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.

 


2.       Taking in Information

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.

 

 


3.       Understanding Individual Differences in Decision Making Style

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.” 

Carl Jung, from Man and His Symbols, p. 61

 


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.

 


 

5.       Examining and Selecting Options

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.

 


6.       Characteristics of Decisions

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.

 

 


7.       The Rational Decision-Making Approach

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.

 


9.       The Criterion Matrix

The criterion for evaluating options is usually “will this option reach the goal?”  If the goal is to solve a problem, then the evaluation criteria will be “how does this option help us solve this problem?” To develop a criterion matrix you would list the agreed upon relevant criteria across the top of the matrix.  It might be profitability, sales revenue, sector of activity leadership, legal requirements, your favorite, etc.  It is helpful to include all stakeholders interests in the criterion matrix and to include both objective and subjective concerns. 

 

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.

 

 

 


10.  Behavioral and Practical Approaches

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.

 

The practical approach combines elements of both the rational approach and the behavioral approach.  Rather than generate all options or stay limited to just a couple of options, practical decision makers generate a number of feasible options.  Similarly, in sorting through the decision-making criteria, criteria are prioritized and only the most important ones used in making the decision.  This hybrid allows decisions to be made more quickly than in the rational process but includes more options than in the behavioral approach.

 

 


Assignment and Test Questions

 

 

Module 12: Decision Making in Organizations:

 

True-False:

  1. Under the condition of uncertainty, we do not know what the outcome of a decision will be but we do have enough information to estimate the probability of certain outcomes.

True                 False

 

  1. The tendency to take risks varies from person to person.

True                False

 

  1. Everybody uses the same kind of information when making decisions.

True                 False

 

  1. Decision rules can be explicit or implicit.

True                False

 

  1. Rational decision-making model evaluates options, and chooses an acceptable solution.

True                False

 

  1. It is very uncommon for people to come up with a set of decision-making criteria that does not consider all the key stakeholders.

True                 False

 

  1. Every problem statement should contain five clauses with specific content.

True                 False

 

  1. Only the objective concerns of the stakeholders can be helpful in forming a criterion matrix.

True                 False

 

  1. The justification is how you convince others that your assessment of the problem is correct.

True                False

 

  1. The backing refers to the part of the problem statement that tells what you believe caused the problem.

True                 False

 

  1. Decision-making without action wastes people’s time and energy.

True               False

 

  1. Organizational managers prefer to decide on matters based on emotions, pressure, or social concerns.

True                 False

 

  1. Bounded rationality means that although we may want to make a rational decision, we cannot because of our information processing limits.

True               False

 

  1. The behavioral decision making approach should be used when there is a considerable amount of time until an organization needs to make a decision.

True                 False

 

  1. In the practical approach to decision making, a few  options are evaluated, rather than all the options likely to be considered in the rational decision making approach.

True                False

 

  1. People have different cognitive styles for making decisions based on their tendency to perceive facts vs. possibilities and their preference for making judgments based on objective principles or subjective values.

True                False

 

 

Multiple-Choice:

  1. Which of the following is a step decision makers go through?
    1. Examining options
    2. Predicting outcomes
    3. Taking in information
    4. All of the above

 

  1. Which of the following is NOT a way for decision makers to deal with uncertainty?
    1. Make a guess
    2. Rely on their past experiences
    3. Use intuition
    4. Pass the decision making burden to someone else

 

  1. New decision-making situations require all of the following except…
    1. More attention
    2. More information gathering
    3. More information structuring
    4. More programmed decision rules

 

 

 

  1. Which of the following is not a part of a problem statement?
    1. Justification
    2. Problem
    3. Constraints
    4. Solution

 

 

 


Matching the Columns:

 

Please match the term with the definition.

 

  1. Solution
  2. Constraint
  3. Problem
  4. Source
  5. Backing
  6. Justification

 

    1. How you convince others that your assessment of the problem is correct
    2. The central issue
    3. An explanation of how you know this is a problem
    4. An indication of whether the solution space is limited and by what
    5. A statement of what you believe caused the problem
    6. Some course of action to fix the problem

 

Answers:  1-f; 2-d; 3-b; 4-e; 5-c; 6-a.

 


Summary

 

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.)

 

 

 


Bibliography

 

 

Briggs-Myers, I. Introduction to Type, Consulting Psychologists Press, Inc.  1987.

 

Eisenhardt, K.M. “Politics of Strategic Decision Making in High-Velocity Environments:

Toward a Midrange Theory,” Academy of Management Journal Vol. 31, No.4

1988.

 

Werhane, P.C. Moral Imagination and Management Decision Making, New York: Oxford

University Press, 1999.

 

Keen, P. G. W., and Scott-Morton, M. Decision support systems: An organizational

perspective. Reading, Mass.: Addison-Wesley, 1978.

 

Huber, P. Managerial decision making. Glenview, Ill.: Scott, Foresman, 1980.

 

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. New York; AMACOM, 1978.

 

 

 


Glossary

 

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.

 

 


Questions and Answers

 

 

Question 1:

(This question is taken from the last paragraph from subheader 10 in this Module.)

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.

 

 

End of Module