UGBA105: Organizational BehaviorWhat is a “decision?”Some everyday decisionsSome business decisionsIn previous weeks, we discussed: Models of organizational decision-makingThis week:Manager as decision-maker: engineer or leader?Contrasts in Presidential Decision-Making: Carter and ReaganGeorge W. Bush is “The Decider”Models of decision-making: The classical rational modelA tool for rational decision-making: Multi-attribute utility analysisThe model of rational decision making under uncertaintySlide 13Do you act like a rational decision-maker? Barry Schwartz: “The tyranny of choice” Scientific American, April 2004 Optimizing scaleWhen people act like rational decision-makers, how do they feel?Are you decision-averse?The behavioral model James G. March and Herbert Simon Daniel Kahneman and Amos TverskyDaniel Kahneman – 2002 Nobel Prize in EconomicsHeuristics are learned responses to decision situationsDecision-making heuristicsThe availability heuristic and managerial decision-makingThe representativeness heuristic: neglecting base ratesStereotyping and the representativeness heuristicConfirmation and hindsight biasCriticism of the war in Iraq: A case of hindsight bias?More biases: Risk aversion or toleranceSlide 27Risk tolerance/intolerance People adapt to or become tolerant of risk. But one realization of downside risk will increase risk aversionAnother bias: Escalation of commitmentBiases lead to unethical behaviorGROUP DECISION-MAKINGThe pros of group (team) decision-makingThe cons of group decision makingBeware of groupthink! (Janis, 1972)The “risky shift”Consensus decision-makingGoogle practices consensus decision-makingIn summary …UGBA105: UGBA105: Organizational BehaviorOrganizational BehaviorProfessor Jim LincolnProfessor Jim LincolnWeek 8: Week 8: Decision-making in OrganizationsDecision-making in OrganizationsWalter A. Haas School of BusinessUniversity of California, Berkeley2What is a “decision?”What is a “decision?”3Some everyday decisionsSome everyday decisions-OR--OR--OR-4Some business decisionsSome business decisions•I’ve got three great candidates. Who should I hire?•This person’s performance has been mediocre but not awful. Do I fire him?•Should we bet the company on that new product idea? •Do we enter that market or stay out of it?•Should we acquire that hot new start-up?5 In previous weeks, we discussed:In previous weeks, we discussed:Models of Models of organizationalorganizational decision-making decision-making 1. The classical rational model •Managers devise programs (“standard operating procedures”) so that decisions are made “by the book”–Such routine or programmed decisions are delegated down the hierarchy; exceptions are managed by higher-ups •Higher level decisions are uncertain and require problem-solving search–Modern decision tools can help2. The political model Decision-making is unplanned and disorderly. It can occur without clear rules and behind the scenes. It is the outcome of conflicts in which one side prevails over others6This week: This week: •Individual decision-making–Decision-making and management roles–Models of individual decision-making•Rational•Rational under uncertainty•BehavioralAre you a rational decision-maker?•Group decision-making–Pros and cons–Consensus decision-making7Manager as decision-maker: Manager as decision-maker: engineer or leader?engineer or leader?•As a leadership role –Clear vision enables quick, consistent decision-making –Intelligence, intuition, and commitment enables superior “search” for best alternative–Risk tolerance and self-confidence enable fast choice–Charisma ensures wide acceptance of decisions•As an engineering role –Careful analysis of decision alternatives & consequences –Design and implement decision-making tools and programs–Train others in use of those tools8Contrasts in Presidential Decision-Making:Contrasts in Presidential Decision-Making:Carter and ReaganCarter and ReaganThirty-Ninth President, 1977-1981 Born: October 1, 1924 Fortieth President, 1981-1989 Born: February 6, 1911Died: June 5, 20049George W. Bush is “The Decider”George W. Bush is “The Decider”"I hear the voices and I read the front page and I know the speculation. But I'm the decider and I decide what's best.” White House Press Conference, April 18, 200210Models of decision-making:Models of decision-making:The classical rational modelThe classical rational modelAssumptions•You know all the choices in advance•You know all the outcomes of the choices•You have a utility function that rates the outcomes from least- to most-preferred Decision•You make the choice that maximizes (optimizes) your utility function11A tool for rational decision-making: A tool for rational decision-making: Multi-attribute utility analysisMulti-attribute utility analysis i = EXP PAY LOC WORK TRA(1) Assign preference weights (wi) to attributes (i) 0.38 0.26 0.16 0.12 0.08 = 1.00(2) Score (sij) choice alternatives on each attribute: UTILITY*Big 5 0.9 0.8 0.7 0.2 0.3 0.710Dot.com 1.0 0.7 0.9 0.8 1.0 0.826Local bank 0.3 0.5 0.1 0.1 0.4 0.304(3) Calculate utilities of choice alternatives as follows: *Uj = iwi sij Decision : take the Dot.com jobEXP=Quality of experience; PAY=Level of Pay; LOC=Location; WORK=Workload; TRA=Travel requiredSee W. Edwards & J.R. Newman (1982). Multiattribute Evaluation.12The model of rational decision making The model of rational decision making under uncertaintyunder uncertaintyAssumptions•You know all the choices in advance •You know the risks (probabilities) of all the outcomes of the choicesDecision•Maximize expected utility jpjUjA decision-tree analysis of the expected A decision-tree analysis of the expected utility of buying computer insuranceutility of buying computer insurance Choice Outcome Prob. of Value of Outcome Outcomestolen (-3500)not stolen ($0)not stolen ($0)stolen (-$3500+3450)-$100-$50 -$3500$0.01 .99.01.99-$50.50-$35.00Computer cost = $3500.00Insurance cost = $ 50.00Deductible = $ 50.00 Expected Value or UtilityBUYDON’T BUY-$1.00$0.014Do you act like a rational decision-maker? Do you act like a rational decision-maker? Barry Schwartz: “The tyranny of choice”Barry Schwartz: “The tyranny of choice” Scientific American, April 2004 Scientific American,