, then voting on their favourite ideas. ○​ Delphi Technique - a group process using written responses to a series of questionnaires rather than individuals meeting. Questionnaires begin with a broad question and subsequent questionnaires are developed from the information gathered from the previous one. The process ends when the group reaches a consensus.  ○​ Majority Rule - each member of the group gets a single vote and the option with the greatest number of votes is selected. ○​ Consensus - discussing issues, generating a proposal, calling for consensus, and discussing concerns, which are repeated until consensus is reached. ○​ Group Decision Support Systems (GDSS) - interactive computer-based systems that combine communication and decision technologies. These can improve collaborative work through higher information sharing but have the potential to be counterproductive if they become too complicated or fail to take into account human psychology. ○​ Decision Trees - diagrams in which answers to yes or no questions lead decision-makers to address further questions until they reach the end of the tree. Project premortem 1.​ A planning team creates an outline of a plan, such as launching a new product. 2.​ Either the existing group, or a new group, imagines that the plan has failed. They should then note down all the reasons that they can imagine that might have caused this failure. 3.​ Each team member shares items from their list until all the potential problems are identified. 4.​ The list is reviewed for any additional problems. 5.​ The issues are sorted into categories. 6.​ The plan is then revised to correct the flaws and try to avoid these potential problems.