Chapter 7 – Decision Making and Creativity

• Decision Making is the conscious process of making choices among alternatives with

the intention of moving toward some desired state of affairs. The decision is viewed through three paradigms which we will be discussing

Rational Choice Paradigm

• Many business leaders say, in essence, that the best decisions use pure logic and all

available information to choose the alternative with the highest value – such as highest expected profitability, customer satisfaction, employee well-being, or some combination of these outcomes.

• The extreme form of this calculative view of decision making represents the

rational choice paradigm. It is the view that people should – and typically do – use logic and all available information to choose the alternative with the highest value

• The ultimate principle of the rational choice paradigm is to choose the alternative

with the highest subjective expected utility.

Subjective expected utility is the probability (expectation) of satisfaction (utility) for each specific alternative in a decision

Rational choice assumes that decision makers naturally select the alternative that offers he greatest level of happiness (maximization) such as highest returns for stockholders, etc

• There are 6 steps that loop in the Rational decision making process:

• 1 – Identify the problem or opportunity

• 2 – Choose the best decision process

• 3 – Discover / Develop alternative solutions

• 4 – Choose the best alternative

• 5 – Implement the selected Alternative

• 6 – Evaluate decision outcomes. Then repeat.

• There are some problems with the rational choice paradigm, even though it seems so

logical:

• It assumes people are efficient and logical information processing machines

In reality, people have difficulty recognizing problems, and why choices have failed

• It also completely focuses on logical thinking and completely ignores the fact that

emotions also influence, and in some cases dominate, the decision making process

Problems With Each Of The 6 Steps Of Rational Decision Making

There are inherent problems with each of the steps. Let’s start with the first stage, “problem identification”

• Identify the problem or opportunity – 5 widely recognized concerns

o Stakeholder Framing

Employees, suppliers, customers, and other stakeholders have vested interests when bringing good or bad news to corporate decision makers. Often unwittingly, they filter information to amplify or suppress the seriousness of the situation.

Consequently, organizational decisions and actions are influenced mainly by what attracts management’s attention, rather than by what is truly important in the external or internal environment

o Mental Models

Even if stakeholders done frame information, one mind creates its own framing through preconceived mental models. They are visual or relational images in our mind of the external world.

These models represent models of things SHOULD be. Unfortunately, these mental models can also blind us from seeing unique problems or opportunities because they produce a negative evaluation of things that are dissimilar to the mental model.

o Decisive Leadership

Being decisive includes quickly forming opinion of whether an event signals a problem of opportunity. Consequently, eager to look effective, many leaders quickly announce problems or opportunities before having a chance to logically assess the situation. The result is often a poorer decision

o Solution-Focused Problems

Decision makers have a tendency to define problems as veiled solutions, for example “The problem is that we need more control over our suppliers”. This statement does not describe the problem, but is really a slightly rephrased presentation of a solution to an ill-defined problem.

Some take this a step further by seeing all problems as solutions that have worked well for them in the past, even when they were applied under different circumstances

o Perceptual Defense

People sometimes block out bad news as a coping mechanism. Their brain refuses to see information that threatens their self-concept

Recent studies show people are more likely to disregard danger signals when they have limited control over the situation

• Searching For, Evaluating, And Choosing Alternatives

o According to the rational choice paradigm of decision making, people rely on

logic to evaluate and choose alternatives

o This was argued by Herbert Simon who said people engage in bounded

rationality. It is the view that people are bounded in their decision-making capabilities, including access to limited information, limited information processing, and tendency toward satisficing rather than maximizing when making choices

• Problems With Goals

o The rational choice paradigm assumes that organizational goals are clear and

agreed on. In fact, these organizational goals are often ambiguous or in conflict with each other

• Problems With Information Processing

o The rational choice paradigm makes several assumptions about the human

capacity to process information, assuming that decision makers can process information about ALL alternatives and consequences, although in reality this is not possible.

Instead, people usually evaluate only a few alternatives or only the main outcomes of those alternatives. For example, people evaluate only a few brands and their features even though there are dozens of brands and features.

o The main problem is that decision makers evaluate alternatives SEQUENTIALLY

rather than all at the same time.

Consequently, as a new alternative comes along, it is immediately compared to an implicit favorite – a preferred alternative that the decision maker uses repeatedly as a comparison with other choices. This is hardwired in human decision making (naturally compare things) but it often undermines effective decision making because people distort information to favor their implicit favorite over alternatives

o Biased Decision Heuristics

o Humans have built in decision heuristics that automatically distort either the

probability of outcomes or the value of those outcomes. Three of the most widely studied are:

• Anchoring And Adjustment Heuristic

o A natural tendency for people to be influenced by an initial

anchor point such that they do not sufficiently move away from that point as new information is provided.

o For example, you ask one person to estimate whether

Chile’s population is above or below 50 million, then you ask that person to estimate Chile’s population. The initial anchor point (50 million) biases their estimate

• Availability Heuristic

o A natural tendency to assign higher probabilities to objects

or events that are easier to recall from memory, even though ease of recall is also affected by nonprobability factors.

o For example, if there was a news report of the poor

condition of roads and bridges, we are likely to give more

pessimistic estimates of the quality of the province’s road system than if there have been no recent reports

• Representativeness Heuristic is a natural tendency to evaluate

probabilities of events or objects by the degree to which they resemble (are representative of) other events or objects rather than on objective probability information.

o For example, 1/5 students in your class are in engineering

and others are business majors. If one student looks and acts like a stereotype of an engineer, we tend to believe the person is an engineer even though there is much stronger and more reliable statistical evidence that he is a business major.

o Clustering illusion is the tendency to see patterns from a

small sample of events when those events are most likely random. For example, most players believe they are more likely to have a successful shot if their previous 2 or 3 shots were successful. This is the representativeness heuristic at work because players believe these sequences are CAUSALLY connected (representative) when in reality they are random

• Problems With Maximization

o One main assumption in the rational choice paradigm is people want to, and are

able to, choose the alternative with the highest payoff.

o However instead of aiming for maximization, people engage in satisficing –

selecting an alternative that is satisfactory or “good enough”, rather than the alternative with the higher value (maximization)

People satisfice when they select the first alternative that exceeds a standard of acceptance for their needs and preferences. This partly occurs because alternatives present themselves over time, not all at once

Another reason people engage in satisficing rather than maximization is that they lack the capacity and motivation to process the huge volume of information required to identify the best choice.

Emotions And Making Choices

Emotions affect the evaluation of alternatives in 3 ways:

• Emotions Form Early Preferences

o Our brain very quickly attached specific emotions to information about each

alternative, and our preferred alternative is strongly influenced by those initial emotional markers.

o Of course, logical analysis also influences which alternative we choose, but it

requires strong logical evidence to change our initial preferences (initial emotional markers)

• Emotions Change The Decision Evaluation Process

o Specific emotions influence the PROCESS of evaluating alternatives. For

example, we pay more attention to details when in a negative mood, possibly because being in a negative mood signals that there is something wrong that requires attention.

o On the other hand, in a positive mood, we pay less attention to details and rely

on a more programmed decision routine.

Emotions such as anger make us more optimistic about risky alternatives, whereas fear tends to make us less optimistic.

o Overall, emotions shape HOW we evaluate information, not just the choice we

select

• Emotions Serve as Information When We Evaluate Alternatives

o This process is called “emotions as information”. We listen in on our emotions to

gain guidance when making choices. We gain emotional intelligence, and actively try to be more sensitive to subtle emotions on the conscious level in order to make a decision.

o For example, when buying a car you not only logically evaluate each vehicle’s

features: you also try to gauge your emotions when visualizing what it would be like to own each of the cars on your list of choices. It is kind of like a “gut feeling”

Making Choices & Intuition

• Intuition is the ability to know when a problem or opportunity exists and to select the

best course of action without conscious reasoning.

o All gut feelings are emotional signals, but not all emotional signals are intuition

o Intuition relies on action scripts – programmed decision routines that speed up

our response to pattern matches or mismatches. They shorten the decision making process by jumping from problem identification to selection of a solution

• Research has found that decisions have a higher failure rate when leaders are decisive,

rather than contemplative about available options. Of course, decisions can be ineffective when it takes too long to make a choice, but research indicates that a lack of logical evaluation of alternatives is a greater concern than the amount of time it takes.

• Another strategy is called scenario planning: It is a systematic process of thinking

about alternative futures and what the organization should do to anticipate and react to those environments.

o It is a useful vehicle for choosing the best solutions under possible scenarios,

long before they occur. Alternative courses of action are evaluated without the pressure and emotions that occur during real emergencies

Evaluating Decision Outcomes

• Decision makers often are not honest with themselves. One problem like this is the

confirmation bias (also known as post-decisional justification) which is unwitting selectivity in the acquisition and use of evidence. People ignore or downplay the negative outcomes of the selected alternative and overemphasize its positive outcomes

• Another reason why decision makers don’t evaluate their decision very well is due to

escalation of commitment

o Escalation of commitment is the tendency to repeat an apparently bad decision

or allocate more resources to a failing course of action

o But why are decision makers led deeper and deeper into failing projects? There

are four main influences:

Self-Justification

• Decision makers want to appear rational and effective. It is an

impression management tactic, and to demonstrate the importance of a decision by continuing to invest in it, where pulling the plug symbolizes the project’s failure and the decision maker’s incompetence

Prospect Theory Effect

• This is a natural tendency to experience stronger negative

emotions when LOSING something of value, than the positive emotions when GAINING something of equal value

• When looking at escalation of commitment, stopping a project is a

certain loss, which is more painful to most people than the uncertainty of success associated with continuing to fund the project. Given the choice, the less “painful” option is chosen

Perceptual Blinders

• Sometimes escalation of commitment occurs because decision

makers don’t see the problems soon enough. They non-consciously screen out or explain away negative information to protect self-esteem. Serious problems initially look like random errors along the trend line to success. This happens often when information is sufficiently ambiguous that it can be misinterpreted or justified

Closing Costs

• The financial, reputational, and other costs of terminating the

failing project can also be a powerful incentive to continue investing in that project.

• These costs are particularly important in political situations,

because closing the project is acknowledgment that the decision makers made a grave mistake in their previous decision

Creativity

• Creativity is the development of original ideas that make a socially recognized

contribution.

• The question of how creativity occurs has been pondered for hundreds of years.

Professor Graham Walls built on a previous model, to create the four-stage model:

1. Preparation – The process of investigating the problem or opportunity in many ways. Involves developing a clear understanding of what you are trying to achieve, through a novel solution, and then actively studying information seemingly related to the topic

2. Incubation – the problem is set aside, but our mind is still working on it in the background. The important thing is to maintain a low-level awareness by frequently revisiting the problem.

Incubation assists in divergent thinking – reframing a problem in a unique way and generating different approaches to the issue. This is the contrast of convergent thinking , which finds the conventionally accepted “right answer” to a logical problem

3. Illumination is the third stage of creativity, and refers to the experience of suddenly becoming aware of a unique idea. Visually depicted as a light bulb, it is more like a brief flash of light and can be quickly lost if not documented. For this reason, many creative people carry a notebook nearby.

4. Verification – Illuminations are just rough ideas, and require verification through detailed logical evaluation, experimentation, and further creative insight. So, although verification is the final stage in creativity, it is really the beginning of al long process of creative decision making toward development of an innovative product or service.

Characteristics of Creative People

• Cognitive And Practical Intelligence – creative people have above-average

intelligence to synthesize information, analyze ideas, and apply their ideas. They also

have practical intelligence – the capacity to evaluate the potential usefulness of their ideas

• Persistence – they have persistence, which is based on a higher need for achievement,

a strong motivation from the task itself, and a moderate or high degree of self-esteem.

• Knowledge And Experience – creative people require a foundation of knowledge and

experience to discover or acquire new knowledge. However, most of the time, as people acquire knowledge and experience about a specific topic their mental models tends to become more rigid, counteracting creativity.

• Independent Imagination – creative people have the cluster of personality traits and

values that support an independent imagination. These include high openness to experience, moderately low need for affiliation, and strong values around self-direction and self-stimulation.

Employee Involvement

Employee Involvement (also called participative management) refers to the degree to which employees influence how their work is organized and carried out. The main levels of involvement (from lowest to highest) include:

1. Decide Alone – decision maker completes the entire process without conferring with anyone else

2. Receive Information From Individuals – Ask individuals for info. These individuals do not make recommendations and might not even know what the problem is about

3. Consult with individuals – the decision maker describes the problem to selected individuals and seeks both their information and recommendations. The final decision is made by the decision maker, who may or may not take the advice from others into account

4. Consult With Team – The decision maker brings together a team of people (such as all staff in the department) who are told about the problem and provide their ideas or recommendations. The decision maker makes the final decision, which may not reflect the team’s information

5. Facilitate the team’s decision: The entire decision making process is handed over to the team, where the original decision maker serves only as a facilitator to guide the team’s decision process and keep everyone on track

Contingencies of Employee Involvement

The employee involvement model lists four contingencies:

• Decision Structure

o Programmed decisions are less likely to need employee involvement because

solutions are already worked out from past incidents. In other words, the benefits of employee involvement increase with the novelty and complexity of the problem or opportunity

• Source of Decision Knowledge

o In many cases, employees are closer to customers and production activities, so

they often know where the company can save money, improve product or service quality, and realize opportunities. This is particularly true for complex decisions where employees are most likely to possess relevant information (leader lacks sufficient knowledge, and employees have additional information that can improve decision quality)

• Decision Commitment

o Participation improves employee commitment to the decision. If employees are

unlikely to accept a decision without involvement, some level of participation is necessary.

• Risk of Conflict

o Two types of conflict undermine employee involvement. First, if employee goals

and norms conflict with the organizations’, low involvement is recommended. Second, the degree of involvement depends on whether employees will agree on the solution. If conflict is likely to occur, high involvement would be difficult to achieve