UNIVERSITÄT HILDESHEIM

1. UNIVERSITÄT HILDESHEIM Communication in Organizations Decision Theory Anna Lazor / Bettina Ferring / Christoph Münch 20. Mai 2003

2. Structure • Introduction • Making decisions step by step • The bounded rationality model • Decision making under uncertainty • Advantages and Disadvantages of Group Decision Making • Individual vs. Group Decision Making • Ethical Decision Making • The Role of Culture in Shaping Decisions

3. What is a decision?

4. Historical facts “Sapere aude!“  motto of the enlightenment Francisco Goya 1797-98: “the sleep of reason produces monsters“ The individual appears, natural freedom to think for yourself

5. Freedom to think = high responsibility • The difficulty in life is the choice “It could be argued that the essence of living is free choice - the process of making decisions. To be deprived of choices is to lose all meaning“ (Driver 1979 p. 59) Good decision-making brings about a better life, it gives you some control over your life. A good decision is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives.

6. Programmed and nonprogrammed decisions There are two general types of decision : • Programmed decision: structured, repeatedly tested, well defined, clear set of options from which a choice can be made Example: Replacement of an office copy machine 2. Nonprogrammed decision: unstructured, unique, new, require a special treatment, unsharply defined  A single solution is custom-tailored to the problem!

7. Making decisions step by step Creating a model which can describe different stages in decision making Two major stages: 1.: problem identification 2.: problem solution Reflection before action! As a Chinese proverb says, "To chop a tree quickly, spend twice the time sharpening the ax.“ Carpenters say, "Measure twice, cut once."

8. Step 1: Monitor the decision environment The manager monitors internal and external information that will indicate deviations from planned or acceptable behavior. • Talk to colleagues • Financial statements • Performance evaluations • Industry indices • Competitor‘s activities • …

9. Step 2: Define the decision problem The manager responds to deviations by identifying essential details of the problem • Where • When • Who was involved • Who was affected • How are current activities influenced

10. Step 3: Specify decision objectives The manager determines what performance outcomes should be achieved by a decision.

11. Step 4: Diagnose the problem The manager digs below the surface to analyze the cause of the problem. Additional data may be gathered to facilitate this diagnosis. Understanding the cause enables appropriate treatment.

12. Step 5: Develop alternative solutions Before a manager can move ahead with a decisive action plan, he or she must have a clear understanding of the various options available to achieve desired objectives. The manager may seek ideas and suggestions from other people.

13. Step 6: Evaluate alternatives This step may involve the use of statistical techniques or personal experience to assess the probability of success. The merits of each alternative are assessed as well as the probability that it will reach the desired objectives.

14. Step 7: Choose the best alternative This step is the core of the desision making process. The manager uses his or her analysis of the problem, objectives, and alternatives to select a single alternative that has the best chance for success.

15. Step 8: Implement the chosen alternative Finally, the manager uses managerial, administrative, and persuasive abilities and gives directions to ensure that the decision is carried out. The monitoring activity (step 1) begins again as soon as the solution is implemented.

16. Enter: The reality Models can not stand the test of reality! The model is just an ideal managers may work toward but never reach. In fact, some heavy constraints do avert the model to be realized in an actual decision making process.

17. Constraints • Limited time • Limited information • Need for agreement (cooperation) • Corporate culture and structure • Own desire for prestige / success • …

18. Bounded rationality model Herbert A. Simon Born in 1916 Died in 2001 He got the prize in economic sciences in memory of Alfred Nobel in 1978 "for his pioneering research into the decision-making process within economic organizations"

19. Sequential consideration of alternatives Unlike the treatment of alternatives in the step- by-step model (which requires that all alternatives under consideration be identified before any evaluation takes place), here the various alternatives are identified and considered one at a time. Those that prove inadequate in the light of the evaluative criteria are discarded before other alternatives are considered.

20. Use of heuristics Heuristics are rules that guide the search for alternatives into areas where there is a good chance of finding satisfactory solutions. • Aiming at satisfactory sub-optimal solutions! • Short-cuts in the decision making process • “When the stock of goods gets down to four, that is the time to buy more.“ • …

21. Satisficing In the previous model, the optimal course of action is chosen after considering all possible alternatives. • Impossibility to do so in reality! The decision makers judge one alternative at a time against certain standards of acceptability, and choose the first alternative which meets the minimal acceptable criteria or the minimum conditions for success! • Acceptance of a satisfactory outcome!

22. Decision making under uncertainty • As a result of the bounded rationality, all decisions carry some element of uncertainty and risk • Cosequences of an action must be undetstood in the cotext of their perceived likelihood to occurrence

23. Reactions to risk I • Rational ideal for decision making under uncertainty is to select the alternative with the highest expected value • The expected value (EV) of an action is the value assigned to each possible consequence of the action, multiplied by the probabilities that each of these possible consequences will occur.

24. Reactions to risk II Do decision makers rely on expected-value calculations, when they make decisions?

25. Reactions to risk III You can have (A) $10 million for sure ( EV = $10 million) or (B) flip a coin and receive $22 million if heads appears and nothing if tails appears (EV = $11 million)

26. Reactions to risk IV Expected value (EV) EV = ($22,000,000*50%)+($0million*50%)=$11,000,000

27. Risk neutral • Typical decision maker is not risk neutral • it assumes that decision maker is indifferent between risky and certain autsomes if they have same EV

28. Risk-averse • Risk-averse decision makers ignore the EV-solution and choose option associated with less risk • Risk-seeking behavior is just the opposite of risk-averse behavoir • Decision maker is risk seeking when he pays a premium to experience risk • Such as gambling in Las Vegas

29. Risk in organizations – Framing and Escalation • Framing – decision makers become increasingly likely to take risks when confronting potential losses • And increasingly likely to avoid risks when confronting possible gains • Escalation – to commit resources to a failing cause based on the (slim) hope that there will be a dramatic positive change

30. Advantages of Group Decision Making • Brings multiple knowledge and skills to the decision • Resource pooling: group has more information than do any of its members • Synergy: members can stimulate and encourage each other

31. Advantages of Group Decision Making • Diversity: heterogenity of members can alter the group‘s effectiveness “Cultural diversity provides the biggest asset for teams with difficult, discretionary tasks requiring innovation.“

32. Advantages of Group Decision Making • Transactive memory: combination of knowledge related to each individual within a team • Situated expertise: concerning group member‘s external ties, „who knows whom“

33. Advantages of Group Decision Making • Expedits acceptance by the group • Increases commitment to decisions • Generally results in higher quality decisions

34. Disadvantages of Group Decision Making • Requires more time • “satisfice“ even when better decision is possible • Individual expertise may be ignored in favour of group consensus • Encourages riskier decisions

35. Disadvantages of Group Decision Making • Creates possibility of “groupthink“ • Irving Janis first identified groupthink as a factor that influenced the misguided Bay of Pigs invasion in 1961 • Occurs in highly cohesive groups • Distorted think- and decision processes make it impossible to make rational decisions

36. Groupthink

37. Symptoms of Groupthink Invulnerability Members feel they are safe and protected from dangers, ostracism or ineffective action Rational Members ignore warnings by rationalizing moral and ethical

38. Symptoms of Groupthink Morality Members believe their actions are inherently moral and ethical Stereotypes Members view opponents as truly evil or stupid and unworthy of or incompetent at negotiations

39. Symptoms of Groupthink Pressure Members pressure all group members to conform to the group‘s decision Self-censorship Members do not express any questions about the group‘s decision

40. Symptoms of Groupthink Unanimity Members perceive that everyone in the group has the same view Mindguards Members may keep averse information that might ruin their perceptions of consensus and the effective decision

41. When make decisions in groups? • Potential benefits are substantial • High error costs • Difficult to reverse or salvage a decision after action has begun • Feedback will not be available until long after the decision has been implemented

42. When make decisions in groups? • Information is incomplete or uncertain • Many feasible alternatives exist • Identifying the optimal alternative is difficult

43. Individual vs. Group Decision Making • Type of problem or task • Individual: when efficiency is desired • Group: when diverse knowledge and skills are required • Acceptance of the decision • Individual: when acceptance is not important • Group: when acceptance by group members is valued

44. Individual vs. Group Decision Making • Quality of the solution • Individual: if „best member“ can be identified • Group: when several group members can improve the solution • Characteristics of the individuals • Individual: when person cannot collaborate • Group: when group members have experience working together

45. Individual vs. Group Decision Making • Climate of the decision making • Individual: when climate is competitive • Group: climate is supportive of group problem solving • Amount of time available • Individual: when relatively little time is available • Group: when relatively more time is available

46. Summary Group decision making is not without difficulties. Group decision making increases communication, commitment, development and ownership of a problem and solution.

47. Summary It‘s an important step to make the right choice between individual and group decision making. „A Decision how to make a decision.“

48. Ethical decision making • Ethics are moral standards, not governed by law, that focus on the human consequences of action • Ethics require behaviour that meets higher standards than that established by low, including selfless behaviour rather than calculated • Ethics are a product of a society‘s culture, which includes its traditions, customs, values, and norms

49. Ethical decision making • The capitalist system would not function if individuals were truly altruistic • People are likely to be more highly motivated if they are encouraged to pursue their own self-interest. • Destinction needs to be made • Short-term self-interests • Long-term self-interests  social dilemma

50. Ethical decision making • Social dilemma - when the best long-term interests of the individual (society) conflict with the immediate interests of the individual