LESSON THREE: DECISION-MAKING IN THE ORGANISATION

A decision is a choice made from among two or more alternatives.

Top managers determine their organization’s goals, what produce or services to offer, how best
to finance operations or where to locate a new.

Individual employees also make decisions. This is largely influenced by perception.

Decision making occurs as a reaction to a problem, that is, there is a discrepancy between some
current state of affairs and desired state requiring the consideration of alternative courses of
action.

Decision making requires the interpretation and evaluation of information. However, the
individual decision makers perceptual process will affect the outcome.

The process of how decisions should be made

Step 1: Define the problem: A problem exists when there is a discrepancy between an existing
and a desired state of affairs. Poor decisions can be traced to the decision maker overlooking a
problem or defining a wrong one.

Step 2: Identify the decision criteria that will be important in solving the problem. The decision
maker determines what is relevant in making the decision. It involves the decision makers
interests, values and similar personal preferences in to the process. Any factors not identified in
this step are considered irrelevant.

Step 3 Allocate weights to the criteria-The decision maker weights the previously identified
criteria in order to give them correct priority in the decision.

Step 4: Develop the alternatives- the decision maker should generate possible alternatives that
could succeed in resolving the problem.

Step 5 : Evaluate the alternatives-The decision maker critically analyses and evaluates each
alternative by rating then on criterion and the weights established. Establish the strength and
weakness of each alternative.

Step 6: Select the best alternative: It involves computing the optimal decision by evaluating each
alternative against the weighted criteria and selecting the alternative with the higher total score.

Biases and Errors in Decision Making

Decision makers allow systematic biases and errors to creep into their judgments due to
attempted shortcuts to avoid difficult trade-offs. The shortcuts can lead to severe distortions
from rationality. The following biases arise:
i) Overconfidence bias-Overestimation of performance by employees. This arises
when individuals whose intellectual and interpersonal abilities are weakest
overestimate their performance. It occurs due to inadequate information.
However, as managers and employees become more knowledgeable about issues,
the less likely they are to display overconfidence.
ii) Anchoring bias- It is a tendency to fixate on initial information. Once set,
employees fail to adequately adjust for subsequent information. It occurs because
our mind appears to give a disproportionate amount of emphasis to the first
information it receives. Anchors are used in advertising, management, politics,
real estate and law where persuasion skills are important.
iii) Confirmation bias-It represents a specific case of selective perception. The
information gathered is typically biased towards supporting views that people
hold. This bias influences where individuals go to collect evidence because they
tend to seek out places that are more likely to tell them what they want to here. It
also leads them to give too much weight to supporting information and too little to
contradictory information.
iv) Availability bias-It is the tendency for people to base their judgement on
information that is readily available to them. It explains why managers when
doing annual performance appraisals tend to give more weight to recent behaviors
of an employee than those behaviors of six or nine months ago.
v) Representative bias-The tendency to assess the likelihood of an occurrence by
inappropriately considering the current situation as identical to the past. For
example, Managers predict the performance of a new product by relating it to a
previous product’s success.
vi) Escalation commitment-It refers to staying with a decision even when there is
clear evidence that it is wrong. Individuals escalate commitment to a failing
course of action when they view themselves as responsible for the failure.
vii) Randomness error-It is the tendency to believe we can predict the outcome of
random events. People have difficulty dealing with chance. Decision making
becomes impaired when we try to create meaning out of random events. This
happens when imaginary patterns are turned in to superstitions
viii) Winners’s curse- This is a decision-making dictum(saying) that argues that the
winning participant in an auction typically pay too much the winning item. It
occurs in competitive bidding. Logic predicts that the winners curse gets stronger
as the number of bidders increase.
ix) Hindsight bias-It is the tendency for us to believe falsely that we would have
accurately predicted the outcome of an event after that outcome is actually
known. It reduces the the ability to learn from the ast. It permits people to think
that they are better at making predictions than they really are and can result in
them being more confident about the accuracy of the future decisions than they
have a right to be.
 Organization Constraints to Decision Making
i) Performance evaluation-Managers are strongly influenced in their decision making by the
criteria on which they are evaluated.
ii) Reward systems-The organization’s reward system influences decision makers by
suggesting to them what choices are preferable in terms of personal payoff. For example,
giving bonus and promotions to managers who avoid controversial decisions.
iii) Formal regulations-Most organizations have rules, policies, procedures and other
formalized regulations in order to standardize the behavior of their members and decision
making.
iv) System-imposed time constraints-Organizations impose deadlines on decisions. A host of
decisions must be made quickly in order to stay ahead of the competition and keep
customers satisfied.
v) Historical precedents-Decisions are not made in a vacuum. They have a context. Decisions
made in the past are ghosts that continually haunt current choices, that is, commitments that
have already been made constrain current options. For example, the decision you might
make after meeting “Mr or Mrs Right” is more complicated if you are already married than
if you are single. Choices made today, therefore, are largely a result of choices made over
the years.