Understanding Decision-Making

Types of Decisions

Despite the far-reaching decisions in the previous example, not all have significant consequences or require much thought. For instance, before you come to class, you make habitual and straightforward decisions such as what to wear, what to eat, and which route to take to and from home and school. You probably do not spend much time on these mundane decisions. These straightforward decisions are termed programmed decisions, which occur frequently enough that we develop an automated response to them. The computerized response we use to make these decisions is called the decision rule. For example, many restaurants routinely face customer complaints as part of their business. Because complaints are a recurring problem, responding to them may become a programmed decision. The restaurant might enact a policy stating that every time they receive a valid customer complaint, they should receive a free dessert, representing a decision rule.

On the other hand, unique and essential decisions require conscious thinking, information gathering, and careful consideration of alternatives. These are called nonprogrammed decisions. For example, in 2005, McDonald’s Corporation became aware of the need to respond to growing customer concerns regarding the unhealthy aspects (high in fat and calories) of the food they sell. This is a non-programmed decision because, for several decades, customers of fast-food restaurants have been more concerned with the taste and price of the food than its health implications. In response to this problem, McDonald’s decided to offer healthier alternatives, such as substituting French fries in Happy Meals with apple slices. In 2007, they also banned the use of trans fat at their restaurants.

A crisis also constitutes a nonprogrammed decision for companies. For example, the leadership of Nutrorim was facing a tough decision. They had recently introduced a new product, ChargeUp with Lipitrene, an improved version of their popular sports drink powder, ChargeUp. At some point, a phone call came from a state health department to inform them of 11 cases of gastrointestinal distress that might be related to their product, which led to a decision to recall ChargeUp. The decision was made without an investigation of the information. While this decision was conservative, it was made without a process that weighed the information. Two weeks later, it became clear that the reported health problems were unrelated to Nutrorim’s product. All the cases were traced back to a contaminated juice bar at a health club. However, damage to the brand and the balance sheets had already been done. This unfortunate decision prompted Nutrorim to reassess its approach to decision-making under pressure. The company now gathers information to make informed choices even when time is of the essence (Garvin, 2006).

Decisions can be classified into three categories based on the level at which they occur. Strategic decisions set the course of an organization. Tactical decisions are decisions about how things will get done. Finally, operational decisions refer to employees’ daily decisions to make the organization run. For example, consider the restaurant offering a free dessert when a customer complaint is received. The restaurant owner made a strategic decision to have excellent customer service. The restaurant manager implemented a free dessert policy as a way to address customer complaints, a tactical decision. Finally, the restaurant servers make individual decisions each day by evaluating whether each customer complaint received is legitimate and warrants a free dessert.

Figure 6.2.2 Examples of Decisions Commonly Made Within Organizations

In this section, we will discuss different decision-making models designed to understand and evaluate the effectiveness of nonprogrammed decisions. We will cover four approaches: the rational decision-making model, the bounded rationality decision-making model, the intuitive decision-making model, and the creative decision-making model.

Making Rational Decisions

The rational decision-making model describes a series of steps that decision makers should consider if their goal is to maximize the quality of their outcomes. In other words, going through the formal steps of the rational decision-making model may make sense if you want to make the best choice.

Let’s imagine that your old, clunky car has broken down, and you have enough money saved for a substantial down payment on a new car. It will be your first significant purchase, and you want to make the right choice. Therefore, the first step has already been completed—we know you want to buy a new car. Next, in step 2, you must decide which factors are essential. How many passengers do you want to accommodate? How important is fuel economy to you? Is safety a significant concern? You only have a certain amount of money saved and don’t want to take on too much debt, so the price range is also essential. If you know you want to have room for at least five adults, consider a car that gets at least 20 miles per gallon, one with a strong safety rating, and spend no more than $22,000 on the purchase.

Additionally, if you like how it looks, you have identified the key decision criteria. All the potential options for purchasing your car will be evaluated against these criteria. Before we can proceed, you need to determine the importance of each factor to your decision in step 3. If each is equally important, then there is no need to weigh them against one another. However, if you know that price and mpg are key factors, you might weigh them heavily and assign medium importance to the other criteria. Step 4 requires you to generate all alternatives for your options. Then, in step 5, use this information to evaluate each alternative against the established criteria. You choose the best alternative (step 6), and then you would go out and buy your new car (step 7).

Of course, the outcome of this decision will influence the next decision. That is where step 8 comes in. For example, if you purchase a car and experience problems with it, you will be less likely to consider the same make and model when repurchasing a car.

While decision makers can get off track during any of these steps, research shows that searching for alternatives in the fourth step can be the most challenging and often leads to failure. One researcher found that no alternative generation occurred in 85% of the decisions he studied (Nutt, 1994). Conversely, successful managers know what they want at the outset of the decision-making process, set objectives for others to respond to, conduct an open-ended search for solutions, involve key people in the process, and avoid using their power to impose their perspective (Nutt, 1998).

The rational decision-making model offers essential lessons for decision-makers. First, when making a decision, ensure that you establish your decision criteria before searching for alternatives. This would prevent you from liking one option too much and setting your criteria accordingly. For example, let’s say you started browsing cars online before you generated your decision criteria. You may come across a vehicle that reflects your sense of style and develop an emotional connection with it. Then, because of your love for the particular car, you may say to yourself that the fuel economy of the car and the innovative braking system are the most important criteria. After purchasing it, you may realize that the vehicle is too small for your friends to ride in the back seat, which was something you should have thought about. Setting criteria before you search for alternatives may prevent you from making such mistakes. Another advantage of the rational model is that it encourages decision-makers to generate all alternatives, rather than just a few. By generating many options that cover a wide range of possibilities, you are unlikely to make a more effective decision that does not require sacrificing one criterion for the sake of another.

Despite all its benefits, you may have noticed that this decision-making model also involves several unrealistic assumptions. It assumes that people completely understand the decision to be made, are aware of all their available choices, have no perceptual biases, and want to make optimal decisions. Nobel Prize-winning economist Herbert Simon observed that while the rational decision-making model may aid decision-makers when working through problems, it doesn’t accurately represent how decisions are frequently made within organizations. Simon argued that it didn’t even come close.

Think about how you make important decisions in your life. It is likely that you rarely sit down and complete all eight steps in the rational decision-making model. For example, this model suggests that we explore all possible alternatives before making a decision. Still, this process is time-consuming, and individuals are often under pressure to make decisions within a limited timeframe. Moreover, even if we had access to all the available information, it could be challenging to compare the pros and cons of each alternative and rank them according to our preferences. Anyone who has recently purchased a new laptop or cell phone can attest to the challenge of sorting through each brand and model’s unique strengths and limitations to find the solution that best meets their particular needs. The availability of too much information can lead to analysis paralysis, where an excessive amount of time is spent gathering and considering information, yet no decisions are made. A senior executive at Hewlett-Packard Development Company LP admits that his company suffered from this spiral of analyzing things for too long, to the point where data gathering led to “not making decisions, instead of us making decisions” (Zell, Glassman, & Duron, 2007). Moreover, you may not always be interested in reaching an optimal decision. For example, if you want to purchase a house, you may be willing and able to invest a significant amount of time and energy in finding your dream house. Still, if you are only looking for an apartment to rent for the academic year, you may be willing to take the first one that meets your criteria of being clean, close to campus, and within your price range.

Making “Good Enough” Decisions

The bounded rationality model of decision making recognizes the limitations of our decision-making processes. According to this model, individuals knowingly limit their options to a manageable set and choose the first acceptable alternative without conducting an exhaustive search for other options. An essential part of the bounded rationality approach is the tendency to satisfy (a term Herbert Simon coined from satisfy and suffice), which refers to accepting the first alternative that meets your minimum criteria. For example, many college graduates do not conduct a national or international search for potential job openings. Instead, they focus their search on a limited geographic area and accept the first offer in their chosen area, even if it may not be the ideal job. Satisficing is similar to rational decision making. The main difference is that, rather than selecting the best option and maximizing the potential outcome, the decision maker saves cognitive time and effort by accepting the first alternative that meets the minimum threshold.

Making Intuitive Decisions

The intuitive decision-making model has emerged as an alternative to other decision-making processes. This model refers to arriving at decisions without conscious reasoning. 89% of managers surveyed admitted to using intuition to make decisions at least sometimes, and 59% said they used intuition often (Burke & Miller, 1999). Managers make decisions under challenging circumstances, including time pressures, constraints, uncertainty, changing conditions, and obvious and high-stakes outcomes. Thus, it makes sense that they would not have the time to use the rational decision-making model. Yet when CEOs, financial analysts, and health care workers are asked about their critical decisions, they seldom attribute success to luck. To an outside observer, it may seem like they are making guesses about the course of action. Still, it turns out that experts systematically make decisions using a different model than was earlier suspected.

Research on life-or-death decisions by fire chiefs, pilots, and nurses finds that experts do not choose among a list of well-thought-out alternatives. They don’t decide between two or three options and choose the best one. Instead, they consider only one option at a time. The intuitive decision-making model argues that in a given situation, experts making decisions scan the environment for cues to recognize patterns (Breen, 2000; Klein, 2003; Salas & Klein, 2001). Once a pattern is identified, they can play out a potential course of action through to its outcome based on their prior experience. Thanks to training, experience, and knowledge, these decision makers know how well a given solution may work. If they run through the mental model and find that the solution will not work, they alter it before putting it into action. If it still is not deemed a workable solution, it is discarded as an option, and a new idea is tested until a workable solution is found. Once a viable action is identified, the decision maker puts the solution into motion. The key point is that only one choice is considered at a time. Novices cannot make effective decisions in this manner because they lack sufficient prior experience to draw upon.

Making Creative Decisions

In addition to rational decision-making, bounded rationality, and intuitive decision-making models, creative decision-making is crucial for an effective decision-maker. Creativity is the generation of new, imaginative ideas. With the flattening of organizations and intense competition among companies, individuals and organizations are driven to be creative in their decisions, ranging from cost-cutting to generating new business ideas. While creativity is the first step in the innovation process, creativity and innovation differ. Innovation begins with creative ideas and involves realistic planning and follow-through. Innovations such as 3M’s Clearview Window Tinting emerge from a creative decision-making process that considers what may or may not work to solve real-world problems.

The five steps to creative decision-making are similar to previous decision-making models in several key ways. All the models include problem identification, the step at which the need for problem-solving becomes apparent. It is impossible to solve a problem if you do not recognize that you have one. Immersion is when the decision maker consciously thinks about the problem and gathers information. A key to success in creative decision making is having or acquiring expertise in the studied area. Then, incubation occurs. During incubation, the individual sets the problem aside and refrains from thinking about it for a while. At this time, the brain is working on the problem unconsciously. Then comes illumination, or the insight moment when the solution to the problem becomes apparent to the person, sometimes when it is least expected. This sudden insight is the “eureka” moment, similar to what happened to the ancient Greek inventor Archimedes, who found a solution to the problem he was working on while taking a bath. Finally, the verification and application stage happens when the decision maker consciously verifies the feasibility of the solution and implements the decision.

A NASA scientist describes his decision-making process as leading to a creative outcome: He had been trying to figure out a better way to de-ice planes to make the process faster and safer. After recognizing the problem, he immersed himself in the literature to understand all the options and worked on the issue for months, seeking a solution. It was not until he sat outside a McDonald’s restaurant with his grandchildren that it dawned on him. The golden arches of the M of the McDonald’s logo inspired his solution; he would design the de-icer as a series of M’s. This represented the illumination stage. After he tested and verified his creative solution, he was done with that problem, except to reflect on the outcome and process.

How Do You Know If Your Decision-Making Process Is Creative?

Researchers focus on three factors to evaluate the level of creativity in the decision-making process. Fluency refers to the number of ideas a person can generate. Flexibility refers to how different the ideas are from one another. If you can develop several distinct solutions to a problem, your decision-making process is highly flexible. Originality refers to how unique a person’s ideas are. You might say that Reed Hastings, founder and CEO of Netflix Inc., is pretty creative. His decision-making process shows at least two elements of creativity. We do not know exactly how many ideas he had throughout his career, but his ideas were quite distinct from one another. After teaching math in Africa with the Peace Corps, Hastings was accepted at Stanford, where he earned a master’s degree in computer science. Soon after starting work at a software company, he invented a successful debugging tool, which led to his founding of the computer troubleshooting company Pure Software LLC in 1991. After the company’s merger and subsequent sale in 1997, Hastings founded Netflix, revolutionizing the DVD rental business with online rentals delivered through the mail, accompanied by no late fees. In 2007, Hastings was elected to Microsoft’s board of directors. As you can see, his ideas are high in originality and flexibility (Conlin, 2007).

Some experts have proposed that creativity occurs as an interaction among three factors: people’s personality traits (openness to experience, risk taking), their attributes (expertise, imagination, motivation), and the situational context (encouragement from others, time pressure, physical structures) (Amabile, 1988; Amabile et al., 1996; Ford & Gioia, 2000; Tierney, Farmer, & Graen, 1999; Woodman, Sawyer, & Griffin, 1993). For example, research shows that individuals who are open to experience, less conscientious, more self-accepting, and more impulsive tend to be more creative (Feist, 1998).

There are many techniques available that enhance and improve creativity. Linus Pauling, the Nobel Prize winner who popularized the idea that vitamin C could help strengthen the immune system, said, “The best way to have a good idea is to have a lot of ideas.”^[2] One popular method for generating ideas is brainstorming. Brainstorming is a group process of generating ideas that follows a set of guidelines, including no criticism during the brainstorming process, the idea that no suggestion is too crazy, and building on other ideas (piggybacking). Research shows that the quantity of ideas leads to better idea quality in the end, so setting high idea quotas, in which the group must reach a set number of ideas before they are done, is recommended to avoid process loss and maximize the effectiveness of brainstorming. Another unique aspect of brainstorming is that, since the various backgrounds and approaches provide the group with more to draw upon, the more people are included in the process, the better the decision outcome tends to be. A variation of brainstorming is wildstorming, in which the group focuses on impossible ideas and then imagines what would happen to make them possible (Scott, Leritz, & Mumford, 2004).

Figure 6.3.6

Which decision-making model should I use?