Chapter Seven: Decision making

What Is Decision Making?

Decision making refers to making choices among alternative courses of action—which may also
include inaction. A decision-making process is a series of steps taken by an individual to
determine the best option or course of action to meet their needs. While it can be argued that
management is decision making, half of the decisions made by managers within organizations
fail (Ireland & Miller, 2004; Nutt, 2002; Nutt, 1999). Therefore, increasing effectiveness in
decision making is an important part of maximizing effectiveness at work. This chapter will help
you understand how to make decisions.

Individuals throughout organizations use the information they gather to make a wide range of
decisions. These decisions may affect the lives of others and change the course of an
organization. For example, the decisions made by executives and consulting firms for Enron
(American Energy Company based in Housten, Texas in early 2000’s) ultimately resulted in a
$60 billion loss for investors, thousands of employees without jobs, and the loss of all employee
retirement funds.

Because many decisions involve an ethical component, one of the most important considerations
in management is whether the decisions you are making as an employee or manager are ethical.
Here are some basic questions you can ask yourself to assess the ethics of a decision (Blanchard
& Peale, 1988).

 Is this decision fair?

 Will I feel better or worse about myself after I make this decision?
 Does this decision break any organizational rules?
 Does this decision break any laws?
 How would I feel if this decision was broadcast on the news?

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Types of Decisions

Despite the far-reaching nature of the decisions in the previous example, not all decisions have
major consequences or even require a lot of thought. For example, before you come to class, you
make simple and habitual decisions such as what to wear, what to eat, and which route to take as
you go to and from home and school. You probably do not spend much time on these mundane
decisions. These types of straightforward decisions are termed programmed decisions; these
are decisions that occur frequently enough that we develop an automated response to them. The
automated response we use to make these decisions is called the decision rule. For example,
many restaurants face customer complaints as a routine part of doing business. Because this is a
recurring problem for restaurants, it may be regarded as a programmed decision.

Programmed decision-making refers to decisions that are repetitive in nature and follow a
specific set of procedures. These decisions are typically made by lower-level managers and are
implemented on a daily basis. Examples of programmed decisions include setting work
schedules, granting employee leave, and ordering routine supplies. These decisions are not
typically long-term and can be changed at any time.

Non-programmed decision-making, on the other hand, relates to decisions that are not routine
and arise from unstructured problems. These decisions are usually made by upper-level
management and have a long-term impact on the organization. Examples of non-programmed
decisions include launching a new product line, entering a new market, or responding to a crisis
situation. Non-programmed decisions are unique and important require conscious thinking,
information gathering, and careful consideration of alternatives. A crisis situation also constitutes
a non-programmed decision.

Decision making can also be classified into three categories based on the level at which they
occur. Strategic decisions set the course of organization. Tactical decisions are decisions about
how things will get done. Finally, operational decisions are decisions that employees make each
day to run the organization. For example, remember the restaurant that routinely offers a free

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dessert when a customer complaint is received. The owner of the restaurant made a strategic
decision to have great customer service. The manager of the restaurant implemented the free
dessert policy as a way to handle customer complaints, which is a tactical decision. And, the
servers at the restaurant are making individual decisions each day evaluating whether each
customer complaint received is legitimate to warrant a free dessert.

Individual decision-making is when one person makes a decision in an official capacity, often in
smaller organizations or with an autocratic management style, Example a manager firing an
employee. Group decision-making involves making decisions through a collaborative process.
Multiple viewpoints and perspectives are considered. Examples include a team of managers
deciding on a marketing strategy or a board of directors deciding on a merger or acquisition.

Decisions Commonly Made within Organizations

Decision making models

A decision-making model is a system or process which individuals can follow or imitate to

ensure they make the best choice among various options. A model makes the decision-making

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process easier by providing guidelines. Decision-making models can also be used to avoid
challenges by creating a structured, transparent process. Decision models also make the decision-
making process visible and easily communicable for everyone involved.

Different decision-making models are designed to understand and evaluate the effectiveness of
non-programmed decisions. This discussion covers four decision-making approaches starting
with the rational decision-making model, moving to the bounded rationality decision-making
model, the intuitive decision-making model, and ending with the creative decision-making
model.

Rational Decision Making

The rational decision-making model describes a series of steps that decision makers should
consider if their goal is to maximize the quality of their outcomes. In other words, if you want to
make sure you make the best choice, going through the formal steps of the rational decision-
making model may make sense.

Let’s imagine that your old, clunky car has broken down and you have enough money saved for
a substantial down payment on a new car. It is the first major purchase of your life, and you want
to make the right choice. The first step, therefore, has already been completed—we know that
you want to buy a new car. Next, in step 2, you’ll need to decide which factors are important to
you. How many passengers do you want to accommodate? How important is fuel economy to
you? Is safety a major concern? You only have a certain amount of money saved, and you don’t
want to take on too much debt, so price range is an important factor as well. If you know you
want to have room for at least five adults, get at least 20 miles per gallon, drive a car with a
strong safety rating, not spend more than $22,000 on the purchase, and like how it looks, you’ve
identified the decision criteria. All of the potential options for purchasing your car will be
evaluated against these criteria.

Before we can move too much further, you need to decide how important each factor is to your
decision in step 3. If each is equally important, then there is no need to weight them, but if you
know that price and gas mileage are key factors, you might weight them heavily and keep the

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other criteria with medium importance. Step 4 requires you to generate all alternatives about
your options. Then, in step 5, you need to use this information to evaluate each alternative
against the criteria you have established. You choose the best alternative (step 6) and you go out
and buy your new car (step 7).

Of course, the outcome of this decision will be related to the next decision made; that is where
the evaluation in step 8 comes in. For example, if you purchase a car but have nothing but
problems with it, you are unlikely to consider the same make and model in purchasing another
car the next time!

Steps in the Rational Decision-Making Model

While decision makers can get off track during any of these steps, research shows that limiting
the search for alternatives in the fourth step can be the most challenging and lead to failure.

The rational decision-making model has important lessons for decision makers. First, when
making a decision you may want to make sure that you establish your decision criteria before

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you search for all alternatives. This would prevent you from liking one option too much and
setting your criteria accordingly. For example, let’s say you started browsing for cars before you
decided your decision criteria. You may come across a car that you think really reflects your
sense of style and make an emotional bond with the car. Then, because of your love for this car,
you may say to yourself that the fuel economy of the car and the innovative braking system are
the most important criteria. After purchasing it, you may realize that the car is too small for all of
your friends to ride in the back seat when you and your brother are sitting in front, which was
something you should have thought about! Setting criteria before you search for alternatives may
prevent you from making such mistakes. Another advantage of the rational model is that it urges
decision makers to generate all alternatives instead of only a few. By generating a large number
of alternatives that cover a wide range of possibilities, you are likely to make a more effective
decision in which you do not need to sacrifice one criterion for the sake of another.

Despite all its benefits, this decision-making model involves a number of unrealistic
assumptions. It assumes that people understand what decision is to be made, that they know all
their available choices, that they have no perceptual biases, and that they want to make optimal
decisions. Nobel Prize–winning economist Herbert Simon observed that while the rational
decision-making model may be a helpful tool for working through problems, it doesn’t represent
how decisions are frequently made within organizations.

Think about how you make important decisions in your life. Our guess is that you rarely sit down
and complete all eight steps in the rational decision-making model. For example, this model
proposed that we should search for all possible alternatives before making a decision, but this
can be time consuming and individuals are often under time pressure to make decisions.
Moreover, even if we had access to all the information, it could be challenging to compare the
pros and cons of each alternative and rank them according to our preferences. Anyone who has
recently purchased a new laptop computer or cell phone can attest to the challenge of sorting
through the different strengths and limitations of each brand, model, and plans offered for
support and arriving at the solution that best meets their needs. In fact, the availability of too
much information can lead to analysis paralysis, where more and more time is spent on gathering
information and thinking about it, but no decisions actually get made.

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Making “Good Enough” Decisions (bounded rationality model)

The bounded rationality model of decision making recognizes the limitations of our decision-
making processes. According to this model, individuals knowingly limit their options to a
manageable set and choose the best alternative without conducting an exhaustive search for
alternatives. An important part of the bounded rationality approach is the tendency to satisfice,
which refers to accepting the first alternative that meets your minimum criteria. For example,
many college graduates do not conduct a national or international search for potential job
openings; instead, they focus their search on a limited geographic area and tend to accept the first
offer in their chosen area, even if it may not be the ideal job situation. Satisficing is similar to
rational decision making, but it differs in that rather than choosing the best choice and
maximizing the potential outcome, the decision maker saves time and effort by accepting the
first alternative that meets the minimum threshold.

Making Intuitive Decisions

The intuitive decision-making model has emerged as an important decision-making model. It

refers to arriving at decisions without conscious reasoning. When we recognize that managers
often need to make decisions under challenging circumstances with time pressures, constraints, a
great deal of uncertainty, highly visible and high-stakes outcomes, and within changing
conditions, it makes sense that they would not have the time to formally work through all the
steps of the rational decision-making model. Research on life-or-death decisions made by fire
chiefs, pilots, and nurses finds that these experts do not choose among a list of well-thought-out
alternatives. They don’t decide between two or three options and choose the best one. Instead,
they consider only one option at a time. Due to training, experience, and knowledge, these
decision makers have an idea of how well a given solution may work. If they run through the
mental model and find that the solution will not work, they alter the solution and retest it before
setting it into action. If it still is not deemed a workable solution, it is discarded as an option and
a new idea is tested until a workable solution is found. Once a viable course of action is
identified, the decision maker puts the solution into motion. The key point is that only one choice
is considered at a time. Novices are not able to make effective decisions this way because they
do not have enough prior experience to draw upon.

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Making Creative Decisions

In addition to the rational decision making, bounded rationality models, and intuitive decision
making, creative decision making is a vital part of being an effective decision
maker. Creativity is the generation of new, imaginative ideas. With the flattening of
organizations and intense competition among organizations, individuals and organizations are
driven to be creative in decisions ranging from cutting costs to creating new ways of doing
business. Please note that, while creativity is the first step in the innovation process, creativity
and innovation are not the same thing. Innovation begins with creative ideas, but it also involves
realistic planning and follow-through.

The creative decision making model involves five steps. The model includes problem
identification, which is the step in which the need for problem solving becomes apparent. If you
do not recognize that you have a problem, it is impossible to solve it. Immersion is the step in
which the decision maker thinks about the problem consciously and gathers information. A key
to success in creative decision making is having or acquiring expertise in the area being studied.
Then, incubation occurs.. At this time, the brain is actually working on the problem
unconsciously. Then comes illumination or the insight moment, when the solution to the
problem becomes apparent to the person, usually when it is least expected. Finally,
the verification and application stage happens when the decision maker consciously verifies the
feasibility of the solution and implements the decision.

Figure 11.9. The Creative Decision-Making Process

How Do You Know If Your Decision-Making Process Is Creative?

Researchers focus on three factors to evaluate the level of creativity in the decision-making
process. Fluency refers to the number of ideas a person is able to generate. Flexibility refers to

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how different the ideas are from one another. If you are able to generate several distinct solutions
to a problem, your decision-making process is high on flexibility. Originality refers to an idea’s
uniqueness.

Dimensions of Creativity

Some experts have proposed that creativity occurs as an interaction among three factors: (1)
people’s personality traits (openness to experience, risk taking), (2) their attributes (expertise,
imagination, motivation), and (3) the context (encouragement from others, time pressure, and
physical structures) (Amabile, 1988; Amabile, et. al., 1996; Ford & Gioia, 2000; Tierney, et. al.,
1999; Woodman, et. al., 1993). For example, research shows that individuals who are open to
experience, are less conscientious, more self-accepting, and more impulsive, tend to be more
creative (Feist, 1998).

There are many techniques available that enhance and improve creativity. Linus Pauling, the
Nobel prize winner who popularized the idea that vitamin C could help build the immunity
system, said, “The best way to have a good idea is to have a lot of ideas.” One popular way to
generate ideas is to use brainstorming. Brainstorming is a group process of generated ideas that
follows a set of guidelines that include no criticism of ideas during the brainstorming process, the
idea that no suggestion is too crazy, and building on other ideas. Research shows that the
quantity of ideas actually leads to better idea quality in the end, so setting high idea quotas where
the group must reach a set number of ideas before they are done, is recommended to avoid
process loss and to maximize the effectiveness of brainstorming. Another unique aspect of
brainstorming is that the more people are included in brainstorming, the better the decision

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outcome will be because the variety of backgrounds and approaches give the group more to draw
from.

Ideas for Enhancing Organizational Creativity

We have seen that organizational creativity is vital to organizations. Here are some guidelines for
enhancing organizational creativity within teams (Amabile, 1998; Gundry, et. al., 1994; Keith,
2008; Pearsall, et. al., 2008; Thompson, 2003).

Team Composition (Organizing/Leading)

 Diversify your team to give them more inputs to build on and more opportunities to
create functional conflict while avoiding personal conflict.
 Change group membership to stimulate new ideas and new interaction patterns.
 Leaderless teams can allow teams freedom to create without trying to please anyone up
front.

Team Process (Leading)

 Engage in brainstorming to generate ideas—remember to set a high goal for the number
of ideas the group should come up with.
 Use the nominal group technique in person or electronically to avoid some common
group process pitfalls. Consider anonymous feedback as well.
 Use analogies to envision problems and solutions.

Leadership (Leading)
 Challenge teams so that they are engaged but not overwhelmed.
 Let people decide how to achieve goals, rather than telling them what goals to achieve.
 Support and celebrate creativity even when it leads to a mistake. But set up processes to
learn from mistakes as well.
 Model creative behavior.

Culture (Organizing)
 Institute organizational memory so that individuals do not spend time on routine tasks.

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  Build a physical space conducive to creativity that is playful and humorous—this is a
place where ideas can thrive.
 Incorporate creative behavior into the performance appraisal process.
 And finally, avoiding groupthink can be an important skill to learn (Janis, 1972).

The four different decision-making models—rational, bounded rationality, intuitive, and creative
—vary in terms of how experienced or motivated a decision maker is to make a choice.
Choosing the right approach will make you more effective at work and improve your ability to
carry out all the P-O-L-C functions (planning, organizing, leading, controlling)

Decision making models

Faulty Decision Making

No matter which model you use, you need to know and avoid the decision-making traps that
exist. Daniel Kahnemann (another Nobel prize winner) and Amos Tversky spent decades
studying how people make decisions. They found that individuals are influenced by
overconfidence bias, hindsight bias, anchoring bias, framing bias, and escalation of commitment.
Overconfidence bias occurs when individuals overestimate their ability to predict future events.

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Hindsight bias is the opposite of overconfidence bias, as it occurs when looking backward in
time where mistakes made seem obvious after they have already occurred. In other words, after a
surprising event occurred, many individuals are likely to think that they already knew this was
going to happen. Anchoring refers to the tendency for individuals to rely too heavily on a single
piece of information. Framing bias refers to the tendency of decision makers to be influenced by
the way that a situation or problem is presented. For example, customers tend to prefer a
statement such as “85% lean beef” as opposed to “15% fat” (Li, et. al., 2007). Escalation of
commitment occurs when individuals continue on a failing course of action after information
reveals this may be a poor path to follow. It is sometimes called sunk costs fallacy because the
continuation is often based on the idea that one has already invested in this course of action.

Decision Making in Groups

When it comes to decision making, are two heads better than one? The answer to this question
depends on several factors. Group decision making has the advantages of drawing from the
experiences and perspectives of a larger number of individuals. Hence, they have the potential to
be more creative and lead to a more effective decision. In fact, groups may sometimes achieve
results beyond what they could have done as individuals. Groups also make the task more
enjoyable for members in question. Finally, when the decision is made by a group rather than a
single individual, implementation of the decision will be easier because group members will be
invested in the decision. If the group is diverse, better decisions may be made because different
group members may have different ideas based on their background and experiences. Research
shows that for top management teams, groups that debate issues and that are diverse make
decisions that are more comprehensive and better for the bottom line in terms of profitability and
sales (Simons, et. al., 1999).

Despite its popularity within organizations, group decision making suffers from a number of
disadvantages. We know that groups rarely outperform their best member (Miner, 1984). While
groups have the potential to arrive at an effective decision, they often suffer from process losses.
For example, groups may suffer from coordination problems. Anyone who has worked with a
team of individuals on a project can attest to the difficulty of coordinating members’ work or
even coordinating everyone’s presence in a team meeting. Furthermore, groups can suffer

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from social loafing, or the tendency of some members to put forth less effort while working
within a group. Groups may also suffer from groupthink, the tendency to avoid critical
evaluation of ideas the group favors. Finally, group decision making takes a longer time
compared with individual decision making, given that all members need to discuss their thoughts
regarding different alternatives.

Thus, whether an individual or a group decision is preferable will depend on the specifics of the
situation. For example, if there is an emergency and a decision needs to be made quickly,
individual decision making might be preferred. Individual decision making may also be
appropriate if the individual in question has all the information needed to make the decision and
if implementation problems are not expected. However, if one person does not have all the
information and skills needed to make the decision, if implementing the decision will be difficult
without the involvement of those who will be affected by the decision, and if time urgency is
more modest, then decision making by a group may be more effective.

Advantages and Disadvantages of Different Levels of Decision Making

Tools and Techniques for Making Better Decisions

Nominal Group Technique (NGT) was developed to help with group decision making by
ensuring that all members participate fully. NGT is not a technique to be used at all meetings

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routinely. Rather, it is used to structure group meetings when members are grappling with
problem solving or idea generation. It follows four steps (Delbecq, et. al., 1975). First, each
member of the group engages in a period of independently and silently writing down ideas.
Second, the group goes in order around the room to gather all the ideas that were generated. This
goes on until all the ideas are shared. Third, a discussion takes place around each idea and
members ask for and give clarification and make evaluative statements. Finally, individuals vote
for their favorite ideas by using either ranking or rating techniques. Following the four-step NGT
helps to ensure that all members participate fully and avoids group decision-making problems
such as groupthink.

Delphi Technique is unique because it is a group process using written responses to a series of
questionnaires instead of physically bringing individuals together to make a decision. The first
questionnaire asks individuals to respond to a broad question, such as stating the problem,
outlining objectives, or proposing solutions. Each subsequent questionnaire is built from the
information gathered in the previous one. The process ends when the group reaches a consensus.
Facilitators can decide whether to keep responses anonymous. This process is often used to
generate best practices from experts.

Majority rule refers to a decision-making rule where each member of the group is given a single
vote, and the option that receives the greatest number of votes is selected. This technique has
remained popular, perhaps because of its simplicity, speed, ease of use, and representational
fairness.

Consensus is another decision-making rule that groups may use when the goal is to gain support
for an idea or plan of action. While consensus tends to take longer in the first place, it may make
sense when support is needed to enact the plan. The process works by discussing the issues,
generating a proposal, calling for consensus, and discussing any concerns. If concerns still exist,
the proposal is modified to accommodate them. These steps are repeated until consensus is
reached. Thus, this decision-making rule is inclusive, participatory, cooperative, and democratic.
Research shows that consensus can lead to better accuracy (Roch, 2007), and it helps members
feel greater satisfaction with decisions (Mohammed & Ringseis, 2001) and to have greater

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acceptance. However, groups take longer with this approach and groups that cannot reach
consensus become frustrated (Peterson, 1999).

Group decision support systems (GDSS) are interactive computer-based systems that are able
to combine communication and decision technologies to help groups make better decisions.

Decision trees are diagrams in which answers to yes or no questions lead decision makers to
address additional questions until they reach the end of the tree. Decision trees are helpful in
avoiding errors such as framing bias. Decision trees tend to be helpful in guiding the decision
maker to a predetermined alternative and ensuring consistency of decision making—that is,
every time certain conditions are present, the decision maker will follow one course of action as
opposed to others if the decision is made using a decision tree.

SWOT Diagram helps a manager study a situation in four quadrants:

 Strengths: Where does the organization excel compared to its competition? Consider the
internal and external strengths.
 Weaknesses: What could the organization improve?
 Opportunities: How can the organization leverage its strengths to create new avenues for
success? How could addressing a specific weakness provide a unique opportunity?
 Threats: Determine what obstacles prevent the organization from achieving its goals.

Pareto Principle helps identify changes that will be the most effective for an organization. It’s
based on the principle that 20 percent of factors frequently contribute to 80 percent of the
organization’s growth. For example, suppose 80 percent of an organization’s sales came from 20
percent of its customers. A business can use the Pareto Principle by identifying the
characteristics of that 20 percent customer group and finding more like them. By identifying
which small changes have the most significant impact, an organization can better prioritize its
decisions and energies.

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