UGBA105: Organizational BehaviorAgendaWhat 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 ReaganPresident George W. Bush: The DeciderDemographic and cultural variations in decision-making styleINDIVIDUAL DECISION-MAKINGThe classical (rational) theory of individual decision-makingMulti-attribute utility analysis of job choiceRational decision making under uncertaintySlide 16Which would you choose?Do you behave like a rational decision-maker? Barry Schwartz: “The tyranny of choice” Scientific American, April 2004 Optimizing scaleWhen people act like rational optimizers, what are the psychological consequences?Are you decision-averse?The behavioral model James G. March and Herbert Simon Daniel Kahneman and Amos TverskyDanny 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 31Risk 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 eschews “heroic” for 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, Berkeley2Agenda•Today: –Models of individual- and group-level decision making–Biases in decision-making•Thursday –Case: “The collapse of Barings”•Discussion questions will be forthcoming3What is a “decision?”A choice among alternative courses of action4Some everyday decisions-OR--OR--OR-5Some 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?6 In previous weeks, we discussed:Models of organizational 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 others7This week: •Individual decision-making–Decision-making and management roles–Models of individual decision-making•Rational•Rational under uncertainty•Behavioral•Group decision-making–Pros and cons–Consensus decision-making8Manager as decision-maker: engineer or leader?•As a leadership role –Clear vision enables quick, consistent decision-making –Intelligence, intuition, and commitment enables superior “search” for best alternative–Charisma ensures wide acceptance of decisions•As an engineering role –Careful analysis of decision alternatives & consequences –Design and implementation of decision-making tools and programs9Contrasts in Presidential Decision-Making:Carter and ReaganThirty-Ninth President, 1977-1981 Born: October 1, 1924 Fortieth President, 1981-1989 Born: February 6, 1911Died: June 5, 200410President George W. Bush: 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, 200211Demographic and cultural variations in decision-making style•Men versus women•Asian versus Western?•? versus ?12INDIVIDUAL DECISION-MAKING•Classical rational model •Rational under uncertainty model•Behavioral model13The classical (rational) theory of individual decision-makingAssumptions•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 function14Multi-attribute utility analysis of job choice 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:(3) Calculate utilities of choice alternatives as follows: *Uj = iwi sij 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 Decision: take the Dot.com jobEXP=Quality of experience; PAY=Level of Pay; LOC=Location; WORK=Workload; TRA=Travel required15Rational decision making under uncertaintyAssumptions•You know all the choices in advance •You know the risks (probabilities) associated with the outcomes Decision•Maximize expected utility jpjUjA decision-tree analysis of the expected utility of A decision-tree analysis of the expected utility of buying computer insurancebuying 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$0.017Which would you choose?Imagine that you are a physician working in an Asian village, and six hundred people have come down with a life-threatening disease. Two possible treatments exist. If you choose treatment A, you will save exactly two hundred people. If you choose treatment B, there is a one-third chance