Decision
Making in Organizations
Introduction
All organizational members make decisions. Managers, in particular must make decisions in
response to problems or opportunities by making choices among alternatives in relation to
a desired outcome. The elements of the
decision-making process, the characteristics of decisions, decision-making tools, and
three approaches to decision making are the focus of this module.
1.
Decision
Making
Decision
making is the process of choosing one course of action from a set of options. Most decision-makers are taking in information,
examining and selecting options, predicting likely outcomes based on those options,
considering the relative value of the options, all in light of particular goals. Within organizations, it is also important to
consider how often certain kinds of decisions must be made and what kind of information is
available to use in making the decision.
Through
doing systematic study of the decision making process, researchers have delineated three
important informational conditions we may be in when taking in information to make
decisions – certainty, risk, and
uncertainty. There are also individual differences in what
information is considered valid and how best to make judgments using that information. The Myers Briggs model is used to describe those
differences.
There
are systematic decision making processes within organizations depending upon the type and
frequency of decisions – we discuss when such decision rules are effective. We then
explore three decision-making approaches – Rational, Behavioral and Practical. The rational decision-making approach has received
the most research attention. Within the
rational approach we discuss the importance of and components of high quality problems
statements. We end with a tool for
coordinating high quality decision making – the criterion matrix.
Different
information conditions present different challenges to decision makers. Sometimes we know exactly what we need to know in
order to make a good decision. For instance,
we have a situation where there are two choices and only two choices and we know the
consequences and costs of each choice. In
such a situation of informational certainty we can make the best decision without much
difficulty. Under a condition of risk, we do
not know with certainty what the outcome of a decision will be but we do have enough
information to estimate the probability of various outcomes.
We then calculate the expected value of our choices adjusted for the
probability that outcome will result from our decision.
In situations of informational uncertainty we do not have enough information
to estimate the probability of the outcomes. In such situations decision makers make
their best guess, rely on their past experience, intuition, or make a judgment call and
live with the consequences.
It
is not always so easy to know which informational condition you are in – certainty,
risk, or uncertainty. Moreover, individual
decision makers differ in their experience of which situation they are in. A situation that might be informational uncertainty
for one person, might be informational certainty for another who has tools or skills to
handle things. And the tendency to take risks
varies from person to person. Our view of whether the information available is complete or
ambiguous may depend on our preferences and filters in regards to information we are
willing to consider as relevant for a given decision.
One
of the simplest and most widely used tools for understanding individual differences in
decision making style is the Myers Briggs Type Indicator (MBTI). The core cognitive styles in this model describe
one’s preference for taking in information through the five senses with a focus on
facts and figures (The Sensing Preference) which is contrasted with taking in information
through a sixth sense with receptivity to possibilities not evident through the five
senses (The Intuitive Preference). Each
perceptual orientation determines what kinds of information a person will consider valid
input in making a decision.
Once
we have our informational input, we then evaluate, or judge, the information in some
relatively consistent way. The MBTI
describes a preference for making decisions based on one’s understanding of cause and
effect from an ‘objective’ mental distance (Thinking Judgments). These decisions tend to be based on people’s
principles. The Thinking judgment
preference is contrasted with the propensity to make decisions based on the subjective
impact of that decision on that person or other people (The Feeling Judgment preference). Feeling judgments tend to be grounded in peoples
values. Both types of judgments, in theory,
are rational ways to make decisions. Managerial
organizational bias tends to support the combination of a focus on facts and figures (the
Sensing preference) with objective judgments (the Thinking Judgment preference). The original book by Briggs-Myers emphasized that
all the styles work and have value – they are merely “Gifts Differing”.
“Sensation/sense
perception tells you that something exists; thinking tells you what it is; feeling tells
you whether it is agreeable or not; and intuition tells you whence it comes and where it
is going.”
4.
Cognitive Style and
Decision Making
The
combination of perceptual preference and judgment style results in four cognitive style
combinations: Sensing-Thinking; Sensing-Feeling; Intuition-Thinking and Intuition-Feeling.
·
Sensing-Thinkers
focus their attention on facts. They tend to
become adept at applying facts to their experience. They
find scope for their abilities in technical areas. And
they solve problems by a detached analysis of facts in a step-by-step process moving from
cause to effect.
·
Sensing-Feelers
also focus on facts, but tend to connect those facts to ways of providing practice
assistance to people. They pay attention to
the daily concerns of organizational members. Their
decision making style for solving problems leans towards using their personal view of
daily experience to develop step-by-step processes that obtain a valued and feasible
outcome.
·
Intuition-Feelers
focus their attention on possibilities and tend to become adept at understanding the
aspirations of people. They are good at
communicating the need for decisions because they take a personalized view of the
possibilities and values inherent in the decisions.
·
Intuitive-thinkers
also focus on possibilities and are adept at developing theoretical concepts that appeal
to people who want a more objective analysis of the possibilities linked to cause and
effect.
Remember,
good decisions require appropriate use of all the functions. Sensing is required for
noticing and storing relevant data; Intuition for generating possibilities and forming
internal images of the future; Thinking for implementing logical plans and objective
evaluation of pros and cons; and Feeling for assessing what’s important to the people
involved and checking for congruence with values. A
strong emphasis on either judging function helps make sure decisions get made and tasks
get done; the strong perceiving function assures that enough data is gathered and we
remain flexible and able to change when necessary.
In
selecting from the various options available through the decision making process,
individuals, groups and organizations set up decision rules.
The decision rule is what we use to actually choose options once
available information has been gathered and examined.
Usually the decision rule is to maximize the probability of meeting some
goal or objective. For instance, a beneficiary
service representative will often know how they may resolve a service quality dispute when
dealing with beneficiaries. If a beneficiary service goal is building beneficiary loyalty, the
representative may be told to apologize, promise to speak to whoever provided poor
service, and offer a coupon for a return to that establishment. Even though this may be a
non-routine experience for the beneficiaries, it probably happens often enough within the
organization for beneficiary service representatives to have developed some rules about how to
handle those situations.
Sometimes
these decision rules are very explicit, as in the case of routine decisions made
repeatedly in organizations for which policies have been developed. Sometimes these rules are implicit – ways of
making decisions that are habitual and brought forth from past decision-making situations. Sometimes the situation is obviously so new and
different that everyone knows new decision rules need to be established.
Programmed
decisions are those that recur in our organizations and so it is possible to set up
systems to handle them. Programmed
decisions can be effective and efficient when the type of decision is well structured, the
goals have been clarified, information is readily available, and procedures have been put
in place to make such routine decisions at all levels within the organization. Decision rules or guidelines have been put in place
so that many of these decisions can be made efficiently.
Problem-solving
decisions however are new decisions being made with ambiguous or limited information with
vague goals. These often require more
attention, more gathering and structuring of the information, more time and attention, and
more judgment and creativity. Within
organizations these problem-solving decisions are a major part of managerial work. The issues are unique and require developing and
evaluating options, sometimes making new decision rules.
In practice, as executives and managers gain familiarity with the
information and accumulate some success in handling this decision-making complexity
(because the decisions have become more like programmed decisions) they first empower and
then delegate these decisions to other members of the organization.
There
are many variations on the rational decision making model.
Most organizations describe a circular model, which require the
following:
·
Identifying
a goal or problem,
·
Collecting
data relevant to generating options for solving the problem,
·
Defining
the criteria you agree to use to choose between the options,
·
Evaluating
those options according to those decision making criteria,
·
Choosing
an option that satisfies the criteria,
·
Implementing
the choice,
·
Examining
the outcomes to see whether the action met the goals, and
·
Deciding
whether to change on continue in that path.
With
routine decisions this rational-decision making process is often rapid because the options
considered are usually limited and constrained by past-habitual responses. With complex decisions this process may continue
for a long time for various reasons. Sometimes the process is iterative. You generate options and criteria and new
information comes in which causes you to go back and re-examine options or the
decision-making criteria. It is not uncommon
for people to come up with a set of decision-making criteria that seem rational in the
beginning but fail to account for a key stakeholder’s interests. The result is a re-evaluation of the options
accounting for those interests.
8.
Problem
Statements and Justifications
When
the decision making involves a problem, it is helpful to develop a sound statement of the
problem. A good problem statement involves a
few sentences, includes the central problem, implicitly identifies the perspective you are
taking, is motivating-engaging to people you need to help you fix the problem, and
describes the root problem in such a way that when that is fixed any correlating symptoms
will disappear.
Structurally
a problem statement states the problem (the central issue), the backing (an explanation of
how you know this is a problem), the constraints (an indication of whether to solution
space is limited and by what), the source of the problem (a statement of what you believe
caused the problem), and a solution (specifies some course of action to fix the problem).
The
justification is how you convince others that your assessment of the problem is correct. An effective justification provides data to
support the problem statement, makes a reasonable interpretation of those data, clearly
distinguishes between data and interpretation, and is believable by your audience because
it is framed in their language.
Think
of the problem statement as the bottom-line description and the justification as the
information you can provide if/when follow up questions are asked.
In
the first column list all the options. You now
have a grid where you can have a structured conversation about how well each of the
options meets each of the criteria. When
possible establish the value and costs of each option.
When necessary you may also note risks, uncertainties, preferences, and
values associated with each option. If you
note in the process that information is missing for one of the options, then gather that
information and return to make the final decision once the matrix is a complete as
possible. This tool, like any tool, is
dependent upon the skill of the users. Exercise
caution and fairness in using it.
After
selecting an option the next step is to act on the decision.
With the use of the criterion matrix it is also possible to develop
contingency plans. Decision making without
action wastes people’s time and energy. As
you implement the decisions it is important to measure results against expectations and
revisit the process if results fall short.
A
different approach to decision making is the behavioral approach. This approach is guided by a few different
assumptions when compared to the rational approach. First,
we make decisions with bounded rationality rather than perfect rationality. Bounded rationality means that although we want to
make a rational decision, we cannot because of our information processing limits, so we
select from a couple of acceptable alternatives now (satisfice). We are willing to accept a less than perfect
decision (suboptimize) in order to get some decision made. Often the cost of no decision is great for
the organization so delaying the decision would make any decision, even the best decision,
a worse result than an OK decision made now. The
behavioral approach can work in the short-term, but may not be effective for long- term
organizational viability.
Module 12:
Decision Making in Organizations:
True-False:
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Multiple-Choice:
Matching the
Columns:
Please
match the term with the definition.
Answers: 1-f; 2-d; 3-b; 4-e; 5-c; 6-a.
In
this module we examined the components of the decision-making process (taking in
information, examining and selecting options, predicting likely outcomes, and considering
the relative value of the options), decision-making tools (problem statements,
justifications, and the criterion matrix), and three decision-making modules (rational,
behavioral, and practical.)
Briggs-Myers,
Eisenhardt,
K.M. “Politics of Strategic Decision Making in High-Velocity Environments:
Toward a
Midrange Theory,”
1988.
Werhane,
P.C. Moral Imagination and Management Decision Making,
University
Press, 1999.
Keen,
P. G. W., and Scott-Morton, M. Decision support systems: An organizational
perspective.
Huber,
P. Managerial decision making.
Mintzberg,
H., Raisinghani, D., and Theoret, A. “The structure of unstructured
Decisions,”
Administrative Science Quarterly, 1976, 21.
Oxenfeldt,
A.R., Miller, D. W., and Dickenson, R.A. A basic approach to
executive
decision making.
Bounded
rationality. Describes the situation when a rational decision is
desired but information is limited, requiring an acceptance of suboptimal alternatives.
Criterion
matrix. Evaluating and choosing from the options in
relation to specific goals/objectives/interests.
Decision
making. The process of choosing one course of action from a
set of options.
Decision
rules. Guidelines for making decisions that maximize the
probability of meeting a specific goal or objective.
Informational
risk. Occurs when managers do not know with certainty
what the outcome of a decision will be but do have enough information to estimate the
probability of various outcomes.
Justification. Provides data to support the problem statement,
makes a reasonable interpretation of those data, clearly distinguishes between data and
interpretation, and is believable by your audience because it is framed in their language.
Problem
statement. States the problem (the central issue), the backing
(an explanation of how you know this is a problem), the constraints (an indication of
whether the solution space is limited and by what), the source of the problem (a statement
of what you believe caused the problem), and a solution (specifies some course of action
to fix the problem).
Learning Objectives include:
·
Become familiar with the elements of the
decision-making process
·
Develop an integrated understanding of the strengths
and weaknesses of three decision-making approaches.
Question 1:
(This question is
taken from the last paragraph from subheader
Question
1. I think the rational decision making
approach is the best way to make decisions, but it seems to me it is rarely used in my
organization. Why not?
Answer
1: The rational
decision making approach is considered an ideal way to make decisions in organizations
because decisions are made in a logical, sequential manner with in-depth consideration of
options. But in practice it is often
unrealistic. Many of us make decisions based
on emotion, pressure, or social concerns. And
often our information is limited by time, money, and our own cognitive biases. Moreover, not all the options lend themselves to
quantification or articulation that will allow easy comparisons. Lastly, most of us cannot truly predict the future
so we do not know all the possible outcomes of any option.
Question 2:
(This question is taken from the module text, subheader
10.)
Question
2. The Practical decision making approach
seems to encourage making poorer decisions than one would make using the rational
approach. Yet you make it sound as though that
approach is used often. Why?
Answer 2:
Sometimes sub-optimal decisions are made because information is very limited, the
option-generation part of the process is limited for some reason, or the decision-making
criteria are too narrow to get the desired result. Information
gathering and criterion listing may be limited when people feel a sense of urgency –
time is running out. In some organizations decision makers will be so impatient with the
rational decision making process that they will limit the generation of options phase
– thereby shifting to the behavioral or practical approaches -- so that some action
can be taken. Many people use the behavioral
approach because it provides a satisfactory fast way to make decisions in time-bound,
crisis type situations. Some people may use
this approach because it helps them maintain decision-making power. Participatory managers often like the practical
approach.
Question
3: How would the decision making process look
different for someone who makes their decisions based on facts, figures and logic when
compared to a decision made with intuition and values.
Will you provide an example of different decision-making based on cognitive
style?
Answer
3: Let’s say
that the two people have to decide how to price a new product. The fact-based person might focus on the market
research data and compare pricing alternatives to past successful pricing
of similar products modified by a consumer price index. The intuition-based person might do focus groups to
test consumer value and psychological responses to the product and
investigate options that would cause the consumers to be willing to pay premium
pricing based on perceived value. Notice
that key differences in their approach are underlined.
Both ways of making a decision could work.
Both are actually logical – but each is based in different assumptions
about meaningful data and how best to make the decision.