Decision making Models

and Biases
Interpersonal Dynamics
Abstract
Decision making can be defined as a process of finding feasible alternatives and then choosing
the optimum one. Decision making is of utmost importance to effective managers, since the
success or failure of businesses is dependent on decisions taken. Good decision making process
helps in adopting the best course of action in carrying out a given task while using optimum
resources. Decisions can be made either at the spur of the moment, due to emotional dominance
or due to requirement of situation such as shortage of time, or after contemplating on all
alternatives i.e. rational decision making. The rational informed kind is the one that most of us
want to make since a decision-making process based on facts leads to good decisions. So in order
to make effective decisions it is important to know about decision making models. Besides using
particular style for decision making, managers also use “rule of thumb” or heuristics to simplify
their decision making which can lead to errors and biases in evaluating information. Therefore in
this paper we will discuss about the various decision making models, and heuristics, which will
help managers in taking effective and informed decisions that will be profitable to their
organization.
Introduction
All of us have to make decisions every day. Some decisions are relatively straightforward and simple:
Shall I cook food or order it? Others are quite complex: Which of the jobs shall I accept? Decision
making covers a wide territory. It encompasses everything from major decisions such as
choosing a life partner, to the routine choices of everyday life. The choices we make, the small
ones as well as big ones, shouldn’t be taken lightly because our choices shapes our future.
Decision making is a skill and not an in-born trait. It can be improved by knowing the various
models and styles that exist. Also it is important to be aware of the roadblocks which hamper the
optimal decision making. However it is crucial to remember that perfecting ones decision skills
doesn’t guarantee that all the decisions will give the desired results. Good decision skills focuses
on means used to reach the decision, not on the ends. That is one cannot control the outcomes but
only the process for arriving at those outcomes.

Decision making Models

Decision making models are all about making good judgments. There are judgments that are
emotional, spur of the moment which leads to a quick decision. And there are rational informed
kind judgments. The rational informed judgment is the ones that most of us want to make. That
is especially true when it comes to business and organization where money is at stake.

1. Rationality Model

A rational decision making model provides a structured and sequenced approach to

decision making. Using such an approach can help to ensure discipline and consistency is
built into your decision making process. As the word rational suggests, this approach
brings logic and order to decision making. Our rational decision making model consists
of a series of steps, beginning with problem/opportunity identification, then generating
alternative solutions, selecting a solution and finally implementing and evaluating the
solution.
However it is always not possible for people to be rational. There are barriers that start
with the unrealistic assumptions that underlie rationality. Some of these are:
 1. A clear and unambiguous problem: Rationality assumes that the decision maker fully
understands the problem. In reality, problems are typically complex, with
considerable ambiguity due to which this model becomes less optimal.
2. It is not always possible to identify all the criteria and alternatives. People tend to
focus on the visible and obvious ones only. Also biases and personal preference cope
in which restricts the full listing.
3. There is time and cost constraint which makes it impossible to obtain the full
information.
4. Due to lack of information decision makers cannot accurately assess each alternative.

These limitations bring us to our second time of model i.e. bounded rationality.

2. Bounded Rationality
Bounded rationality is a concept based on the fact that rationality of individuals is limited
by the information they have, the cognitive limitations of their minds, and the finite
amount of time they have to make decisions. This contrasts with the concept of
rationality as optimization. Another way to look at bounded rationality is that, because
decision-makers lack the ability and resources to arrive at the optimal solution, they
instead apply their rationality only after having greatly simplified the choices available.
Thus the decision-maker is a satisficer, one seeking a satisfactory and sufficient solution
rather than the optimal one. The concept of bounded rationality revises this assumption to
account for the fact that perfectly rational decisions are often not feasible in practice due to the
finite computational resources available for making them.
Also cognitive decision theorists suggested that decision makers rely on heuristics which are
shortcut to judgments. These will be discussed later in this paper.

3. Intuitive decision making

In situations with higher time pressure, higher stakes, or increased ambiguities, people
use intuitive decision making rather than structured approaches, to immediately arrive at
a satisfactory course of action, without weighing alternatives.
 In this model, the person or group just goes with the option that satisfies their emotional
reactions and takes the decision. The advantages of this type of model are that it is quick
and it helps ensure that it takes into account what the person really cares about.

Intuitive decisions can have some serious drawbacks.

1. The important available alternatives can be ignored leading to missing the better
solution.
2. Using this method, decisions can be made on inaccurate or incomplete information.
3. Prejudices creep in which overrules the facts. For example, employer might not hire
the best qualified person because of say prejudice in terms of age, sex, or race.
4. Intuitive decisions might be very difficult in a team decision situation because people
have different intuitive perspectives.

Biases and errors

1. Overconfidence:
Confidence is said to essential for success. However this same confidence when becomes
extreme can lead to the downfall of an individual, company and even state.
A number of influences can lead us to become overconfident like illusion of superiority.
We tend to have both unrealistic positive views about ourselves and to be unrealistic
about our future in relation to others. Second is the naïve belief that random events can be
controlled. Third is our ability to imagine all the ways in which events can unfold. People
become overconfident because they fail to realize the ways in which one can be wrong.
So to limit this malady one can ask others to offer counterarguments which will help in
finding the flaws in the position. It is found that people are overconfident when the area
under consideration is outside their expertise. Some of the overconfident statements made
in the past will show the importance of knowing and correcting this bias.
“There is no reason anyone would want a computer in their home” by Ken Oslon,
founder of digital equipment co. in 1977.
“Stocks have reached what looks like a permanent high plateau” (Irving Fisher,
Economist in 1929 before Great Depression.)
2. Inertia Bias:
Procrastination is a general disposition to postpone things. All of us suffer from it on one
or other occasion however it becomes serious and harmful when one procrastinates in
daily activities and major issues. Some of the reasons for procrastination are fragile self
esteem, fear of losing or making mistakes, lack of motivation, poor organization and even
being a perfectionist. Sometimes task itself is the source of procrastination where the
task or decision are unpleasant, example quitting smoking, and going on a diet.

3. Immediate Gratification:
It is the situation where people tend to take decisions which will give immediate results
instead of considering the long term effect. To overcome the temptation of immediate
gratification setting long term goals and reviewing them can be helpful. Also paying
attention to both rewards and costs in important. Our natural tendency is to inflate
immediate rewards and underplay future costs.

4. Anchoring Bias:
It is a tendency to fixate on initial information. Once set, we then fail to adjust to
subsequent information. It occurs since our mind appears to give disproportionate amount
of emphasis to the first information it receives.. Therefore initial impressions, ideas,
prices and estimates carry undue weight relative to information received later. Anchors
are widely used by people in the persuasion professions like advertising, politicians, and
lawyers. For example the sales of stores increases during marginal discount offer since
buyers are influenced by initial price set by the seller. And get an impression that they are
getting a better deal. Therefore to be less susceptible to anchoring bias, first of all one
should be aware of it. And then scrutinize the initial value that seems unusually low or
high.

5. Selective Perception:
When decision makers selectively organize and interpret events based on their biased
perceptions, they are using the bias of selective perception. For example in general
 students of a particular specialization like HR, marketing, finance etc consider their own
specialization as a backbone of the organization. It is difficult to eliminate selective
perception. Each of us brings to every situation our past experiences, attitudes and
interests. But we can minimize our bias by increasing the awareness, confronting the
expectations and considering how others might interpret the situation.

6. Confirmation Bias:
The confirmation bias represents a specific case of selective perception. We seek out
information that reaffirms our past choices and discount information that contradicts past
judgments. We tend to accept information that confirms our preconceived views while
being critical and skeptical of information that challenges these views. Therefore the
information we gather is typically biased towards supporting views already held. For
example when an individual move to less popular city he tends to look at the negatives of
city while ignoring the positives since it reaffirms his bias that the city is not good
enough.

7. Framing Bias:
When decision makers select and highlight certain aspects of a situation while excluding
others. Hence creating incorrect reference points. People treat perceived losses
considerably differently than perceived gains. When decision outcomes are framed as
avoiding losses, we tend to be risk seeking. When framed as gain, we tend to be risk
averse. For example it was found that more lung cancer patients select surgery when told
that they hae 68% chance of living for more than a year compared to being told that
surgery results in a 32% chance of dying by the end of the year. Similarly seller can
easily sell an expensive item if he frames it as an investment instead of an expense.

8. Availability bias:
It is the tendency of people to base their judgments on information which is readily
accessible. We tend to remember events that are most available in our memory. This in
turn, distorts the ability to recall events in a balanced manner and results in distorted
judgments and probability estimates. For example the earthquake insurance rose after the
 Bhuj, Gujrat earthquake in 2002 since business men understood that people tend to
overestimate unlikely events just after their occurrence, so they pushed highly profitable
products to the consumers. To overcome this bias one should not over-rely on the
memory for information prior to decision making instead finding correct facts and
analyzing them will lead to better decision.

9. Representation Bias:
Decision makers are acting under the representation bias when they assess the likelihood
of an event based on how closely it resembles other events i.e. they draw analogies when
none exists. For example an employer may reject the job application a candidate since he
is from same college as one of the current employee who is underperforming. To avoid
this bias decision maker should be careful in drawing comparison from non identical
situation. Also one should not decide after looking at a small sample. For example don’t
rush to buy a book on the recommendation of 4 random reviewers.

10. Randomness:
It occurs when decision makers try to create meaning out of random events. For example
increase in the sale of lottery tickets at a stall where someone won a big amount.
Sometimes people turn random events into superstition. For example in sports quite a few
sportsmen wear a shirt or shoes considering them to be lucky.

11. Sunk Costs:

The sunk cost error is when decision makers forget that current choices can’t correct the
past. They incorrectly fixate on past expenditures of time, money, or effort in assessing
choices rather than on future consequences. For example a person bought tickets for a
movie which he later on finds out is really bad. But he still goes for the movie because he
had paid the amount. Here he does not realize that by watching the movie he is wasting
his time as well. To avoid sunk cost bias take decisions that influences future not the past.
And admit mistakes. The idea here is to know when to say stop.
 12. Self serving bias:
Decision makers who are quick to take credit for their success and blame failure on
outside factors exhibit this bias. To manage this bias we need to be aware of this
tendency and be careful about being too confident in extrapolating from past successes or
in placing the blame for your setbacks. Also challenging one’s own natural inclinations
for example questioning the reasons of success or failure might help in avoiding this bias.

13. Hindsight Bias:

It is the tendency for the decision makers to falsely believe that they would have
accurately predicted the outcome of an event once that outcome is actually known. For
example a lot more people become sure about the inevitability of who would win a
cricket match on the day after the game than they were the day before.
The hindsight bias reduces our ability to learn from the past. It permits us to think that we
are better at making predictions than we really are and can result in our being more
confident about the accuracy of future decisions. The most effective way to lessen the
hindsight bias is to make oneself consider alternative reasons why the results from a
given event might have turned out differently.

Conclusion

In the end it is worthwhile to mention that no skill may be more important to success in life than
the ability to make competent decisions. And this skill can be improved by knowing about the
process by which one makes decision, the models that are used and the biases that may creep in
while making a decision. It will do well to remember that people have power to control their
future through the decisions they make. By understanding and practicing the suggestions offered
here, one can increase the decision batting average and become more effective decision maker.

References
Books:
Organization Behaviour by Stephen P. Robbins
Decide & Conquer by Stephen p. Robbins
Understanding Organizational Behaviour by Udai Pareek
Organizational Decision Making – Cambridge Series on Judgment and Decision making Edited
by Zur Shapira.

Websites
en.wikipedia.org/wiki/Decision_making
www.mindtools.com
www.decision-making-confidence.com