Chap 11. BU288

What is decision making?

The process of developing a commitment to some course of action: an existing state to a desired state.

Components-

• it’s a process

• requires commitment

• choice between alternatives

What is a well-structured problem?

• clear existing state

• clear desired state

• “programs” set to solve them

What is an ill-structured problem?

- unclear existing state
- unclear desired state
- not obvious how to go from one to the other (can't be solved through programmed decisions)

What is decision-based evidence making vs. evidence-based decision making?

Evidence to back up decision (confirmation bias) vs. evidence to create decision

What are the steps of the rational decision making process?

1. Problem identification

2. Info search

3. Development and evaluation of alternative solutions

4. Solution choice and implementation

5. Solution evaluation

What is perfect rationality?

A decision making strategy where a person is perfectly informed, logical and oriented toward economic gain.

What is bounded rationality?

Managers try to act rationally but decisions are bounded by:

• Information: limited information.

• Time: needing to make a quick choice

• Political: need to please others in organization with each decision we make.

• Willpower: weigh present more heavily than the future.

• Self-interest: please others, protect image.

What is framing and how does it affect decision making?

The manner in which objectively equivalent alternatives are presented.

Gain frame - encourages conservative decision Loss frame - encourages risk, would rather lose less than accept a sure loss

What is prospect theory?

Viewing value of gain as way less than loss

How does bounded rationality affect problem identification?

• perceptual defence, avoid unpleasant feelings

• believe problem lies in managers specialty

• problem defined in terms of solutions

• problem diagnosis in terms of symptoms

What are biases that happen in information search?

Availability bias: choosing the most quickly available information

Confirmation bias: searching for information that confirms one’s solution

Not-invented-here bias: ignoring information that came from outside sources

What are biases that influence decision making?

• overconfidence

• confirmation bias

• stereotyping

• framing effects (riskier decisions in the face of potential losses compared to potential gains)

• Escalation of commitment (continue on with a failing course of action)

• Group decision-making biases: groupthink and group polarization

What is anchoring and adjustment?

The common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions. Adjusting from there to yield a final answer.

What is satisficing vs maximizing?

Find base level of adequacy for solution and search for others until one exceeds it vs. choosing decision with the greatest expected value

What is escalation of commitment?

Devoting more resources into a failing course of action in effort to recoup sunk costs.

• form of self-justification (theory)

• overconfidence (confirmation bias)

• problem framing after sunk cost (loss aversion based on prospect theory)

• social norms favour consistent behaviour (impression management)

How to avoid escalation of commitment?

- seek disconfirming information

- reframe losses as gains

- structure incentives so you're not punished for changing your mind

- hand off decisions to new people

- not considering expended resources

- frequently remember goals of investment

What is hindsight?

People tend to evaluate past decision making processes inaccurately. We have a self-serving bias.

How does mood affect decision making?

positive mood:

• remember good information

• positive evaluations of things

• overestimate probability of good events

• more creative decision making

• more simplified decision making

What is the abilene paradox?

A circumstance where a group of people agree to a course of action based on the theory that it's best for the group even though individuals don't want to do it. Feel that their objections are not strong enough

What is the availability vs representative heuristic?

Availability: people predict the frequency of an event, or a proportion within a population, based on how easily or how readily available an example can be remembered

Representative: people judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data as opposed to using base rates

What is the Gamblers fallacy?

Mistaken notion that the odds for something with a fixed probability increase or decrease depending upon recent occurrences

What are the pros and cons of group decision making?

Pro: higher quality, people more accepting and committed to group decisions, a diffusion of responsibility

Cons: time, conflict, domination and groupthink

What is risky vs. conservative shift?

Risky shift: tendency for group to make riskier decisions than the initial average risk by individual members

Conservative shift: tendency for groups to make safer decisions

What are the Warning signs of group think?

- isolation from external resources

- pressure

- strong leader

- defensiveness

- illusion of unanimity

How to avoid groupthink?

- devils advocate

- objective leaders

- norms that encourage dissent and communication

- outside experts who can challenge the view of core members

- subgroups

- second guess meeting

What is Group polarization and why does it happen?

Group discussion seems to polarize/exaggerate the initial position of group:

• discussion of favoured ideas

• diffusion of responsibility

• minimized with more structured decision making

3 methods to improving decision making?

1. Evidence based management

2. Crowdsourcing opinions (facet of EBM)

3. Analytics and big data (facet of EBM)