BUS 304: Organizational Behavior &

Leadership

Decision Making
Designed by: Dr. Payam Saadat
City University of Seattle
Winter 2019-20
 “The mother of all harmful
mistakes in business is
mistaking absence of evidence
for evidence of absence.”
(Taleb, 2012, 109)
 Learning Objectives
• Apply the 6-Step Rational Decision Making process to make decisions.
• Understand how human judgments are limited by available
information, time constraints, and cognitive limitations (i.e., bounded
rationality).
• Explain System 1 and System 2 Thinking.
• Define heuristics and how they might impact decisions.
• Define cognitive biases, identify a wide range of biases, and explain
how to overcome each type to be able to make less-biased decisions.
 Let’s Build the
Case!
• The external environment is becoming
more volatile, uncertain, complex, and
ambiguous (VUCA), which increases the
odds of any decision to be wrong than
right.
• Consequences of poor decisions can be
very serious!
Before We Get Too Deep, Let’s Test Our
Decision-Making Skills!

(MindTools, 2018)
Decision Points & Consequences
 Decision Points
• We are faced with personal and professional decision making scenarios and decision
points on a daily basis.

• To guide our decision making process and enhance the quality of our decisions, we
should identify and select a number of effective decision making processes/frameworks.

• Many decision making frameworks and processes exist. It is important to know which
one can serve us better under certain conditions.
• A common point in all decision making scenarios: Each one proposes a problem, and each
problem has a number of alternative solutions.

• Let’s look at one decision making process!

 The 6-Step Rational Decision Making
Process
1. Define the problem
2. Generate alternatives
3. Identify the relevant criteria
4. Weigh the criteria
5. Evaluate each alternative on each criterion
6. Compute the optimal decision
 1. Define the Problem
• “Managers often act without a thorough understanding of the problem to
be solved, leading them to solve the wrong problem. Accurate judgement
is required to identify and define the problem. Managers often err by (a)
defining the problem in terms of a proposed solution, (b) missing a bigger
problem, or (c) diagnosing the problem in terms of its symptoms. Your goal
should be to solve the problem, not just eliminate its temporary
symptoms.”

Zoom out and see the problem and its implications from a
broader perspective!

Example: Selecting among jobs often translates into as or more

important decisions such as adopting a new lifestyle, getting a
new place to live, and even adapting relationships.

(Bazerman & Moore, 2009, p. 2)

 2. Generate Alternatives
• This step involves the identification of possible courses of action. Decision
makers often spend an inappropriate amount of search time seeking
alternatives, thereby creating a barrier to effective decision making. An
optimal search continues only until the cost of the search outweighs the
value of the added information.

(Bazerman & Moore, 2009, p. 2)

Create lots of free options, which means if the alternative Rational flâneur (or just flâneur):
failed, loss/harm would be zero or minimal. Also, learn Someone who, unlike a tourist,
from failed alternatives to gradually evolve and reach better makes a decision opportunistically at
every step to revise her/his schedule
solutions.
(or her/his destination) so she/he can
imbibe things based on new
Example: Apply for a wide range of jobs and try to
information obtained. In research
follow-up with the hiring agent to obtain information and entrepreneurship, being a
about what they perceived as your strengths and flâneur is called “looking for
weaknesses. optionality.”
(Taleb, 2012)
 3. Identify the Relevant Criteria
• To make the best decision, you will need to identify all the criteria
that are relevant to you across each of your choices.

It is important to adopt a holistic/systems thinking approach

to be able to identify and incorporate a combination of
factors into your decision making as opposed to just one or
two. Stay away from linear thinking!

Example: You might compare job offers on criteria

such as salary, benefits, responsibilities, travel, and
location.

(Bazerman & Moore, 2009, p. 2)

 4. Weigh the Criteria
• Different criteria will vary in importance to a decision maker.
Competent decision makers will know the relative value they place on
each of the criteria identified. The value may be specified in dollars,
points, or whatever scoring system makes sense. For example, when
deciding on a job, consider the value of the quality of life that you will
have after getting the job vs. transportation costs vs. stress-level, etc.

(Bazerman & Moore, 2009, p. 2)

 5. Evaluate Each Alternative on Each Criterion

• Determine how well your choices will meet your goals by carefully
assessing the potential consequences of each alternative across the
criteria you’ve identified. For example, you might recognize that one
job would allow you to spend ample time with family but would give
you less money to spend on vacations than another job.
 6. Compute the Optimal Decision
• Select the choice that maximizes the criteria you value. By adding up
the weighted rankings for each alternative, you will discover which
solution you rate highest (e.g., your ideal job offer).
Let’s See If You Remember All 6 Steps of the
Decision Making Process!

2 3 4 5

6
 “The capacity of the
human mind for
formulating and solving
complex problems is
very small.”
- Herbert Simon
 Some Facts about How We Make Decisions

Remember Bounded Rationality?

• Restrictions on our available time
and resources limit the quantity
and quality of the information we
factor into our decisions.
• We retain only a small amount of
information in our usable memory.
• Even the smartest among us have
“bounded” (limited) intelligence
and powers of perception.
Our ability to make the best
choices based on the
information available
is constrained, and we may
have to rely on
simple decision-making
strategies.
(Simon, 1957)
 Some Facts about
How We Make
Decisions

• So, now that we know

our judgments are
limited by available
information, time
constraints, and
cognitive limitations,
let’s see how our brain
processes information
and helps us make
decisions!
System 1 (Fast Thinking) & System 2 (Slow
Thinking)
Daniel Kahneman
Nobel Prize Winner
 System 1 Thinking: Reliance on Heuristics
• We are usually very busy with school, work, and life in general. As a
result, we tend to rely on System 1 thinking. In particular, to make
decisions, we begin to use a variety of mental shortcuts, rules of
thumb, educated guess, intuitive judgement, guesstimate,
stereotyping, profiling, or common sense collectively known as
“Heuristics.”

• Heuristics: “Simple and general rules a person employs to solve a

specific category of problems under conditions that involve a high
degree of risk-taking behavior and uncertainty” (Ricciardi, 2008, p.96).
 Heuristics from a More Technical View
Myers (1989) provided this viewpoint on heuristics, “all of us have a repertoire of
these strategies based on bits of knowledge we have picked up, rules we have
learned, or hypotheses that worked in the past” (p. 286). These strategies known
as heuristics in the formal sense are “rules of thumbs” that are considered very
common in all types of decision-making situations. Furthermore, heuristics are a
“cognitive tool” for reducing the time of the decision making process for an
individual investor or investment professional. In essence, “heuristics are mental
shortcuts or strategies derived from our past experience that get us where we
need to go quickly, but at the cost of sending us in the wrong direction” (Ricciardi
and Simon, 2001, p. 19) or introducing biases that result in over or
underestimating the actual outcome.
Heuristic: Dividing a pizza
using 1/n

General
Examples
 Rule of Thumb

“If my employees and

Heuristic: colleagues knew what I was
Ethical Decision Making in planning, would they let me?”
Business Example

(DeLuca, 1999, p. 30)

 The Downside of Heuristics = Biases
Heuristics allow us to make quick “good-enough” decisions under
certain circumstances; however, these rules of thumb can also cloud
our judgement and cause us to make poor decisions, thereby negatively
affecting our choices in situations, such as valuing a house, deciding the
outcome of a legal case, or making an investment decision. These
systematic deviations from logic, probability, or rational choice are
known as “biases.”

Biases affect all of us and our decisions; therefore, it

is vital to enhance our understanding of them to be
able to make less-biased decisions.
(Ricciardi, 2008)
 An Example: From Heuristic to Bias
• Type of Heuristic: The Availability Heuristic

• Definition and Applications: “This heuristic is utilized in order to judge the

likelihood or frequency of an event or occurrence. In various experiments in
psychology, the findings have revealed individuals tend to be biased by
information that is easier to recall, influenced by information that is vivid,
well-publicized, or recent. An individual that employs the availability heuristic
will be guided to judge the degree of risk of a behavior or hazardous activity
as highly probable or frequent if examples of it are easy to remember or
visualize. Furthermore, the availability heuristic provides the inclination for an
individual to form their decisions on information that is easily available to
them” (Ricciardi, 2008, p. 96).
 An Example: From Heuristic to Bias
• According to Schwartz (1998), “Biases may arise because the ease
which specific instances can be recalled from memory affects
judgments about the relative frequency and importance of data. This
leads to overestimation of the probability of well publicized or
dramatic events . . . or recent events along with the underestimation
of less recent, publicized or dramatic events . . .A prominent example
of the availability bias is the belief of most people that homicides
(which are highly publicized) are more common than suicides, but, in
fact, the reverse is true” (p. 64).
Case Example: From Heuristic to Bias
• A strong majority of individuals are more likely to express or
experience a high degree of anxiety (an increase in perceived risk)
over flying in an airplane than driving in an automobile. This
increased anxiety (fear) among the general public towards flying in
airplanes occurs because of the extensive media coverage of the few
major airline accidents ultimately increases an individual’s
perception of the risk, whereas an individual feels safer driving in an
automobile. This is because an individual has the perception of
control of the risky situation or task known as personal control. This
conflicts with classical decision theory since the rational choice
(decision) is to fly in an airplane rather than to drive in a car if the
person only considers and examines the statistical data on safety.
The safety statistics reveal the number of automobile accidents and
deaths from driving a car is far greater than the number of airplane
crashes and deaths from airline accidents.
 20 Biases That Harm Our Decisions
Get to Know Them & Learn How to Avoid Them!

Negotiate a Higher Salary With the "Anchoring Bias!"

 20 Biases That Harm Our Decisions
Get to Know Them & Learn How to Avoid Them!
This is a very important
bias to know about!
 20 Biases That Harm Our Decisions
Get to Know Them & Learn How to Avoid Them!
 20 Biases That Harm Our Decisions
Get to Know Them & Learn How to Avoid Them!
 20 Biases That Harm Our Decisions
Get to Know Them & Learn How to Avoid Them!
 A Framework for Better Decision Making
• What do we know so far about decision making?
• The 6 steps that help to make better decisions.
• Bounded rationality: How human judgments are limited by available
information, time constraints, and cognitive limitations.
• System 1 (fast) and System 2 (slow) Thinking: How the brain processes
information and guides our decision making.
• Our excessive reliance on intuitive decision making known as using heuristics.
• Reliance on heuristics can lead to biased decision making.
• Biases: A systematic pattern of deviation from norm or rationality in judgment.
• Different types of biases exist. Knowing about biases enables us to better
manage them and make less-biased decisions.
A Framework for Better Decision Making
Leverage System 1 thinking. Find ways to make
reliance on intuition a plus, not a minus.

Implement System 2 thinking. Encourage yourself and

others to engage in greater deliberation and analysis.

Bypass both systems. Adjust how information and

choices are presented by reorganizing the decision-
making environment.
(Gino, Bazerman, & Shonk, 2016)
A Framework for Better Decision Making

(Gino, Bazerman, & Shonk, 2016)

A Framework for Better Decision Making

(Gino, Bazerman, & Shonk, 2016)

A Framework for Better Decision Making

(Gino, Bazerman, & Shonk, 2016)

Let’s Make
Great Decisions!