Which of the following is one of the assumptions underlying nonrational models of decision making?

11.1 RATIONAL AND NONRATIONAL MODELS OF DECISION MAKING

MAJOR QUESTION

How can people integrate rational and nonrational models of decision making?

THE BIGGER PICTURE

Decision making is a key process within the Integrative Framework for Understanding and Applying OB. We have been encouraging you to use this framework throughout this book in order to enhance your ability to solve problems. Use of the framework helps you identify and choose alternative solutions that lead to a desired outcome. This process varies along a continuum of rational to nonrational. Four steps in making rational decisions are (1) identify the problem, (2) generate alternative solutions, (3) evaluate alternatives and select a solution, and (4) implement and evaluate the solution. Examples of nonrational models include (1) satisficing and (2) intuition.

Decision making matters deeply in your personal and work life. Let's consider the impact of decisions made by a few college graduates during the interview process. One job applicant took a nonemergency call on his smartphone 15 minutes into the interview. Do you think this decision made a positive impression? Another decided to bring his father into a 45-minute interview: The recruiter was shocked. Paula Welch, a Cigna HR representative, similarly noted how one recent grad asked his father to call and negotiate a higher salary after receiving a job offer. Here's a really good decision: A college senior brought her cat to the interview in a cage, and then proceeded to play with it during the interview. The end results of these decisions were bad in all cases.6

Decision making entails identifying and choosing alternative solutions that lead to a desired state of affairs. The above examples illustrate how one's decision making affects the chances of getting a job after graduation, but the importance of decision making is much broader. As a case in point, the annual Global Leadership Development study conducted by Training magazine uncovered that critical thinking/problem solving was the second most important competency desired by organizations in 2012 and 2013.7 You would be well served to improve your decision-making skills.

Let's look at two different methods managers can use to make decisions. They can follow a rational model or several nonrational models.

Rational Decision Making: Managers Make Logical and Optimal Decisions

The rational model of decision making explains how managers should make decisions. It assumes that managers are completely objective and possess complete information when making decisions. Decisions thus demonstrate excellent logic and optimize the organization's best interests.

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There are four generic stages associated with rational decision making (see Figure 11.1).

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FIGURE 11.1THE FOUR STAGES IN RATIONAL DECISION MAKING

Stage 1: Identify the Problem or Opportunity—Determining the Actual versus the Desirable We defined a problem in Chapter 1 as a difference or gap between an actual and desired situation. By now you know that problem identification is the first stop in solving any type of problem. We did not mention in our earlier discussion, however, that managers also have to make decisions regarding opportunities. An opportunity represents a situation in which there are possibilities to do things that lead to results that exceed goals and expectations. For example, US medical schools must prepare to produce 5,000 more graduates a year by 2019. Unfortunately, this wonderful opportunity will require some tough decisions because the number of funded residencies has been frozen since 1997. Residencies entail the three to seven years of additional on-the-job training that medical students need before they can practice medicine on their own. Without more residency positions, the Association of American Medical Colleges predicts a shortage of 62,900 doctors by 2015, and potentially as many as 140,000 by 2025.8

Whether you face a problem or an opportunity, the goal is always the same: to make improvements that change conditions from their current state to a more desirable one. This requires you to diagnose the causes of the problem (or the nature of the opportunity).

Stage 2: Generate Alternative Solutions—Both the Obvious and the Creative For many people this is the exciting part of decision making, the step where you get to be creative, think outside the box, and share your ideas of how things should be done. Brainstorming, for instance, is a common technique used by both individuals and groups to generate potential solutions. Brainstorming is discussed later in this chapter. Unfortunately, a research study of 400 strategic decisions revealed that managers struggled during this stage because of three key decision-making blunders:

1. Rushing to judgment. Managers simply make decisions too quickly without considering all relevant information.

1. Selecting readily available ideas or solutions. Managers take the easy solution without rigorously considering alternatives. This can tend to happen when emotions are high about the problem at hand.

1. Making poor allocation of resources to study alternative solutions. Managers don't invest the resources to properly study the problem and alternative courses of action.

Decision makers thus are encouraged to slow down when making decisions, to evaluate a broader set of alternatives, and to invest in studying a greater number of potential solutions.9 The Problem-Solving Application on the next page illustrates how these blunders may have impacted J.P. Morgan Chase's response to the “London whale” trading problem in 2012 and 2013.

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problem solving application

J.P. Morgan Chase Is Trying to Resolve the London Whale Trading Fiasco

J. P. Morgan Chase is one of the largest banks in the world, and it ran afoul of regulators in 2012 and 2013 in what is dubbed the “London whale” fiasco. Since that time, US regulators have been rigorously investigating the situation.

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Jamie Dimon of J.P. Morgan Chase testifying to a governmental committee.

What Happened? Three former London-based traders made large investment bets that led to a nearly $6 billion loss for the company. A French-born employee named Bruno Michel Iksil was called the “London whale” because his bets created the most losses. After the news originally broke, Chase CEO Jamie Dimon referred to the scandal as a “tempest in a teapot.” He later described it as an isolated risk that the bank had taken care of. He wanted the problem to go away.

Regulators are investigating whether or not these three former employees, and the bank itself, “tried to hide some of the mounting losses during the first quarter of this year [2013].”10 They think there was a cover-up.

The Company's Response Over time Dimon concluded that he underestimated the losses because he “relied on advice from colleagues that losses wouldn't worsen.” A US Senate panel did not agree with this interpretation. The committee concluded that Chase “brushed off internal warnings and misled regulators and investors about the score of the losses tied to the trades.”

Dimon denies these charges, saying that no one at the company “thought we had a big problem” but rather “we knew we had a small problem.” The company estimated the problem at $300 million, not $6 billion. In response to the comment that the company withheld information from regulators, Dimon said, “We tried to tell them but we didn't know sometimes.”

Dimon is now vigorously defending the company's integrity and decisions. He said, “I don't know what more I can say. Bad strategy, badly vetted, badly monitored, badly controlled. Embarrassing. Terrible. Sorry.” He also told investors at a conference hosted by Morgan Stanley that “there was no hiding, there was no lying, there was no b—s—.”11 He further promised to fight any lawsuits that are filed against the company.

YOUR CALL

1. Stop 1: What is the problem in this case from CEO Dimon's perspective?

1. Stop 2: Which of the above stage 2 blunders were committed by Chase?

1. Stop 3: Rolling back time, what decisions do you think Chase should have made when it first discovered the losses?

Stage 3: Evaluate Alternatives and Select a Solution—Ethics, Feasibility, and Effectiveness In this stage, you need to evaluate alternatives in terms of several criteria. Not only are costs and quality important, but you should consider the following questions: (1) Is it ethical? (If not, don't consider it.) (2) Is it feasible? (If time is an issue, costs are high, resources are limited, technology is needed, or customers are resistant, for instance, then the alternative is not feasible.) (3) Will it remove the causes and solve the problem?

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Stage 4: Implement and Evaluate the Solution Chosen Once a solution is chosen, it needs implementation. And after implementation, stakeholders need to evaluate how effectively the solution solves the problem. To be effective, the solution should eliminate or significantly reduce the difference between the earlier, actual problem state and the desired outcome. If the gap is not closed, the implementation fails, and either the problem was incorrectly identified or the solution was inappropriately conceived or executed. If the solution fails, management can return to the first step, problem identification. If the problem was correctly identified, management should consider implementing one of the previously identified, but untried, solutions. This process can continue until all feasible solutions have been tried or the problem has changed.

What's Good and Bad about the Rational Model? The rational model is prescriptive, outlining a logical process that managers should use when making decisions. As such, the rational model is based on the notion that managers optimize when making decisions. Optimizing involves solving problems by producing the best possible solution and is based on a set of highly desirable conditions—having complete information, leaving emotions out of the decision-making process, honestly and accurately evaluating all alternatives, having abundant and accessible time and resources, and having people willing to implement and support decisions. Practical experience, of course, tells us that these conditions are all rarely met, and assumptions to the contrary are unrealistic. Herbert Simon in 1978 earned the Nobel Prize for his work on decision making. He put it this way: “The assumptions of perfect rationality are contrary to fact. It is not a question of approximation; they do not even remotely describe the processes that human beings use for making decisions in complex situations.”12

That said, there are three benefits of trying to follow a rational process as much as realistically possible:

1. Quality. The quality of decisions may be enhanced, in the sense that they follow more logically from all available knowledge and expertise.

1. Transparency. It makes the reasoning behind a decision transparent and available to scrutiny.

1. Responsibility. If made public, it discourages the decider from acting on suspect considerations (such as personal advancement or avoiding bureaucratic embarrassment) and therefore encourages more responsible decisions.13

Nonrational Models of Decision Making: Decision Making Does Not Follow an Orderly Process

Nonrational models of decision making explain how managers actually make decisions. The models typically build on assumptions that decision making is uncertain, that decision makers do not possess complete information, and that managers struggle to make optimal decisions. Two nonrational models are Herbert Simon's normative model and the intuition model.

Simon's Normative Model: “Satisfactory Is Good Enough” Herbert Simon proposed this model to describe the process that managers actually use when making decisions. The process is guided by a decision maker's bounded rationality. Bounded rationality represents the notion that decision makers are “bounded” or restricted by a variety of constraints when making decisions. These constraints include any personal characteristics or internal and external resources that reduce rational decision making. Personal characteristics include the limited capacity of the human mind, personality, and time constraints. Consider gender: Males tend to make more risky decisions than females.14 Examples of internal resources are the organization's human and social capital, financial resources, technology, plant and equipment, and internal processes and systems. External resources include things the organization cannot directly control such as employment levels in the community, capital availability, and government policies.15 Tom Albanese, former CEO of Rio Tinto, the second largest mining company in the world, experienced these constraints when he decided to acquire Riverside Mining Ltd. (see the Example box).

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EXAMPLEBounded Rationality Dooms an Acquisition Decision

In 2013 Tom Albanese stepped down as Rio Tinto's CEO after a series of bad decisions. One involved the acquisition of Riverside Mining Ltd. for $3.7 billion. Albanese was interested in Riverside's coking-coal operations in Africa.

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Through its Diavik Diamond Mine subsidiary, Rio Tinto operates the Diavik mine in the subarctic tundra of Canada's Northwest Territories.

THE FATAL DECISION There were few bidders for Riverside because of “concerns about getting the steel ingredient out of Mozambique's bush country.” The price of coking was $290 a ton at the time of the acquisition decision in 2011. The price was $165 a ton in January 2013.

“Rio Tinto had planned to ship the coal along the Zambezi River, but that strategy proved unworkable when the company ran into trouble dredging the river and failed to secure government approval for shipments.” The effects of this decision resulted in the company writing down $3 billion of lost costs, and the resignation of Albanese and the company's head of strategy, Doug Ritchie.16

YOUR THOUGHTS?

1. How does bounded rationality explain what happened in this example?

1. What constraints of internal and external resources—directly identified or implied—acted as boundaries to the decisions made?

1. What could Albanese have done differently?

Ultimately, these limitations result in the tendency to acquire manageable rather than optimal amounts of information. In turn, this practice makes it difficult for managers to identify all possible alternative solutions. In the long run, the constraints of bounded rationality cause decision makers to fail to evaluate all potential alternatives, thereby causing them to satisfice.

Satisficing consists of choosing a solution that meets some minimum qualifications, one that is “good enough.” Satisficing resolves problems by producing solutions that are satisfactory, as opposed to optimal. Finding a radio station to listen to in your car is a good example of satisficing. You cannot optimize because it is impossible to listen to all stations at the same time. You thus stop searching for a station when you find one playing a song you like or do not mind hearing.

The Intuition Model: “It Just Feels Right” Many entrepreneurs start businesses on the basis of intuition. Consider the following:

EXAMPLE Ignoring recommendations from advisers, Ray Kroc purchased the McDonald's brand from the McDonald brothers: “I'm not a gambler and I didn't have that kind of money, but my funny bone instinct kept urging me on.” Ignoring the fact that 24 publishing houses had rejected the book and her own publishing house was opposed, Eleanor Friede gambled on a “little nothing book,” called Jonathan Livingston Seagull: “I felt there were truths in this simple story that would make it an international classic.”17

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Intuition represents judgments, insights, or decisions that “come to mind on their own, without explicit awareness of the evoking cues and of course without explicit evaluation of the validity of these cues.”18 Unfortunately, the use of intuition does not always lead to blockbuster decisions such as those by Ray Kroc or Eleanor Friede. To enhance your understanding of the role of intuition in decision making, this section reviews a model of intuition and discusses the pros and cons of using intuition to make decisions.

A Model of Intuition Figure 11.2 presents a model of intuition. Note that the model shows two forms of intuition:

1. A holistic hunch represents a judgment that is based on a subconscious integration of information stored in memory. People using this form of intuition may not be able to explain why they want to make a certain decision, except that the choice “feels right.”

1. Automated experiences represent a choice that is based on a familiar situation and a partially subconscious application of previously learned information related to that situation. For example, when you have years of experience driving a car, you react to a variety of situations without conscious analysis.

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FIGURE 11.2A MODEL OF INTUITION

SOURCES: Based in part on D. Kahneman and G. Klein, “Conditions for Intuitive Expertise,” American Psychologist, September 2009, 515–526; E. Sadler-Smith and E. Shefy, “The Intuitive Executive: Understanding and Applying ‘Gut Feel’ in Decision Making,” Academy of Management Executive, November 2004, 76–91; and C. C. Miller and R. D. Ireland, “Intuition in Strategic Decision Making: Friend or Foe in the Fast-Paced 21st Century,” Academy of Management Executive, February 2005, 19–30.

In Figure 11.2, you can see that intuition is represented by two distinct processes. One is automatic, involuntary, and mostly effortless. The second is quite the opposite in that it is controlled, voluntary, and effortful. For example, when trying to answer one of the Your Thoughts? questions at the end of the Example boxes, you may spontaneously have an answer pop into your mind based on your recollection of what you previously read (an automatic process). Upon further reflection (controlled process), however, you may decide your initial thought is wrong and that you need to go back and reread some material to arrive at another answer. This in turn may cause novel ideas to come to mind, and the two processes continue. These intuitive processes are influenced by two sources: expertise and feelings (see Figure 11.2). Expertise represents an individual's combined explicit knowledge (i.e., information that can easily be put into words) and tacit knowledge (i.e., information gained through experience that is difficult to express and formalize) regarding an object, person, situation, or decision opportunity.

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EXAMPLE Steve Jobs used a combination of explicit and tacit knowledge to create new products. The feelings component reflects the automatic, underlying effect one experiences in response to an object, person, situation, or decision opportunity. An intuitive response builds on the interaction between one's expertise and feelings in a given situation.

1. Pros and Cons of Using Intuition. There are two benefits of using intuition to make decisions. (1) It can speed up the decision-making process, which is valuable when you are under time constraints.19 (2) It is useful when resources are limited. On the downside, however, intuition is subject to the same types of biases associated with rational decision making, biases we discuss in the next section of this chapter. In addition, the decision maker may have difficulty convincing others that the intuitive decision makes sense, so a good idea may be ignored.

1. What Is the Bottom Line on Intuition? We believe that intuition and rationality are complementary and that managers should attempt to use both when making decisions.20 We thus encourage you to use intuition when making decisions. You can develop your intuitive awareness by using the recommendations in Table 11.1.

TABLE 11.1GUIDELINES FOR DEVELOPING INTUITIVE AWARENESS

RECOMMENDATION

DESCRIPTION

1. Open up the closet

To what extent do you experience intuition; trust your feelings; count on intuitive judgments; suppress hunches; covertly rely upon gut feel?

2. Don't mix up your I's

Instinct, insight, and intuition are not synonymous; practice distinguishing among your instincts, your insights, and your intuitions.

3. Elicit good feedback

Seek feedback on your intuitive judgments; build confidence in your gut feel; create a learning environment in which you can develop better intuitive awareness.

4. Get a feel for your batting average

Benchmark your intuitions; get a sense for how reliable your hunches are; ask yourself how your intuitive judgment might be improved.

5. Use imagery

Use imagery rather than words; literally visualize potential future scenarios that take your gut feelings into account.

6. Play devil's advocate

Test out intuitive judgments; raise objections to them; generate counterarguments; probe how robust gut feel is when challenged.

7. Capture and validate your intuitions

Create the inner state to give your intuitive mind the freedom to roam; capture your creative intuitions; log them before they are censored by rational analysis.

SOURCE: From E. Sadler-Smith and E. Shefy, “The Intuitive Executive: Understanding and Applying ‘Gut Feel’ in Decision Making,” Academy of Management Executive, November 2004, 88. Reproduced with permission of The Academy of Management, via Copyright Clearance Center.

Improving Your Intuitive Awareness Do you think being intuitive is a good thing? Would you like to become more intuitive? If yes, then you will find the Self-Assessment on the next page valuable.

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http://textflow.mheducation.com/figures/1259187799/connect.pngSELF-ASSESSMENT 11.1

Am I Intuitive?

Go to connect.mheducation.com and complete Self-Assessment 11.1 to assess your intuitiveness. Then answer the following questions:

1. What is your level of intuitiveness? Do you agree with this assessment?

1. What are the two highest items driving your intuition? When do you tend to use these characteristics?

1. What are your two lowest items that detract from your intuition? When do they get in the way of your making intuitive decisions?

TAKE-AWAY APPLICATION—TAAP

Use the results of Self-Assessment 11.1 and Table 11.1 to answer the following:

1. Examine the recommendations in Table 11.1 and evaluate each one as either a strength of yours—something you do—or a weakness—something you tend not to do.

1. For those recommendations in Table 11.1 that you think might be your weaknesses, consider whether results from the intuition Self-Assessment can help you to turn the weaknesses to strengths.

1. Develop a plan to further develop your self-assessment strengths on the basis of the recommendations in Table 11.1 for increasing your intuitive awareness.

Integrating Rational and Nonrational Models Applying the idea that decisions are shaped by characteristics of both problems and the contexts in which decision makers have to solve the problems, consultants David Snowden and Mary Boone have come up with their own approach that responds to the challenging environments facing today's organizations. They essentially integrate rational and nonrational models by identifying four kinds of decision environments and an effective method of decision making for each.21

1. Simple. A simple context is stable, with clear cause-and-effect relationships, so the best answer can be agreed upon.

Effective: The rational model. Decision makers gather information, categorize it, and respond in an established way.

1. Complicated. There is a clear relationship between cause and effect, but some people may not see it, and more than one solution may be effective.

Effective: The rational model. Decision makers investigate and analyze options.

1. Complex. There is one right answer, but many unknowns obscure cause-and-effect relationships.

Effective: Intuition. Decision makers start by experimenting, testing options, and probing to see what might happen as they look for a creative solution.

1. Dynamic/Chaotic. Cause-and-effect relationships change so fast that no pattern emerges.

Effective: Both intuition and evidence-based decision making, discussed in Section 11.3 of this chapter. Decision makers act first to establish order and then find areas where it is possible to identify patterns so that aspects of the problem can be managed.22

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11.2 DECISION-MAKING BIASES: RULES OF THUMB OR “HEURISTICS”

MAJOR QUESTION

It's hard to be rational. What are the biases that get in the way?

THE BIGGER PICTURE

You and everyone else use “heuristics” when making decisions. By better understanding the nature of these various rules of thumb, you can improve your ability to make more rational decisions. Heuristics fall into eight categories: availability bias, representativeness bias, confirmation bias, anchoring bias, overconfidence bias, hindsight bias, framing bias, and escalation of commitment bias.

Ever had a hard time explaining why you made a particular decision? It would be normal because all of us use shortcuts or “rules of thumb” when making decisions. Academics call them judgmental heuristics, pronounced “hyur-ris-tiks.” Judgmental heuristics represent cognitive shortcuts or biases that are used to simplify the process of making decisions.23