Organizational Behaviour - Decision Making PDF

ORGANIZATIONAL BEHAVIOUR 1 Chapter 9 – Decision Making  2 Agenda Topics to Cover 1. How “should” decisions be made? 01 2. How do individuals 02 actual...

ORGANIZATIONAL BEHAVIOUR 1 Chapter 9 – Decision Making  2 Agenda Topics to Cover 1. How “should” decisions be made? 01 2. How do individuals 02 actually make 03 decisions? 04 3. What role does intuition play in 05 effective decision 06 making?  3 Rational Decision Making How decisions “should” be made “Rational” Decision- Making Process of choosing a course of action of a # of different alternatives Makes consistent, value- maximizing choices within specified constraints Assumption of classical/Neoclassical economics  4 Rational Decision Making Model  5 Rational Decision-Making Assumptions that might not be met Problem clarity Model The problem is clear and unambiguous Known options The decision maker can identify all relevant criteria and viable alternatives Clear preferences The criteria and alternatives can be ranked and weighted Constant preferences Specific decision criteria are constant and the weights assigned to them are stable over time No time or cost constraints Full information is available because there are no time or cost constraints Maximum payoff The choice alternative will yield the highest perceived value  6 “Rational” Decision Making Is it all that rational? Is this really how we make decisions? Evidence says “no” Many management theories are based on economics Treats “economic agents” as “opportunistic”/ “self interest seeking with guile”  7 Actual Decision Making Is it all that rational? 1. Bounded Rationality 2. Satisficing 3. Intuition 4. Judgment Shortcuts  8 Bounded Rationality Limitations on one’s ability to interpret, process, and act on information When choosing an “education” did you consider: Every school? Every program? Other options? Are we really that “du mb”?  9 Satisficing Like a “C+”, it is “good enough” Identifying a solution that is “good enough” The first acceptable option rather than the optimal one Examples: Hiring decisions Job search Spouse/mate Group decisions  10 Intuition Not “rational” but often not wrong… A non-conscious process created from distilled experience that results in quick decisions Relies on holistic associations Affectively charged – engaging the emotions Although not rational, it is not wrong or in opposition to rational analysis. “gut feeling” can be useful, but sometimes you might just be gassy  11 Actually Making Decisions How do we do it? Perceptions Vs Reality We often make decisions based on perceptions (not fact) Attribution theory of perception. Remember? Selective perception Halo effect Projection Contract effect Stereotyping  12 Making a Bad Decision Things we do all the time Worse When making decisions we often: 1. Take shortcuts 2. Have biases  13 Overconfidence Bias Believing too much in our own ability to make good decisions – especially when outside of own expertise The weaker the ability, the more likely to overestimate performance/ability  14 Dunning-Kruger Effect  15 Dunning-Kruger Effect Low ability individuals think they are better than they are You need a certain level of skill/knowledge in an activity to realize how truly bad you are  16 Confirmation Bias Selecting and using only facts that support our decision Journalism Hiring/promotion In science  17 Confirmation Bias/Overconfidence  18 Availability Bias Emphasizing information that is most readily at hand Recent & Vivid Risk of death Airplane crashes 1/11 million Shark attack 1/3.7 million Car crashes 1/500 Getting stabbed from Kijiji?  19 In four pages of a novel (about 2,000 words), how many words would you expect to find that have the form _ _ _ _ ing (seven letter words that end with ing)? Indicate your best estimate by circling one of the values below: 0 1-2 3-4 5-7 8-10 11-15 16+ 0 0 0 3 2 6 8 In four pages of a novel (about 2,000 words), how many words would you expect to find that have the form _ _ _ _ _ n _ (seven letter words that have the n in the sixth position)? Indicate your best estimate by circling one of the values below: 0 1-2 3-4 5-7 8-10 11-15 16+ 19  20 Randomness Error The tendency to believe that we can predict the outcome of random events Trying to make meaning out of random patterns Superstitions 20  21 Risk Aversion  22 Risk Aversion We prefer a sure thing over a risky outcome The reason free samples work Loss aversion: Risk of lose is stronger than the potential of gain People prefer to take a chance when preventing a negative outcome  23 Sunk Cost Fallacy What happened with the Challenger? A cost that has already been paid and thus cannot be recovered is called sunk cost Tendency to persist in an activity because of previously invested effort, time or money Sunk costs are permanent losses of resources incurred as the result of a decision (i.e., honoring sunk costs). E.g., Resist selling a stock whose value continues to depreciate  24 Irrational Escalation of Commitment Increasing commitment to a decision in spite of evidence that it is wrong – especially if responsible for the decision! Dollar Auction The more “rational” the decision the more irrational commitment  25 Anchoring Bias Using early, first received information as the basis for making subsequent judgments Talked about this in “negotiations”  26 Anchoring Bias  27 Framing You bought a movie ticket online to see Avengers: Infinity War (cost $20). You get to the theater and discover that you forgot your admission ticket at home. Will you buy a new ticket? You decide to go see the movie Avengers: Infinity War, but you did not buy your ticket yet (cost $20). When you arrive to the theater you realize that lost a $20 bill. Will you still buy your movie ticket? 27  28 Planning fallacy The tendency of people to underestimate the duration of time to complete a specific task or project When we predict our own tasks we tend to show an optimistic bias (underestimating time). When other predict task completion time, they show a pessimistic bias (overestimating time). Potential explanations: Not taking our experience into consideration Wishful thinking Self-serving bias 28  29 Hindsight bias Tendency to believe we could accurately predict the outcome, after the outcome of the even is known May lead to increase in confidence and performance (if reasonable) But, may reduces our ability to think rationally and learn from the past  30 What can be done? Focus on goals Helps you to eliminate options that are not in alignment with your goals Look for disconfirming information Don’t create meaning Increase options  31 Summary Bringing it all together – Thinking Fast and Slow 31