GRA 6820

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GRA 6820The Psychology of Decision
Making(Harrison, Chapter 6)
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Overview of chapter 6

• The role of personality
• Risk behavior
• Perception in decision making
• Subconscious influences

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The disciplines of decision making
The Descriptive approach
The Normative approach
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Disciplinary roots of decision science
DESCRIPTIVE THEORIES PRESCRIPTIVE THEORIES
INDIVIDUAL Psychology Marketing Psychiatry Literature Decision science Economics Operations research Philosophy/logic
GROUP Social psychology Organizational behavior Anthropology Sociology Game theory Organizational behavior Clinical psychiatry/therapy Finance/economics
ORGANIZATION Organization theory Sociology Industrial organization Political science Planning/strategy Control theory/cybernetics Organization design Team theory/economics
SOCIETY Sociology Anthropology Macroeconomics Legal philosophy Political sciences Social choice
Kleindorfer, P.R., Kunreuther, H.C. and
Schoemaker, P.J.H. (1993). Decision Sciences An
integrative perspective, Cambridge.
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Sense-making

• A characteristic of humans is trying to make
  sense of incomprehensible things.
• Sense-making is described as
• Structuring the unknown, but in different ways.
• Placing stimuli into some sort of framework a
  frame of reference that guides interpretations.
• A thinking process that uses retrospective
  accounts to explain surprises.
• Reciprocal interaction of information seeking,
  meaning assignment and action.
• An interpretive process needed for organizational
  members to understand and share understandings
  about features of the organization.
• A process in which individuals develop cognitive
  maps of their environment.

Sense may be in the eye of the beholder, but
beholders vote and the majority rules. K.E.
Weick
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Factors influencing strategy

• Complexity
• Uncertainty
• Long time delays between action and reaction
• Conflicting objectives
• Multiple decision makers

We seek a rational framework to help us sort
through these issues
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Problem structure
Degree of Structure Degree of Structure Operational Performance Operational Management Management Control Strategic Planning
Structured Structured Payroll Production Accounts Receivable Budget Management Portfolio Analysis
Equipment Scheduling Inventory Control Short-term Forecasting Site Location
Dispatching Maintenance Management Long-term Forecasting Mergers and Acquisitions
Unstructured Unstructured Equipment Diagnosis Cash Management Budget Preparation Product Planning
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Sense-making Multiple perspectives
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The principle of bounded rationality

• The capacity of the human mind for formulating
  and solving complex problems is very small
  compared to the size of those problems whose
  solution is required for objectively rational
  behavior in the real world or even for a
  reasonable approximation to such objectivity.

Simon, H.A. (1957). Administrative Behavior A
study of decision making processes in
administrative organizations, 4th ed. New York
The Free Press.
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The mind of the strategist

• Successful business strategies result not from
  rigorous analysis, but from a particular state of
  mind.
• Strategy making is in essence a creative and
  partly intuitive process, often disruptive of the
  status quo.
• Strategists employ analysis only to stimulate the
  creative process, to test the ideas that emerge,
  to work out their strategic implications or to
  ensure successful execution.

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The anatomy of a decision

• The rational approach to decision making
• Define the problem.
• Identify the criteria.
• Weight the criteria.
• Generate alternatives.
• Rate each alternative on each criterion.
• Compute the optimal decision.

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Phases in the strategic decision making process

• Subject to constraints.
• Individual
• Organizational
• Cultural

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Problem solving constraints

• Cultural constraints
• Cultural Iceberg
• Organizational constraints
• Contextual variables
• Structural variables
• Individual constraints
• Cognitive
• Personality

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The cultural iceberg
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Problem solving constraints Organizational
factors

• Contextual variables

• Size
• Technology
• Environmental uncertainty

• Age
• Interdependence

Structural variables

• Differentiation
• SOP formalization
• Centralization

• Division of labor
• Status system
• Managerial

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Constraints Individual factors

• Stereotypical thinking
• Risk of failure
• Memory constraints
• World-view constraints

• Self imposed constraints
• Lack of a questioning attitude
• Functional constraints
• Problem solving language constraints

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A model of cognitionThe human information
processing model
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Biases

• Assumptions
• Judgment is plagued by random error and
  systematic biases.
• Good judgment requires mental skills exceeding
  our capabilities.
• Capacity of the mind is small relative to the
  size of the problems.
• Heuristics and rules of thumb are used to cope
  with problem complexity.
• Good news
• This allows us to deal with the real world.
• Bad news
• This often leads to faulty data acquisition and
  processing.

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Biases in problem solving

• Acquisition biases
• Availability
• Selective perception
• Frequency
• Base rate
• Illusory correlation
• Data presentation
• Framing

• Processing biases
• Inconsistency
• Conservatism
• Nonlinear extrapolation
• Information sources
• Source consistency
• Consistent information sources can increase
  confidence in judgments, but not increase
  predictive accuracy.
• Data presentation

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Biases in problem solving

• Decision environment
• Time pressure
• Information overload
• Distractions
• Emotional stress
• Social pressures

• Processing heuristics
• Habits/rules of thumb
• Anchoring and adjustment
• Representativeness
• Justifiability
• Law of small numbers
• Regression bias
• Best guess strategy

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Biases in problem solving

• Output bias
• Question format
• Scale effects
• Wishful thinking
• Illusion of control

• Feedback bias
• Outcome irrelevant learning structures
• Misperception of chance occurrences
• Failure/success attributions
• Logical fallacies in recall
• Hindsight

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Feedback biases and learning
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Heuristics and biases in decision making - Summary

• Availability Judgments distorted by easily
  recalled events
• Selective perception Expectations bias
  observations
• Illusory correlation Encourages belief that
  unrelated variables are correlated
• Conservatism Ignoring full effect of
  new information
• Law of small numbers Overestimating
  representativeness of small groups
• Regression bias Failure to allow for
  regression to the mean
• Wishful thinking Probability of desired
  events judged too highly
• Illusion of control Overestimating personal
  control over outcomes
• Logical reconstruction Logical
  reconstruction of inaccurately recalled events
• Hindsight bias Overestimation of
  predictability of past events

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Antidotes to counteract biases
Bias Antidote
Under- estimating uncertainty Use frameworks for stratgic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Believing chance is predictable Use frameworks for stratgic analysis Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Selective perception Use frameworks for stratgic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions
Anchoring and adjustment Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Seeing opportunities incrementally Use frameworks for stratgic analysis Use multiple perspectives Consider improbable or unpopular assumptions
Seeking only confirming evidence Use frameworks for stratgic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Framing biases Use multiple perspectives Devils advocate Re-evaluate over time
Reasoning by inappropriate analysis Use multiple perspectives Devils advocate Re-evaluate over time
Escalating commitment irrationally Use frameworks for stratgic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Teisberg, E.O. (1991). Why do good managers
choose poor strategies? Harvard Business School
Case 9-391-172.
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Mental models

• Personal theories of how things work
• The most important factors.
• The causal and correlational relationships that
  link them.
• These models have different names
• Conceptual structures
• World views
• Schema
• Cognitive maps
• Institutional models

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How do mental models affect behavior?

• Events
• Sale of a new office building.
• Property prices up 10 compared to last year.
• Patterns
• Annual new construction activity over the past
  50 years.
• Structure
• Mental models
• Application of economic supply and demand
  models to real estate market behavior.

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The ladder of inference
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Skills for working with mental models

• Becoming more aware of your own thinking and
  reasoning.
• Reflection
• Inquiring into others thinking and reasoning.
• Inquiry
• Making your own thinking and reasoning more
  visible to others.
• Advocacy

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The role of personality

• Jungian personality dimensions
• Jungs psychological types
• Myers-Briggs Type Indicator test
• Implications for decision making

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• Behavior
• Orderly reason for
• personal differences
• Preference for

Perceiving
Jung
Briggs
Making decisions
How and where one uses these function
How one deals with the world Behavior
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Personality dimensions
Extravert/Introvert Thinking/Feeling Sensing/In
tuition Judgment/Perception

• Results in four basic problems solving styles.
• Each style has strengths and weaknesses.
• No one style is uniquely superior.
• Typology can be related to different inquiry,
  managerial and organizational styles.

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Individual cognitive style

• Provides insight into yourself and your behavior
• as a manager.
• as a communicator.
• as a problem solver.
• Provides a logical model of human behavior
• Empirically verified

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Jungian personality dimensions
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Individual benefits

• Communication
• Career choices
• Leadership style
• Team building
• Learning and teaching skills
• Problem solving

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Cognitive style how is it measured?

• Myers-Briggs Type Indicator
• Based on the concepts of Jungian psychology
• Time for a small test

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Why we need each other (1)

• Feelers need Thinkers
• To examine, analyze and organize.
• To stand against opposing people, or to fire
  people if necessary.
• To change, reform, or withdraw priviledges.
• To maintain policy.
• Thinkers need Feelers
• To convey how others feel.
• To persuade other to solve problems.
• To help people understand one anothers views.
• To build support for a system.

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Why we need each other (2)

• Intuitives need Sensers
• To notice essential facts.
• To point out prolems.
• To offer illustrations based on experience.
• To point out assets and liabilities in the here
  and now.
• To keep track of details.
• Sensers need Intuitives
• To see possibilities in the future.
• To plan and prepare.
• To develop new ideas and systems.
• To solve problems creatively and ingeneously.
• To maintain enthusiasm.

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Focus of the MBTI

• The sources of our energy
• The question of introversion and extroversion
• The ways we perceive reality
• Sensingly, in concrete detail, or intuitively by
  appreciating hunches and possibilities
• The ways we act
• Thinking clearly and logically, or in a more
  subjective way, basing decisions on personal
  values ahead of logic feeling
• Our propensity to act
• Judging and decisiveness, or keeping options open
  - perceiving

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Myers-Briggs Type Indicator test

• MBTI questionnaire
• MBTI scoring sheet
• MBTI calculations
• Interpretation

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The perfect problem-solver
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Implications for decision making

• Data acquisition
• By Sensation or by Intuition, but not both at the
  same time
• Sensation information input through the senses.
• Intuition acquisition by imagination, seeing
  the whole of a situation, the gestalt.
• Data processing
• Decisions are reached by Thinking or Feeling
• Thinking decision based on impersonal analyses
  and analytical modes of reasoning.
• Feeling decision based on personalistic, value
  judgments.

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The process of perception gathering
data/information

• (S) Sensing function
• The reality factor
• perceives in terms of specifics, using the five
  senses
• sees things one-at-time, in the concrete
• has a present time focus the here and now
• occupied with and attentive to facts
• can be criticized for being set in ways
• sometimes cannot see the forest for the trees

• (N) Intuitive function
• The sixth sense
• perceives in terms of patterns, relations
• sees possibilities
• has a future time focus oriented to change,
  innovation
• tends to estimate or approximate factual details
• can be criticized for having head in the
  clouds, not enjoying the present
• sometimes cannot see the tree for the forest

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The process of judging coming to
conclusion/rational process for closure

• (T) Thinking function
• The analytic factor
• comes to conclusion using established principles,
  logically attending to cause and effect
• principal concern for truth and the wider
  principles involved
• values fairness highly particularly sensitive to
  injustice
• has an atemporal time orientation appeals to
  reason, likes analysis
• consistency and validity are important
  principles are applied impersonally
• values what is true

• (F) Feeling function
• The bonding factor
• comes to conclusion by an associative process
  by analogy,and comparison with past experience
• principal concern for the interpersonal and
  intersubjective dimensions involved
• values harmony highly particularly sensitive to
  conflict
• oriented to past events appeals to what is
  meaningful, relies on the psychological
• compassion is important
• values what is good

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Attitude observable preference, style of
interacting with the world

• (J) Judging
• needs closure on events, relationships, ideas
• wants to finish get things done
• Values punctuality sees time in terms of
  decision
• prefers advance clarity, order, structure
• likes schedules and working to a plan
• comes across as decisive
• interested only in essentials
• keys in on the conscious factors
• can leap to conclusion and move into action out
  of sheer urgency to come to closure
• can be stubborn or one track
• can be vulnerable in not considering alternatives

• (P) Perceiving
• needs to hang loose with events, relationships,
  ideas
• prefers openness to what may come
• punctuality is not a high value sees time in
  terms of opportunity
• has tolerance for ambiguity, open-endedness
• prefers spontaneity, is adaptable to changes
• tends to postpone decisions and action
• never has enough information
• keys in on the unconscious
• can move into action out of sheer intensity of
  perception
• can be pulled in many different directions
• can be vulnerable in not recognizing the tragedy
  of the excluded possibility

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Attitude orientation/direction of energy flow

• (E) Extraversion
• the outside world captures attention life is
  discovered mutually in the external forum
• needs a public forum to sort out experience
• tends to expand and propagate rather than
  conserve is expansive, energized by interaction
• engages others easily comfortable in new groups
• assumes free movement can intrude on others
  unawares can make demads for response by sheer
  force of presence
• if you dont know where they are, you havent
  been listening
• the unlived life isnt worth examining

• (I) Introversion
• the inner world is the world of most important
  activity life is discovered interiorly and
  shared
• needs time and space to process life-experience
  interiorly
• tends to consolidate, defend moderates and
  controls personal disclosure and interaction
  energized by privacy and intimacy
• can appear withdrawn is generally cautious of
  others space can stalemate a situation by
  silence
• the unexamined life isnt worth living

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Problem solving styles

• ST represents concepts of the Industrial
  Revolution.
• NT stress conceptual analyses instead of
  precise quantification.
• SF and NF define different types of qualitative
  analyses.
• ST and NF are polar opposites in preferences for
  information gathering and processing.
• NT and SF are two forms of qualitativeness and do
  not conflict to the same extent as ST-NF types.

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Problem solving using Type preferences (1)

• Sensing
• What are the facts?
• What exactly is the situation?
• What has been done?
• What am I and others doing?
• How would an outsider look at this situation?
• Intuition
• What are the possibilities?
• What other ways are there for solving this
  problem?
• What do the data imply?
• What are the implications beyond the facts?
• What is this problem analogous to?

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Problem solving using Type preferences (2)

• Thinking
• What are the pros and cons of each possibility?
• What are the logical consequences of each
  possibility?
• What is the cost of each?
• What are the pleasant and unpleasant outcomes of
  each?
• What is the consequence of not acting?
• Feeling
• How much do I care about what I gain or lose in
  each alternative?
• What are the values involved for each
  possibility?
• How will people concerned react to the outcome?
• Who is committed to carry out the solution?
• Will the outcome contribute to individual or
  group harmony?

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Problem solving using Type preferences (3)

• Perception
• Use at each step to ensure openness to all
  aspects of the problem.
• Judgment
• Use to set a timetable for moving on to the next
  step of the decision process.
• Introversion
• Use to reflect at each step along the way.
• Extroversion
• Use to discuss each step and to implement the
  solution.

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Contributions

• A knowledge of cognitive type
• Lessens friction.
• Reveals the value of differences.
• Helps to understand and appreciate the strengths
  of each type.
• Lessens waste of potential.
• and
• Opposites can supplement each other in joint
  undertakings.
• Pooling preferences offers best chance of finding
  a solution valid for both.

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Decision trapsRusso and Schoemaker, Decision
Traps 1989

1. Plunging in.
2. Frame blindness.
3. Lack of frame control.
4. Overconfidence in your judgment.
5. Shortsighted shortcuts.
6. Shooting from the hip.
7. Group failure.
8. Fooling yourself about feedback.
9. Not keeping track.
10. Failure to audit your decision process.

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Risk behavior A small test

• Decision 1 Choose between
• A certain gain of 240
• A 25 chance to gain 1000, and a 75 chance to
  gain nothing
• Decision 2 Choose between
• A certain loss of 750
• A 75 chance to lose 1000, and a 25 chance to
  lose nothing

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Risk behavior A small test, continued

• Decision 2a Choose between
• A 25 chance to win 240, and a 75 chance to
  lose 760
• A 25 chance to win 250, and a 75 chance to
  lose 750

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Holdout slides
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Risk behavior

• Tversky and Kahneman work on the effect of
  framing on risk preference.
• Risk-averse concerning gains
• Risk-seeking concerning losses

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Perception in decision making

• Biases and heuristics
• Antidotes

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Definition Problem

• A formal statement of a set of assumptions about
  the world.
• The assumptions are rarely made explicit.
• Whether we see an event or situation as a
  problem depends on our view of the world.
• Problems do not exist independently of the person
  who sees them.
• Mistaking the map for the territory.

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Factors affecting strategic decisions

• About resources, core competencies and
  capabilities