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GRA 6820


GRA 6820 The Psychology of Decision Making (Harrison, Chapter 6) – PowerPoint PPT presentation

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Title: GRA 6820

GRA 6820The Psychology of Decision
Making(Harrison, Chapter 6)
Overview of chapter 6
  • The role of personality
  • Risk behavior
  • Perception in decision making
  • Subconscious influences

The disciplines of decision making
The Descriptive approach
The Normative approach
Disciplinary roots of decision science
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.
  • 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.
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
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
Sense-making Multiple perspectives
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.
The mind of the strategist
  • Successful business strategies result not from
    rigorous analysis, but from a particular state of
  • 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.

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.

Phases in the strategic decision making process
  • Subject to constraints.
  • Individual
  • Organizational
  • Cultural

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

The cultural iceberg
Problem solving constraints Organizational
  • Contextual variables
  • Size
  • Technology
  • Environmental uncertainty
  • Age
  • Interdependence

Structural variables
  • Differentiation
  • SOP formalization
  • Centralization
  • Division of labor
  • Status system
  • Managerial

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

A model of cognitionThe human information
processing model
  • 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

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

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

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

Feedback biases and learning
Heuristics and biases in decision making - Summary
  • Availability Judgments distorted by easily
    recalled events
  • Selective perception Expectations bias
  • 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

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.
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

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.

The ladder of inference
Skills for working with mental models
  • Becoming more aware of your own thinking and
  • Reflection
  • Inquiring into others thinking and reasoning.
  • Inquiry
  • Making your own thinking and reasoning more
    visible to others.
  • Advocacy

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

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

Making decisions
How and where one uses these function
How one deals with the world Behavior
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.

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

Jungian personality dimensions
Individual benefits
  • Communication
  • Career choices
  • Leadership style
  • Team building
  • Learning and teaching skills
  • Problem solving

Cognitive style how is it measured?
  • Myers-Briggs Type Indicator
  • Based on the concepts of Jungian psychology
  • Time for a small test

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.

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.

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

Myers-Briggs Type Indicator test
  • MBTI questionnaire
  • MBTI scoring sheet
  • MBTI calculations
  • Interpretation

The perfect problem-solver
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

The process of perception gathering
  • (S) Sensing function
  • The reality factor
  • perceives in terms of specifics, using the five
  • 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,
  • 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

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
  • 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
  • oriented to past events appeals to what is
    meaningful, relies on the psychological
  • compassion is important
  • values what is good

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
  • 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,
  • 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
  • can be pulled in many different directions
  • can be vulnerable in not recognizing the tragedy
    of the excluded possibility

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
  • needs time and space to process life-experience
  • 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
  • the unexamined life isnt worth living

Problem solving styles
  • ST represents concepts of the Industrial
  • NT stress conceptual analyses instead of
    precise quantification.
  • SF and NF define different types of qualitative
  • 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.

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
  • What do the data imply?
  • What are the implications beyond the facts?
  • What is this problem analogous to?

Problem solving using Type preferences (2)
  • Thinking
  • What are the pros and cons of each possibility?
  • What are the logical consequences of each
  • What is the cost of each?
  • What are the pleasant and unpleasant outcomes of
  • 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
  • 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?

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

  • 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
  • Pooling preferences offers best chance of finding
    a solution valid for both.

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.

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

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

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

Perception in decision making
  • Biases and heuristics
  • Antidotes

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.

Factors affecting strategic decisions
  • About resources, core competencies and