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CHAPTER 5
Perception and Individual
Decision Making
LEARNING OBJECTIVES

After studying this chapter, your students should be able to:

5-1.   Explain the factors that influence perception.

5-2.   Describe attribution theory.
5-3.   Explain the link between perception and decision making.
5-4.   Contrast the rational model of decision making with bounded
rationality and intuition.
5-5.   Explain how individual differences and organizational constraints
affect decision making.
5-6.   Contrast the three ethical decision criteria.
5-7.   Describe the three-stage model of creativity.

BRIEF CHAPTER OUTLINE

I.   What Is Perception?
A.   Perception is a process by which individuals organize and interpret their
sensory impressions in order to give meaning to their environment.
B.   Why is this important to the study of OB?
1.   Because people’s behavior is based on their perception of what reality
is, not on reality itself.

II.   Factors That Influence Perception

A.   Factors that shape and can distort perception:
1.   Perceiver
2.   Target
3.   Situation
B.   Perceiver: When an individual looks at a target and attempts to interpret
what he or she sees, that interpretation is heavily influenced by personal
characteristics of the individual perceiver.
C.   The more relevant personal characteristics affecting perception of the
perceiver are attitudes, motives, interests, past experiences, and
expectations.
D.   Target: Characteristics of the target can also affect what is being perceived.
This would include attractiveness, gregariousness, and our tendency to
group similar things together. For example, members of a group with
clearly distinguishable features or color are often perceived as alike in
other, unrelated characteristics as well.
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E.   Context: The context in which we see objects or events also influences our
attention. This could include time, heat, light, or other situational factors.

III.  Person Perception: Making Judgments about Others

A.   Attribution Theory
1.   Our perceptions of people differ from our perceptions of inanimate
objects.
2.   Our perception and judgment of a person’s actions are influenced by
these assumptions.
3.   Attribution theory suggests that when we observe an individual’s
behavior, we attempt to determine whether it was internally or
externally caused. That determination depends largely on three factors:
a.   Distinctiveness
b.   Consensus
c.   Consistency
4.   Clarification of the differences between internal and external
causation:
a.   Internally caused behaviors are those that are believed to be under
the personal control of the individual.
b.   Externally caused behavior is what we imagine the situation forced
the individual to do.
5.   Three determining factors
a.   Distinctiveness refers to whether an individual displays different
behaviors in different situations. What we want to know is whether
the observed behavior is unusual.
b.   If it is, the observer is likely to give the behavior an external
attribution.
c.   If this action is not unusual, it will probably be judged as internal.
d.   Consensus occurs if everyone who is faced with a similar situation
responds in the same way. If consensus is high, you would be
expected to give an external attribution to the employee’s tardiness,
whereas if other employees who took the same route made it to
work on time, your conclusion as to causation would be internal.
e.   Consistency in a person’s actions. Does the person respond the same
way over time? The more consistent the behavior, the more the
observer is inclined to attribute it to internal causes.
6.   Fundamental attribution error
a.   There is substantial evidence that we have a tendency to
underestimate the influence of external factors and overestimate
the influence of internal or personal factors.
7.   Self-serving bias
a.   There is also a tendency for individuals to attribute their own
successes to internal factors, such as ability or effort, while putting
the blame for failure on external factors, such as luck. This is called
the “self-serving bias” and suggests that recipients will distort
feedback provided to employees.
8.   Cultural Differences
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a.   The evidence on cultural differences in perception is mixed, but

most suggest there are differences across cultures in the
attributions people make.
i.   One study found Asian managers less likely to use the self-
serving bias.
ii.   On the other hand, Asian managers are more likely to blame
institutions or whole organizations.
iii.   This tendency to make group-based attributions also explains
why individuals from Asian cultures are more likely to make
group-based stereotypes.
b.   Differences in attribution tendencies don’t mean the basic concepts
of attribution and blame completely differ across cultures, though.
i.   Self-serving biases may be less common in East Asian cultures,
but evidence suggests they still operate across cultures.
ii.   Studies indicate Chinese managers assess blame for mistakes
using the same distinctiveness, consensus, and consistency cues
Western managers use.
i   They also become angry and punish those deemed
responsible for failure, a reaction shown in many studies of
Western managers.
B.   Common Shortcuts in Judging Others
1.   Introduction
a.   We use a number of shortcuts when we judge others. An
understanding of these shortcuts can be helpful toward recognizing
when they can result in significant distortions.
2.   Selective Perception
a.   Any characteristic that makes a person, object, or event stand out
will increase the probability that it will be perceived.
b.   Since we can’t observe everything going on about us, we engage in
selective perception.
3.   Halo and Horns Effect
a.   The halo effect occurs when we draw a general impression on the
basis of a single characteristic. The horns effect, on the other hand,
is when we draw a negative impression from a single characteristic.
4.   Contrast Effects
a.   We do not evaluate a person in isolation. Our reaction to one
person is influenced by other persons we have recently
encountered.
b.   Contrast effect can distort perception.
c.   Research on 22 teams in a Chinese hospitality organization that was
undergoing radical organizational change (and new leader
appointments) suggests that transformational leadership is more
effective in improving support for the changes amongst followers
when the former leader was not transformational—when the former
leader was transformational, they knew leader behaviors were not
as effective.
5.   Stereotyping
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a.   Stereotyping—judging someone based on one’s perception of the

group to which he or she belongs.
b.   Generalization is not without advantages. It is a means of
simplifying a complex world, and it permits us to maintain
consistency. The problem, of course, is when we inaccurately
stereotype.
c.   One problem of stereotypes is that they are widespread
generalizations, though they may not contain a shred of truth when
applied to a particular person or situation.
i.   We have to monitor ourselves to make sure we’re not unfairly
applying a stereotype in our evaluations and decisions.
C.   Specific Applications of Shortcuts in Organizations
1.   Employment Interview
a.   Evidence indicates that interviewers make perceptual judgments
that are often inaccurate.
b.   Interviewers generally draw early impressions that become very
quickly entrenched.
c.   Studies indicate that most interviewers’ decisions change very little
after the first four or five minutes of the interview.
d.   Recent research indicates that our individual intuition about a job
candidate is not reliable in predicting job performance, but that
collecting input from multiple independent evaluations can be
predictive.
2.   Performance Expectations
a.   Evidence demonstrates that people will attempt to validate their
perceptions of reality, even when those perceptions are faulty.
b.   Self-fulfilling prophecy, or the Pygmalion effect, characterizes the
fact that people’s expectations determine their behavior.
Expectations become reality.
3.   Performance Evaluation
a.   An employee’s performance appraisal is very much dependent on
the perceptual process.
b.   Although the appraisal can be objective, many jobs are evaluated in
subjective terms.
c.   Subjective measures are problematic because of selective
perception, contrast effects, and so on.

IV.  The Link Between Perception and Individual Decision Making

A.   Individuals in organizations make decisions; they make choices from
among two or more options.
B.   Decision making occurs as a reaction to a problem.
1.   There is a discrepancy between some current state of affairs and some
desired state, requiring consideration of alternative courses of action.
2.   One person’s problem is another’s satisfactory state of affairs.
C.   Every decision requires interpretation and evaluation of information. The
perceptions of the decision maker will address these two issues:
1.   Data are typically received from multiple sources.
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2.   Which data are relevant to the decision and which are not?

V.   Decision Making in Organizations

A.   The Rational Model, Bounded Rationality, and Intuition
1.   Introduction
a.   In OB, there are generally accepted constructs of decision making
each of us employs to make determinations: rational decision
making, bounded rationality, and intuition.
b.   There are times when one strategy may lead to a better outcome
than another in a given situation.
2.   Rational decision making
a.   We often think the best decision maker is rational and makes
consistent, value-maximizing choices within specified constraints.
b.   These decisions follow a six-step rational decision making model
listed below:
i.   Step 1: Define the problem.
ii.   Step 2: Identify the decision criteria.
iii.   Step 3: Allocate weights to the criteria.
iv.   Step 4: Develop the alternatives.
v.   Step 5: Evaluate the alternatives.
vi.   Step 6: Select the best alternative.
c.   The rational decision-making model assumes that the decision
maker has complete information, can identify all the relevant
options in an unbiased manner, and chooses the option with the
highest utility.
d.   Most decisions in the real world don’t follow the rational model.
i.   People are usually content to find an acceptable or reasonable
solution to a problem rather than an optimal one.
ii.   Choices tend to be limited to the neighborhood of the problem
symptom and the current alternative.
iii.   As one expert in decision making put it, “Most significant
decisions are made by judgment, rather than by a defined
prescriptive model.”
iv.   People are remarkably unaware of making suboptimal
decisions.
B.   Bounded Rationality
1.   When faced with a complex problem, most people respond by
reducing the problem to a level at which it can be readily understood.
a.   This is because the limited information-processing capability of
human beings makes it impossible to assimilate and understand all
the information necessary to optimize.
b.   People satisfice—they seek solutions that are satisfactory and
sufficient.
2.   Individuals operate within the confines of bounded rationality. They
construct simplified models that extract the essential features.
3.   How does bounded rationality work?
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a.   Once a problem is identified, the search for criteria and options

begins.
b.   The decision maker will identify a limited list made up of the more
conspicuous choices, which are easy to find and tend to be highly
visible, and they will represent familiar criteria and previously
tried-and-true solutions.
c.   Once this limited set of options is identified, the decision maker
will begin reviewing it.
i.   The decision maker will begin with options that differ only in a
relatively small degree from the choice currently in effect.
ii.   The first option that meets the “good enough” criterion ends the
search.
iii.   Satisficing is not always a bad idea—a simple process may
frequently be more sensible than the traditional rational
decision-making model.
d.   To use the rational model in the real world, you need to gather a
great deal of information about all the options, compute applicable
weights, and then calculate values across a huge number of criteria.
i.   All these processes can cost time, energy, and money.
ii.   If there are many unknown weights and preferences, the fully
rational model may not be any more accurate than a best guess.
Sometimes a fast-and-frugal process of solving problems might
be your best option.
e.   Bounded rationality can also be of concern in ethical-decision
making. Not only are we prone to make systematic and predictable
errors in ethical decisions, but our perceptions of whether we have
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the freedom or right to behave in a particular way are bounded by

our duties toward the people our actions affect.
i.   Researchers have identified many ways in which the automatic
effects of our bounded rationality can be circumvented in an
ethical context: be sure to triangulate on the focal issue by
asking multiple questions, drawing on multiple sources,
considering the sources from which you derive information;
and leaving more time to decide.
C.   Intuition
1.   Perhaps the least rational way of making decisions is intuitive
decision making, an unconscious process created from distilled
experience.
2.   It occurs outside of conscious thought; it relies on holistic associations,
or links between disparate pieces of information; it’s fast; and it’s
affectively charged, meaning it usually engages the emotions.
3.   While intuition isn’t rational, it isn’t necessarily wrong.
4.   Nor does it always contradict rational analysis; rather, the two can
complement each other.
5.   The key is to neither abandon nor rely solely on intuition, but to
supplement it with evidence and good judgment.
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VI.  Common Biases and Errors in Decision Making

A.   Introduction (how to reduce biases and errors)
1.   Decision makers allow systematic biases and errors to creep into their
judgments.
2.   People tend to rely on experience, impulses, gut feelings, and rules of
thumb. These can lead to distortions.
B.   Overconfidence Bias
1.   Individuals whose intellectual and interpersonal abilities are weakest
are most likely to overestimate their performance and ability.
2.   The tendency to be too confident about their ideas might keep some
from planning how to avoid problems that arise.
3.   Investor overconfidence operates in a variety of ways.
a.   People think they know more than they do, and it costs them.
b.   Investors, especially novices, overestimate not just their own skill
in processing information, but also the quality of the information
they’re working with.
C.   Anchoring Bias
1.   Anchoring bias involves fixating on initial information as a starting
point and failing to adequately adjust for subsequent information.
2.   Anchors are widely used by people in advertising, management,
politics, real estate, and lawyers—where persuasion skills are
important.
3.   Any time a negotiation takes place, so does anchoring.
D.   Confirmation Bias
1.   Confirmation bias is a type of selective perception: we seek out
information that reaffirms past choices, and discount information that
contradicts past judgments.
E.   Availability Bias
1.   Availability bias is the tendency for people to base judgments on
information that is readily available.
F.   Escalation of Commitment
1.   Escalation of commitment occurs when we stay with a decision even
when there is clear evidence that it’s wrong.
2.   When is escalation most likely to occur?
a.   Evidence indicates it occurs when individuals view themselves as
responsible for the outcome.
G.   Randomness Error
1.   Decision making becomes impaired when we try to create meaning out
of random events.
2.   Our tendency to believe we can predict the outcome of random events
is the randomness error.
H.   Risk Aversion
1.   The tendency to prefer a sure thing instead of a risky outcome is risk
aversion.
2.   Overall, the framing of a decision has an effect on whether or not
people will engage in risk aversive behavior—when decisions are
framed positively, such as a potential gain of $50, people will be more
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risk averse (conversely, when the decision is framed in a negative

manner, such as a loss of $50, people will engage in riskier behaviors).
3.   CEOs at risk of termination are exceptionally risk averse, even when a
riskier investment strategy is in their firms’ best interests. Furthermore,
organization have a stronger hold on employees who are more risk
adverse, as they tend to perceive that they have more to lose and are
less likely to leave the organization.
I.   Hindsight Bias
a.   Tendency to believe falsely that one has accurately predicted the
outcome of an event, after that outcome is actually known.
b.   The hindsight bias reduces our ability to learn from the past.

VII.  Influences on Decision Making: Individual Differences and Organizational

Constraints
A.   Individual Differences
1.   Research suggests that personality does influence our decisions.
2.   Personality
a.   Specific facets of conscientiousness—rather than the broad trait
itself—may affect escalation of commitment.
i   Achievement-striving
(a)   Achievement-striving people were more likely to escalate
their commitment, whereas dutiful people were less
likely.
(b)  Achievement-oriented people hate to fail, so they escalate
their commitment, hoping to forestall failure.
(c)   Achievement-striving individuals appear more
susceptible to the hindsight bias, perhaps because they
have a greater need to justify their actions.
b.   People with high self-esteem are strongly motivated to maintain it,
so they use the self-serving bias to preserve it. They blame others
for their failures while taking credit for successes.
3.   Gender
a.   Rumination refers to reflecting at length. In decision making, it
means over-thinking about problems.
b.   Evidence indicates that women analyze decisions more than men.
i.   Women, in general, are more likely than men to engage in
rumination.
ii.   Rumination tendency appears to be moderated by age.
Differences are largest during young adulthood and smallest
after age 65.
4.   Mental ability
a.   We know people with higher levels of mental ability are able to
process information more quickly, solve problems more accurately,
and learn faster, so you might expect them also to be less
susceptible to common decision errors.
5.   Cultural differences
a.   The rational model makes no acknowledgment of cultural
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differences, nor does the bulk of OB research literature on decision

making.
b.   We need to recognize that the cultural background of a decision
maker can significantly influence the selection of problems, the
depth of analysis, the importance placed on logic and rationality,
and whether organizational decisions should be made
autocratically by an individual manager or collectively in groups.
c.   Cultures differ in their time orientation, the importance of
rationality, their belief in the ability of people to solve problems,
and their preference for collective decision making.
i.   Differences in time orientation help us understand why
managers in Egypt make decisions at a much slower and more
deliberate pace than their U.S. counterparts.
d.   While rationality is valued in North America, that’s not true
elsewhere in the world.
i.   A North American manager might make an important decision
intuitively but know it’s important to appear to proceed in a
rational fashion because rationality is highly valued in the West.
ii.   In countries such as Iran, where rationality is not as paramount
as other factors, efforts to appear rational are not necessary.
e.   Some cultures emphasize solving problems, while others focus on
accepting situations as they are.
i.   The United States falls in the first category.
ii.   Thailand and Indonesia are examples of the second.
f.   Because problem-solving managers believe they can and should
change situations to their benefit, U.S. managers might identify a
problem long before their Thai or Indonesian counterparts would
choose to recognize it.
g.   Decision making by Japanese managers is much more group-
oriented than in the United States.
i.   The Japanese value conformity and cooperation.
ii.   Before Japanese CEOs make an important decision, they collect
a large amount of information, which they use in consensus-
forming group decisions.
B.   Organizational Constraints
1.   Introduction
a.   The organization itself constrains decision makers creating
deviations from the rational model.
2.   Performance Evaluation Systems
a.   Managers are strongly influenced in their decision making by the
criteria by which they are evaluated.
3.   Reward Systems
a.   The organization’s reward system influences decision makers by
suggesting to them what choices are preferable in terms of personal
payoff.
4.   Formal Regulations
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a.   Organizations create rules, policies, procedures, and other

formalized regulations to standardize the behavior of their
members.
5.   System-Imposed Time Constraints
a.   Organizations impose deadlines on decisions.
b.   Such conditions often make it difficult, if not impossible, for
managers to gather all the information before making a final choice.
6.   Historical Precedents
a.   Decisions have a context. Individual decisions are more accurately
characterized as points in a stream of decisions.
b.   Decisions made in the past are ghosts that continually haunt
current choices. It is common knowledge that the largest
determining factor of the size of any given year’s budget is last
year’s budget.

VIII.  What about Ethics in Decision Making?

A.   Introduction
1.   Ethical considerations should be an important criterion in
organizational decision making.
B.   Three Ethical Decision Criteria
1.   Utilitarianism—an ethical perspective, in which decisions are made
solely based on their outcomes or consequences.
a.   The goal of utilitarianism is to provide the greatest good for all.
This view tends to dominate business decision making.
b.   Promotes efficiency, productivity, and high profits.
2.   Focus on rights—calls on individuals to make decisions consistent
with fundamental liberties and privileges as set forth in documents
such as the Bill of Rights.
a.   An emphasis on rights in decision making means respecting and
protecting the basic rights of individuals, such as the right to
privacy, free speech, and due process.
b.   Focus on justice—requires individuals to impose and enforce rules
fairly and impartially.
i.   This criterion protects whistle-blowers when they reveal an
organization’s unethical practices to the press or government
agencies, using their right to free speech.
3.   A third criterion is to impose and enforce rules fairly and impartially
to ensure justice or an equitable distribution of benefits and costs.
a.   This criterion is often approached from a deonance standpoint
(employees feel as if they ought to behave in a certain way, as laid
out in rules, laws, norms, or moral principles).
b.   For example, some employees might feel as if they should not steal
from their workplace because it is ethically “wrong” by moral
norms, principles, or standards or forbidden by rules or laws.
c.   Notably, this “ought force” is agnostic of whether organizational
rules exist; often, a decision is deemed as unfair or unjust because it
violated a moral norm or principle.
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4.   Increasingly, researchers are turning to behavioral ethics—an area of

study that analyzes how people actually behave when confronted with
ethical dilemmas.
a.   Their research tells us that while ethical standards exist collectively
(society and organizations) and individually (personal ethics),
individuals do not always follow ethical standards promulgated by
their organizations, and we sometimes violate our own standards.
5.   How might we increase ethical decision making in organizations?
a.   First, seemingly superficial aspects of the environment—such as
lighting, outward displays of wealth and status, and cleanliness—
can affect ethical behavior in organizations.
b.   Second, managers should encourage conversations about moral
issues; they may serve as a reminder and increase ethical decision
making.
c.   Finally, we should be aware of our own moral “blind spots”—the
tendency to see ourselves as more moral than we are, and others as
less moral than they are.
6.   Behavioral ethics research stresses the importance of culture to ethical
decision making.
a.   There are few global ethical standards, as contrasts between Asia
and the West illustrate.
b.   What is ethical in one culture may be unethical in another.
c.   Without sensitivity to cultural differences in defining ethical
conduct, organizations may encourage unethical conduct without
even knowing it.
7.   Lying
a.   Lying is one of the top unethical activities we may indulge in daily,
and it undermines all efforts toward sound decision making.
b.   Lying is deadly to decision making, whether we sense the lies or
not.
i.   Managers—and organizations—simply cannot make good
decisions when facts are misrepresented and people give false
motives for their behaviors.
c.   Lying is a big ethical problem as well.

IX.  Creativity, Creative Decision Making, and Innovation in Organizations

A.   Introduction
1.   Definition: Creativity is the ability to produce novel and useful ideas.
These are ideas that are different from what has been done before, but
that are also appropriate to the problem.
B.   Creative Behavior
1.   Creative behavior occurs in four steps, each of which leads to the next.
a.   Problem formulation: any act of creativity begins with a problem
that the behavior is designed to solve.
i.   Problem formulation: the stage of creative behavior in which
we identify a problem or opportunity that requires a solution as
yet unknown.
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b.   Information gathering: given a problem, the solution is rarely

directly at hand. We need time to learn more and to process that
learning.
i.   Information gathering: the stage of creative behavior when
possible solutions to a problem incubate in an individual’s
mind.
c.   Idea generation: once we have collected the relevant information, it
is time to translate that knowledge into ideas.
i.   Idea generation: the process of creative behavior in which we
develop possible solutions to a problem from relevant
information and knowledge.
d.   Idea evaluation: finally, it’s time to choose from the ideas we have
generated.
i.   Idea evaluation: the process of creative behavior in which we
evaluate potential solutions to identify the best one.
C.   Causes of Creative Behavior
1.   Creative Potential
2.   Is there such a thing as a creative personality?
a.   Indeed. Most people have some of the characteristics shared by
exceptionally creative people. The more of these characteristics we
have, the higher our creative potential.
i.   Intelligence and Creativity Intelligence is related to creativity.
Smart people are more creative because they are better at
solving complex problems.
ii.   Personality and Creativity The Big Five personality trait of
openness to experience correlates with creativity, probably
because open individuals are less conformist in action and more
divergent in thinking.
iii.   Expertise and Creativity Expertise is the foundation for all
creative work and thus, is the single most important predictor
of creative potential.
iv.   Ethics and Creativity Although creativity is linked to many
desirable individual characteristics, it is not correlated with
ethicality.
3.   Creative Environment
4.   What environmental factors affect whether creative potential translates
into creative behaviors?
a.   First, and perhaps most important, is motivation. If you aren’t
motivated to be creative, it is unlikely you will be.
b.   It is also valuable to work in an environment that rewards and
recognizes creative work.
c.   A recent nation-level study suggests that countries scoring high on
Hofstede’s culture dimension of individuality are more creative.
d.   Good leadership matters to creativity too.
e.   Studies show that diverse teams can be more creative, but only
under certain conditions.
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5.   Creative outcomes (Innovation)

6.   We can define creative outcomes as ideas or solutions judged to be novel
and useful by relevant stakeholders.
a.   Novelty itself does not generate a creative outcome if it isn’t useful.
Thus, “off-the-wall” solutions are creative only if they help solve
the problem.
b.   Soft skills help translate ideas into results.

X.   Summary and Implications for Managers

A.   Individuals base their behavior not on the way their external environment
actually is, but rather on the way they see it or believe it to be.
B.   An understanding of the way people make decisions can help us explain
and predict behavior, but few important decisions are simple or
unambiguous enough for the rational model’s assumptions to apply.
C.   We find individuals looking for solutions that satisfice rather than
optimize, injecting biases and prejudices into the decision process, and
relying on intuition.
D.   Managers should encourage creativity in employees and teams to create a
route to innovative decision making.
E.   Specific implications for managers are below:
1.   Behavior follows perception, so to influence behavior at work, assess
how people perceive their work. Often behaviors we find puzzling can
be explained by understanding the initiating perceptions.
2.   Make better decisions by recognizing perceptual biases and decision-
making errors we tend to commit. Learning about these problems
doesn’t always prevent us from making mistakes, but it does help.
3.   Adjust your decision-making approach to the national culture you’re
operating in and to the criteria your organization values. If you’re in a
country that doesn’t value rationality, you don’t feel compelled to
follow the rational decision-making model or to try to make your
decisions appear rational. Adjust your decision approach to ensure
compatibility with the organizational culture.
4.   Combine rational analysis with intuition. These are not conflicting
approaches to decision making. By using both, you can actually
improve your decision making effectiveness.
5.   Try to enhance your creativity. Actively look for novel solutions to
problems, attempt to see problems in new ways, use analogies, and
hire creative talent. Try to remove work and organizational barriers
that might impede your creativity.