Class 11 - Decision Making II

Organizational Behavior I
BU288
Dr. Benjamin KAKAVAND

Class 11
Lesson Plans
Chapter 11: Decision Making

Learning Objectives
 Explain the process of escalation of commitment to an apparently failing
course of action.
 Consider how emotions and mood affect decision making.
 Compare and contrast perfectly rational decision making with decision
making under bounded rationality.
 Discuss the impact of framing and cognitive biases on the decision
process.
 Summarize the pros and cons of using groups to make decisions, with
attention to the groupthink phenomenon and risk assessment.
Decision Making
Perfect Rationality vs Bounded Rationality
 Perfect Rationality: A decision strategy that is completely informed,

perfectly logical, and oriented toward economic gain.
 Bounded Rationality: A decision strategy that relies on limited

information and that reflects time constraints and political
considerations.
Rational Decision Making
Assumptions of the Rational Model
Managers try to act rationally, but they are limited by:

a. Capacity to acquire and process information
b. Time constraints
 Reliance on flawed memory; Obtain too little or irrelevant information;
Potential ignorance of or miscalculation of values and probabilities; etc.
c. Political considerations
d. Self-interest
 Criteria for solution evaluation involve political factors to please others
and factors that protect self-image.
Assumptions of the Rational Model
 We often rely on automatic thinking

 Full of Bias and Heuristics
 We tend to only focus on visible problems
We satisfice:
 Identifying a solution that is “good enough”
 Bounded Rationality places limits on our ability to interpret, process, and
act on info.
We use intuition:
 A subconscious process created out of distilled experience
Problem Framing
Framing refers to the manner in which objectively equivalent alternatives
are presented.
a. Gain Frame
Ifinformation is framed positively (gain frame), it encourages conservative
decisions. We take the sure thing over a chance at gaining more.
In gain frame, we are risk averse. Make more conservative decisions. Go
with the sure thing.
b. Loss Frame
If information is framed negatively (loss frame), it encourages risk. We take
a chance at losing less rather than accept a sure loss.
In loss frame, we are risk seeking. The potential loss is worth so much to us
that we want to avoid it at all costs.
Problem Framing
Prospect Theory—Loss Aversion
Prospect Theory explains how we understand and value gains and losses
differently, and therefore how we make economic decisions.
Kahneman and Tversky (2002): We can’t assume our judgments are good
building blocks for decisions because the judgments themselves may be
flawed.
Example: losses loom larger than gains – a $10 loss will feel worse than a
$10 gain – feel more hurt by the loss than happy for the gain.
Groupthink
Groupthink is the capacity for group pressure to damage the mental
efficiency, reality testing, and moral judgment of decision-making groups.
Unanimous acceptance of decisions is stressed over quality of decisions.
A number of factors contribute to groupthink.
Factors that can cause groupthink include:
High group cohesiveness.
Strong identification with the group.
Concern for approval from the group.
Isolation of the group from other sources of information.
The promotion of a particular decision by the group leader (this appears to
be the strongest cause).
Groupthink Symptoms
 Illusion of invulnerability (members overconfident – ignore danger signals)
 Rationalization (problems are rationalized away)
 Illusion of morality (decisions are perceived as morally correct)
 Stereotypes of outsiders (unfavorable stereotypes of those outside the
group)
 Pressure to conform (members pressure each other to conform with
group’s views)
 Self-censorship (members convince themselves to avoid voicing opinions
contrary to group)
 Illusion of unanimity (members perceive unanimous support)
 Mindguards (some members “protect” the group from information that
goes against decisions)
Devil’s Advocate Role
Devil’s Advocate Role: A person appointed to identify and challenge the

weaknesses of a proposed plan or strategy.
 Introduces controversy
 Brings in extra information
 Illuminates full pros and cons of decision
Can be used to challenge groupthink?

How Do Groups Handle Risk?
Do groups make decisions that are more or less risky than those of
individuals?
Will the degree of risk assumed by the group simply equal the average risk
preferred by its individual members?
Group decisions can involve risky and conservative shifts, and they occur in
a wide variety of settings.
A risky shift is the tendency for groups to make riskier decisions than the
average risk initially advocated by their individual members.
A conservative shift is the tendency for groups to make less risky decisions
than the average risk initially advocated by their individual members.
What determines which kind of shift occurs?
Risks and Groups
Risks and Groups
The Dynamics of Risky and Conservative Shifts for Two Groups
The diagram consists of 2 parts, the position of group members before
discussion and their position after discussion. Each part has a scale with most
conservative alternative on the left, medium risk in the middle, and most risky
alternative on the right.
The before discussion diagram has X marks marked halfway between most
conservative alternative and medium risk, 2 X marks marked 3 quarters of the
way from most conservative alternative to medium risk, and 4 dots marked at
around the 1 third mark from medium risk to most risky alternative.
The after discussion diagram has the X marks all shifted slightly to the left
representing a conservative shift and all dots shifted to the right representing
a risky shift.
Escalation of Commitment
Escalation of commitment refers to the tendency to invest additional
resources in an apparently failing course of action.
Dissonance reduction is one reason.
A social norm that favours consistent behaviour by managers may also be
at work.
It sometimes happens even when the current decision maker is not
responsible for previous sunk costs.
Decision makers might be motivated to not appear wasteful.
Itcan be due to the way in which decision makers frame a problem once
some resources have been sunk.
Personality, moods, and emotions can affect escalation.
It can occur in competitive and non-competitive situations.
Preventing Escalation of Commitment
Are there ways to prevent the tendency to escalate commitment to a failing
course of action?
Be alert for excessive optimism or extremely positive media attention early
in a project cycle.
Encourage continuous experimentation with reframing the problem. Shift
the frame to saving rather than spending.
Set specific goals for the project in advance.
Place more emphasis on evaluating managers on how they made decisions
and less on decision outcomes.
Separate initial and subsequent decision making so that individuals who
make the initial decision to embark on a course of action are assisted or
replaced by others who decide if a course of action should be continued.
Leadership changes can sometimes break a spiral of escalation.
The affect of Emotions and Mood on Decision Making
 Emotions can help decision making but strong emotions can be a
hindrance.
 Mood affects what and how people think when making decisions.
 Mood has the greatest impact on uncertain, ambiguous decisions of the
type that are especially crucial for organizations.
Research on mood and decision-making reveals that:

 People in a positive (negative) mood tend to remember positive
(negative) information.
 People in a positive (negative) mood tend to evaluate objects, people,
and events more positively (negatively).
The affect of Emotions and Mood on Decision Making
 People in a good mood tend to overestimate the likelihood that good

events will occur and underestimate the occurrence of bad events. People
in a bad mood do the opposite.
 People in a good mood adopt simplified, shortcut decision-making

strategies, more likely violating the rational model.
 People in a negative mood are prone to approach decisions in a more

deliberate, systematic, detailed way.
 Positive mood promotes more creative, intuitive decision making.

Structure and Decision Making
When structure can be useful:
No history of past interaction

Structure compensates for lack of norms
History of conflict
Structure controls interaction
Lots of people
Structure makes it manageable
Structure and Decision Making
Participants of unequal status

Structure helps low status views get heard
Scarce on time
Structure forces more efficient use of time and more preparation
Heterogeneous group
Structure helps with different norms
High need to get acceptance and commitment

Structure helps with procedural justice
Politics & Decision Making
Political Defensiveness concerns the defense or protection of self-interest.

The goal is to reduce threats to one’s own power by avoiding actions that
do not suit one’s own political agenda.
Avoiding blame for events that might threaten one’s political capital.
Do you have any experience with this?

Next Class
 Negotiation I
 Chapter 13 (pages 473 – 477)
 Negotiation exercise (distributed in class)

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Organizational Behavior I

Dr. Benjamin KAKAVAND

Chapter 11: Decision Making

Perfect Rationality vs Bounded Rationality

 Perfect Rationality: A decision strategy that is completely informed,

 Bounded Rationality: A decision strategy that relies on limited

Managers try to act rationally, but they are limited by:

 We often rely on automatic thinking

Devil’s Advocate Role: A person appointed to identify and challenge the

Can be used to challenge groupthink?

Research on mood and decision-making reveals that:

 People in a good mood tend to overestimate the likelihood that good

 People in a good mood adopt simplified, shortcut decision-making

 People in a negative mood are prone to approach decisions in a more

 Positive mood promotes more creative, intuitive decision making.

No history of past interaction

Participants of unequal status

High need to get acceptance and commitment

Political Defensiveness concerns the defense or protection of self-interest.

Do you have any experience with this?

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