GRA 6820

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GRA 6820The Psychology of Decision
Making(Harrison, Chapter 6)
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Overview of chapter 6

• The role of personality
• Risk behavior
• Perception in decision making
• Subconscious influences

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The disciplines of decision making
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Disciplinary roots of decision science
DESCRIPTIVE THEORIES PRESCRIPTIVE THEORIES
INDIVIDUAL Psychology Marketing Psychiatry Literature Decision science Economics Operations research Philosophy/logic
GROUP Social psychology Organizational behavior Anthropology Sociology Game theory Organizational behavior Clinical psychiatry/therapy Finance/economics
ORGANIZATION Organization theory Sociology Industrial organization Political science Planning/strategy Control theory/cybernetics Organization design Team theory/economics
SOCIETY Sociology Anthropology Macroeconomics Legal philosophy Political sciences Social choice
Kleindorfer, P.R., Kunreuther, H.C. and
Schoemaker, P.J.H. (1993). Decision Sciences An
integrative perspective, Cambridge.
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Factors influencing strategy

• Complexity
• Uncertainty
• Long time delays between action and reaction
• Conflicting objectives
• Multiple decision makers

We seek a rational framework to help us sort
through these issues
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Sense-making

• A characteristic of humans is trying to make
  sense of incomprehensible things.
• Sense-making is described as
• Structuring the unknown, but in different ways.
• Placing stimuli into some sort of framework a
  frame of reference that guides interpretations.
• A thinking process that uses retrospective
  accounts to explain surprises.
• Reciprocal interaction of information seeking,
  meaning assignment and action.
• An interpretive process needed for organizational
  members to understand and share understandings
  about features of the organization.
• A process in which individuals develop cognitive
  maps of their environment.

Sense may be in the eye of the beholder, but
beholders vote and the majority rules. K.E.
Weick
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Problem structure
Degree of Structure Degree of Structure Operational Performance Operational Management Management Control Strategic Planning
Structured Structured Payroll Production Accounts Receivable Budget Management Portfolio Analysis
Equipment Scheduling Inventory Control Short-term Forecasting Site Location
Dispatching Maintenance Management Long-term Forecasting Mergers and Acquisitions
Unstructured Unstructured Equipment Diagnosis Cash Management Budget Preparation Product Planning
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Sense-making Multiple perspectives
A real-world situation of concern
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Definition Problem

• A formal statement of a set of assumptions about
  the world.
• The assumptions are rarely made explicit.
• Whether we see an event or situation as a
  problem depends on our view of the world.
• Problems do not exist independently of the person
  who sees them.
• Mistaking the map for the territory.

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The principle of bounded rationality

• The capacity of the human mind for formulating
  and solving complex problems is very small
  compared to the size of those problems whose
  solution is required for objectively rational
  behavior in the real world or even for a
  reasonable approximation to such objectivity.

Simon, H.A. (1957). Administrative Behavior A
study of decision making processes in
administrative organizations, 4th ed. New York
The Free Press.
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The mind of the strategist

• Successful business strategies result not from
  rigorous analysis, but from a particular state of
  mind.
• Strategy making is in essence a creative and
  partly intuitive process, often disruptive of the
  status quo.
• Strategists employ analysis only to stimulate the
  creative process, to test the ideas that emerge,
  to work out their strategic implications or to
  ensure successful execution.

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The anatomy of a decision

• The rational approach to decision making
• Define the problem.
• Identify the criteria.
• Weight the criteria.
• Generate alternatives.
• Rate each alternative on each criterion.
• Compute the optimal decision.

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Phases in the strategic decision making process
INTELLIGENCE

• Subject to constraints.
• Individual
• Organizational
• Societal

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Problem solving constraints

• Cultural constraints
• Cultural Iceberg
• Organizational constraints
• Contextual variables
• Structural variables
• Individual constraints
• Cognitive
• Personality

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The cultural iceberg
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Problem solving constraints Organizational
factors

• Contextual variables

Structural variables
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Constraints Individual factors

• Stereotypical thinking
• Risk of failure
• Memory constraints
• World-view constraints

• Self imposed constraints
• Lack of a questioning attitude
• Functional constraints
• Problem solving language constraints

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A model of cognitionThe human information
processing model
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Biases

• Assumptions
• Judgment is plagued by random error and
  systematic biases.
• Good judgment requires mental skills exceeding
  our capabilities.
• Capacity of the mind is small relative to the
  size of the problems.
• Heuristics and rules of thumb are used to cope
  with problem complexity.
• Good news
• This allows us to deal with the real world.
• Bad news
• This often leads to faulty data acquisition and
  processing.

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Biases in problem solving

• Acquisition biases
• Availability
• Selective perception
• Frequency
• Base rate
• Illusory correlation
• Data presentation
• Framing

• Processing biases
• Inconsistency
• Conservatism
• Nonlinear extrapolation
• Information sources
• Source consistency
• Consistent information sources can increase
  confidence in judgments, but not increase
  predictive accuracy.
• Data presentation

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Biases in problem solving

• Decision environment
• Time pressure
• Information overload
• Distractions
• Emotional stress
• Social pressures

• Processing heuristics
• Habits/rules of thumb
• Anchoring and adjustment
• Representativeness
• Justifiability
• Law of small numbers
• Regression bias
• Best guess strategy

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Biases in problem solving

• Output bias
• Question format
• Scale effects
• Wishful thinking
• Illusion of control

• Feedback bias
• Outcome irrelevant learning structures
• Misperception of chance occurrences
• Failure/success attributions
• Logical fallacies in recall
• Hindsight

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Feedback biases and learning
Mental model (governing variables and
relationships)
Choosing
Double loop learning
Acting
Single loop learning
Observing consequences (match/mismatch with
expectations)
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Heuristics and biases in decision making
Availability Judgments distorted by easily recalled events
Selective perception Expectations bias observations
Illusory correlation Encourages belief that unrelated variables are correlated
Conservatism Ignoring full effect of new information
Law of small numbers Overestimating representativeness of small groups
Regression bias Failure to allow for regression to the mean
Wishful thinking Probability of desired events judged too highly
Illusion of control Overestimating personal control over outcomes
Logical reconstruction Logical reconstruction of inaccurately recalled events
Hindsight bias Overestimation of predictability of past events
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Antidotes to counteract biases
Bias Antidote
Under- estimating uncertainty Use frameworks for strategic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Believing chance is predictable Use frameworks for strategic analysis Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Selective perception Use frameworks for strategic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions
Anchoring and adjustment Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Seeing opportunities incrementally Use frameworks for strategic analysis Use multiple perspectives Consider improbable or unpopular assumptions
Seeking only confirming evidence Use frameworks for strategic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Framing biases Use multiple perspectives Devils advocate Re-evaluate over time
Reasoning by inappropriate analysis Use multiple perspectives Devils advocate Re-evaluate over time
Escalating commitment irrationally Use frameworks for strategic analysis Use multiple perspectives Devils advocate Consider improbable or unpopular assumptions Re-evaluate over time
Teisberg, E.O. (1991). Why do good managers
choose poor strategies? Harvard Business School
Case 9-391-172.
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Decision trapsRusso and Schoemaker, Decision
Traps 1989

1. Plunging in.
2. Frame blindness.
3. Lack of frame control.
4. Overconfidence in your judgment.
5. Shortsighted shortcuts.
6. Shooting from the hip.
7. Group failure.
8. Fooling yourself about feedback.
9. Not keeping track.
10. Failure to audit your decision process.

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Decision traps summary(Russo and Schoemaker,
1989)
Plunging in Beginning to gather information and reach conclusions without first taking a few minutes to think about the crux of the issue youre facing or to think through how you believe decisions like this should be made.
Frame blindness Setting out to solve the wrong problem (Type 3 error) because you have created a mental framework for your decision, with little thought, that causes you to overlook the best options or lose sight of important objectives.
Lack of frame control Failing to consciously define the problem in more ways than one or being unduly influenced by the frames of others.
Overconfidence in your judgments Failing to collect key factual information because you are too sure of your assumptions and opinions.
Shortsighted shortcuts Relying inappropriately on rules of thumb such as implicitly trusting the most readily available information or anchoring too much on convenient facts.
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Decision traps - summary
Shooting from the hip Believing you can keep straight in your head all the information youve discovered, and thereby winging it rather than following a systematic procedure when making the final choice.
Group failure Assuming that with many smart people involved, good choices will follow automatically, and therefore failing to manage the group decision-making process.
Fooling yourself about feedback Failing to interpret the evidence from past outcomes for what it really says, either because you are protecting your ego or because you are tricked by hindsight.
Not keeping track Assuming that experience will make its lessons available automatically, and therefore failing to keep systematic records to track the results of your decisions and failing to analyze these results in ways that reveal their key lessons.
Failure to audit your decision process Failing to create an organized approach to understand your own decision making, so you remain constantly exposed to all of the above mistakes.
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Mental models

• Personal theories of how things work
• The most important factors.
• The causal and correlational relationships that
  link them.
• These models have different names
• Conceptual structures
• World views
• Schema
• Cognitive maps
• Institutional models

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How do mental models affect behavior?

• Events
• Sale of a new office building.
• Property prices up 10 compared to last year.
• Patterns
• Annual new construction activity over the past
  50 years.
• Structure
• Mental models
• Application of economic supply and demand
  models to real estate market behavior.

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The ladder of inference
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Skills for working with mental models

• Becoming more aware of your own thinking and
  reasoning.
• Reflection
• Inquiring into others thinking and reasoning.
• Inquiry
• Making your own thinking and reasoning more
  visible to others.
• Advocacy

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Strategic learning Barriers to learning
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Reflection as a resource

• Ask yourself the following...
• What really led me to think that way?
• What was your intention? What were you
  attempting to accomplish?
• Did you achieve the results you intended?
• How might your comments have contributed to the
  difficulties?
• Why didnt you say what was in your left-hand
  column?
• What assumptions are you making about the other
  person or people?
• What are the costs of operating this way? What
  were the payoffs?
• What prevented you from acting differently?

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Applying the Ladder of Inference

• The ladder provides a means to ask questions...
• What is the observable data behind that
  statement?
• Does everyone agree on what the data is?
• Can you run through your reasoning?
• How did we get from that data to these abstract
  assumptions?
• When you said your inference, did you mean
  my interpretation of it?

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Uncovering mental models

• Skills do not come easily and must be exercised.
  
• Here are some steps to consider...
• Identify the conclusion or claim someone is
  making.
• Ask for data or evidence leading to that
  conclusion.
• Inquire into the reasoning that connects the data
  with the claim.
• Infer a possible belief or assumption.
• State your inference and test it on the person.

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Balancing Inquiry and Advocacy

• A palette of conversational and dialogue skills.
• Protocols for balancing inquiry and advocacy.
• Conversational recipes...
• Post hoc examination of conversations.
• Seeking generic strategies for improving use of
  recipes.
• Ask for others perspectives (inquiry).

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Protocols for balancing Advocacy and InquiryFor
improving advocacy
What to do...
What to say...

• State your assumptions, and describe the data
  that led you to them.
• Explain your assumptions.
• Make your reasoning explicit.
• Explain the context of your point of view who
  will be affected by what you propose, how they
  will be affected, and why.
• Give examples of what you propose, even if they
  are hypothetical or metaphorical.
• As you speak, try to picture the other peoples
  perspectives on what you are saying.

Heres what I think, and heres how I got there.
I assumed that...
I came to this conclusion because...
To get a clear picture of what Im talking
about, imagine youre the customer who will be
affected...
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Protocols for balancing Advocacy and
InquiryImproving advocacy
What to do...
What to say...

• Encourage others to explore your model, your
  assumptions and your data.
• Avoid defensiveness when your ideas are
  questioned. If you are advocating something
  worthwhile, then it will only get stronger by
  being tested.
• Reveal where you are least clear in your
  thinking. Rather than making you vulnerable, it
  defuses the force of advocates who are opposed to
  you, and invites improvement.
• Even when advocating listen, stay open,
  encourage others to provide different views.

What do you think about what I just said? or
Do you see any flaws in my reasoning? or What
can you add?
Heres one aspect which you might help me think
through...
Do you see it differently?
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Protocols for balancing Advocacy and InquiryFor
facing points of view you do not agree with
What to do...
What to say...
How did you arrive at this view? or Are you
taking into account data that I have not
considered?

• Again, inquire about what has led the person to
  that view.
• Make sure you truly understand the view.
• Explore, listen, and offer owns views in an open
  way.
• Listen for the larger meaning that may come out
  of honest, open sharing of alternative mental
  models.
• Raise you concerns and state what is leading you
  to have them.

If I understand you correctly, youre saying
that...
Have you considered?
When you say such-and-such, I worry that it
means...
I have a hard time seeing that, because of this
reasoning...
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Protocols for balancing Advocacy and
InquiryImproving inquiry
What to do...
What to say...

• Gently walk others down the ladder of inference
  and find out what data they are operating from.
• Use nonaggressive language, particularly with
  people who are not familiar with these skills.
  Ask in a way which does not provoke
  defensiveness.
• Draw out their reasoning. Find out as much as
  possible about why they are saying what they say.
• Explain your reasons for inquiring, and how your
  inquiry relates to your own concerns, hopes and
  needs.

What leads you to conclude that? or What data
do you have for that? or What causes you to say
that?
Instead of What do you mean? or What s your
proof? say Can you help me understand your
thinking here?
What is the significance of that? How does
that relate to your other concerns? Where does
your reasoning go next?
Im asking you about your assumptions because...
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Protocols for balancing Advocacy and
InquiryImproving inquiry
What to do...
What to say...

• Test what they say by asking for broader
  contexts, or for examples.
• Check your understanding of what they have said.
• Listen for new understanding that may emerge.
  Dont concentrate on preparing to destroy the
  other persons argument or promote your own
  agenda.

How would your proposal affect...? or Is this
similar to...? or Can you describe a typical
example?
Am I correct that youre saying...?
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Traditional vs. Systems Thinking
Traditional Thinking Skills
Systems Thinking Skills

• Static Thinking
• Focusing on particular events
• System-as-Effect Thinking
• Viewing behavior generated by a system as
  driven by external forces
• Tree-by-Tree Thinking
• Believing that really knowing something means
  focusing on the details
• Factors Thinking
• Listing factors that influence or are
  correlated with some result
• Straight-Line Thinking
• Viewing causality as running one way, with each
  cause independent from all other causes
• Measurement Thinking
• Searching for perfectly measured data
• Proving-Truth Thinking
• Seeking to prove models to be true by
  validating with historical data

• Dynamic Thinking
• Framing a problem in terms of a pattern of
  behavior over time
• System-as-Cause Thinking
• Placing responsibility for a behavior on
  internal actors who manage the policies and
  plumbing of the system
• Forest Thinking
• Believing that, to know something, one must
  understand the context of relationships
• Operational Thinking
• Concentrating on getting at causality and
  understanding how a behavior is actually
  generated
• Closed-Loop Thinking
• Viewing causality as an ongoing process with
  the effect feeding back to influence the
  causes, and the causes affecting one another
• Quantitative Thinking
• Accepting that one can always quantify, but not
  always measure
• Scientific Thinking
• Recognizing that all models are working
  hypotheses that always have limited applicability

Richmond, B. The Thinking in Systems Thinking
How Can We Make It Easier to Master? The
Systems Thinker, Vol. 8, No. 2, March 1997.
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The role of personality

• Jungian personality dimensions
• Jungs psychological types
• Myers-Briggs Type Indicator test
• Implications for decision making

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• Behavior
• Orderly reason for
• personal differences
• Preference for

Perceiving
Jung
Briggs
Making decisions
How and where one uses these function
How one deals with the world Behavior
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Personality dimensions
Extravert/Introvert Thinking/Feeling Sensing/In
tuition Judgment/Perception

• Results in four basic problems solving styles.
• Each style has strengths and weaknesses.
• No one style is uniquely superior.
• Typology can be related to different inquiry,
  managerial and organizational styles.

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Individual cognitive style

• Provides insight into yourself and your behavior
• as a manager.
• as a communicator.
• as a problem solver.
• Provides a logical model of human behavior
• Empirically verified

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Jungian personality dimensions
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Problem solving styles
ST SF NF NT
IJ I S T J I S F J I N F J I N T J
IP I S T P I S F P I N F P I N T P
EP E S T P E S F P E N F P E N T P
EJ E S T J E S F J E N F J E N T J
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Individual benefits

• Communication
• Career choices
• Leadership style
• Team building
• Learning and teaching skills
• Problem solving

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Cognitive style how is it measured?

• Myers-Briggs Type Indicator
• Based on the concepts of Jungian psychology

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Why we need each other (1)

• Feelers need Thinkers
• To examine, analyze and organize.
• To stand against opposing people, or to fire
  people if necessary.
• To change, reform, or withdraw priviledges.
• To maintain policy.
• Thinkers need Feelers
• To convey how others feel.
• To persuade other to solve problems.
• To help people understand one anothers views.
• To build support for a system.

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Why we need each other (2)

• Intuitives need Sensers
• To notice essential facts.
• To point out prolems.
• To offer illustrations based on experience.
• To point out assets and liabilities in the here
  and now.
• To keep track of details.
• Sensers need Intuitives
• To see possibilities in the future.
• To plan and prepare.
• To develop new ideas and systems.
• To solve problems creatively and ingeneously.
• To maintain enthusiasm.

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Focus of the MBTI

• The sources of our energy
• The question of introversion and extroversion
• The ways we perceive reality
• Sensingly, in concrete detail, or intuitively by
  appreciating hunches and possibilities
• The ways we act
• Thinking clearly and logically, or in a more
  subjective way, basing decisions on personal
  values ahead of logic feeling
• Our propensity to act
• Judging and decisiveness, or keeping options open
  - perceiving

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The perfect problem-solver
SENSE Collect data with all 5 senses
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Implications for decision making

• Data acquisition
• By Sensation or by Intuition, but not both at the
  same time
• Sensation information input through the senses.
• Intuition acquisition by imagination, seeing
  the whole of a situation, the gestalt.
• Data processing
• Decisions are reached by Thinking or Feeling
• Thinking decision based on impersonal analyses
  and analytical modes of reasoning.
• Feeling decision based on personalistic, value
  judgments.

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The process of perception gathering
data/information

• (S) Sensing function
• The reality factor
• perceives in terms of specifics, using the five
  senses
• sees things one-at-time, in the concrete
• has a present time focus the here and now
• occupied with and attentive to facts
• can be criticized for being set in ways
• sometimes cannot see the forest for the trees

• (N) Intuitive function
• The sixth sense
• perceives in terms of patterns, relations
• sees possibilities
• has a future time focus oriented to change,
  innovation
• tends to estimate or approximate factual details
• can be criticized for having head in the
  clouds, not enjoying the present
• sometimes cannot see the tree for the forest

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The process of judging coming to
conclusion/rational process for closure

• (T) Thinking function
• The analytic factor
• comes to conclusion using established principles,
  logically attending to cause and effect
• principal concern for truth and the wider
  principles involved
• values fairness highly particularly sensitive to
  injustice
• has an atemporal time orientation appeals to
  reason, likes analysis
• consistency and validity are important
  principles are applied impersonally
• values what is true

• (F) Feeling function
• The bonding factor
• comes to conclusion by an associative process
  by analogy,and comparison with past experience
• principal concern for the interpersonal and
  intersubjective dimensions involved
• values harmony highly particularly sensitive to
  conflict
• oriented to past events appeals to what is
  meaningful, relies on the psychological
• compassion is important
• values what is good

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Attitude observable preference, style of
interacting with the world

• (J) Judging
• needs closure on events, relationships, ideas
• wants to finish get things done
• Values punctuality sees time in terms of
  decision
• prefers advance clarity, order, structure
• likes schedules and working to a plan
• comes across as decisive
• interested only in essentials
• keys in on the conscious factors
• can leap to conclusion and move into action out
  of sheer urgency to come to closure
• can be stubborn or one track
• can be vulnerable in not considering alternatives

• (P) Perceiving
• needs to hang loose with events, relationships,
  ideas
• prefers openness to what may come
• punctuality is not a high value sees time in
  terms of opportunity
• has tolerance for ambiguity, open-endedness
• prefers spontaneity, is adaptable to changes
• tends to postpone decisions and action
• never has enough information
• keys in on the unconscious
• can move into action out of sheer intensity of
  perception
• can be pulled in many different directions
• can be vulnerable in not recognizing the tragedy
  of the excluded possibility

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Attitude orientation/direction of energy flow

• (E) Extraversion
• the outside world captures attention life is
  discovered mutually in the external forum
• needs a public forum to sort out experience
• tends to expand and propagate rather than
  conserve is expansive, energized by interaction
• engages others easily comfortable in new groups
• assumes free movement can intrude on others
  unawares can make demads for response by sheer
  force of presence
• if you dont know where they are, you havent
  been listening
• the unlived life isnt worth examining

• (I) Introversion
• the inner world is the world of most important
  activity life is discovered interiorly and
  shared
• needs time and space to process life-experience
  interiorly
• tends to consolidate, defend moderates and
  controls personal disclosure and interaction
  energized by privacy and intimacy
• can appear withdrawn is generally cautious of
  others space can stalemate a situation by
  silence
• the unexamined life isnt worth living

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Problem solving styles

• ST represents concepts of the Industrial
  Revolution.
• NT stress conceptual analyses instead of
  precise quantification.
• SF and NF define different types of qualitative
  analyses.
• ST and NF are polar opposites in preferences for
  information gathering and processing.
• NT and SF are two forms of qualitativeness and do
  not conflict to the same extent as ST-NF types.

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Problem solving using Type preferences (1)

• Sensing
• What are the facts?
• What exactly is the situation?
• What has been done?
• What am I and others doing?
• How would an outsider look at this situation?
• Intuition
• What are the possibilities?
• What other ways are there for solving this
  problem?
• What do the data imply?
• What are the implications beyond the facts?
• What is this problem analogous to?

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Problem solving using Type preferences (2)

• Thinking
• What are the pros and cons of each possibility?
• What are the logical consequences of each
  possibility?
• What is the cost of each?
• What are the pleasant and unpleasant outcomes of
  each?
• What is the consequence of not acting?
• Feeling
• How much do I care about what I gain or lose in
  each alternative?
• What are the values involved for each
  possibility?
• How will people concerned react to the outcome?
• Who is committed to carry out the solution?
• Will the outcome contribute to individual or
  group harmony?

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Problem solving using Type preferences (3)

• Perception
• Use at each step to ensure openness to all
  aspects of the problem.
• Judgment
• Use to set a timetable for moving on to the next
  step of the decision process.
• Introversion
• Use to reflect at each step along the way.
• Extroversion
• Use to discuss each step and to implement the
  solution.

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Contributions

• A knowledge of cognitive type
• Lessens friction.
• Reveals the value of differences.
• Helps to understand and appreciate the strengths
  of each type.
• Lessens waste of potential.
• and
• Opposites can supplement each other in joint
  undertakings.
• Pooling preferences offers best chance of finding
  a solution valid for both.