What you’ll learn to do: Describe the types of decisions made in different types of organizations
Organizations make decisions every day, and, as we mentioned earlier, the better and quicker they do so, the more successful they will be. But what kind of techniques and tools do organizations employ to make good decisions? What are the obstacles and how can a good, creative decision give an organization a leg up on the competition?
- Describe the decision making process
- Compare various biases and errors in decision making
- Discuss ways to promote creativity in decision making
- Discuss group decision making and how organizations make decisions
The Decision Making Process
“To be or not to be: that is the question.” Hamlet lamented.
“Should I stay or should I go now?” The Clash asked.
“Two roads diverged in a yellow wood,” Robert Frost pointed out.
If you’re struggling to make a decision, you’re in good company. Literature, poetry and pop culture provide plenty of sympathy for your plight. Sadly, while they understand your pain, they don’t always sing you to the correct resolution. When it comes to making a decision, in business or in life, how can you be sure you’re doing the right thing?
Well, we wouldn’t be writing songs about making decisions if it were an easy task. That said, researchers have studied the decision-making process as much as anything else, and they’ve come away with some different ideas and models that help us understand how we can make decisions more carefully and successfully. Let’s take a look at the five best known of those decision making models.
Rational Decision Making
The rational decision making model assumes decisions are based on an objective, orderly, structured information gathering and analysis. The model encourages the decision maker to understand the situation, organize and interpret the information, and then take action. There are eight steps in the rational decision making process:
Bad Hotel REviews
Let’s say that you’re the general manager at a nice hotel. Suddenly, you notice that customers are rating your property two and three stars instead of the customary five stars you and the team are used to earning. You need to make a decision about next steps to solve this issue. Let’s start right at the top of the rational decision making model.
- Understand the issue. The issue is clear to you. Customers are rating their experience at your property online, and they’re not happy. This will surely damage your team’s efforts to generate new business. You need to find a way to earn better customer ratings.
- Define the problem. You and your team sit down and read the last twenty or thirty customer reviews on three different travel sites. It turns out that customers’ unhappiness coincides with a recent increase in rates. They no longer feel they’re getting good value for their money.
- Define the objectives. What criteria will your solution have to meet? Clearly, you want to start getting better ratings from customers. You don’t want to see customers complaining about anything online. Your objective is 100% happiness, 100% five-star ratings.
- Diagnose the problem. This is the stage where you look to determine and understand the root causes of your issue. Perhaps you decide that all customer-facing staff report daily on quality issues. And maybe you consult with operations on additional perks that can be incorporated into the guest experience without giving away too much margin.
- Develop alternatives. You ultimately want to create a lengthy list of alternatives and not decide on one too quickly. You look over your employees’ reports on quality. You wait on operations for recommendations on extra perks. You collect all the data.
- Evaluate alternatives. Once you have all your alternatives on the table, you can start to make a choice. Every employee suggestion, every operations recommendation should be in front of you, and you consider each option carefully.
- Select an alternative. One of your employees has suggested two additional members for the housekeeping staff, as the current level of staff is having difficulty keeping up with the increase precipitated by an office building opening up down the street. A member of your operations team has suggested providing a continental breakfast for business travelers in response to the increase in that customer type. Both seem like good ideas. Which will provide the bigger impact?
- Implement alternative. You decide to hire the two additional members for the housekeeping staff, understanding that your customers view quality in clean rooms and common spaces. You get the budget approved and post for those two jobs. You make a plan to check in at the thirty day mark to see if customers’ ratings have improved.
The goal of the rational decision making model is to eliminate possibilities for error and biases. It assumes the following:
- Managers have all the information about the situation.
- Managers are aware of all alternative options and are equipped to evaluate them properly.
- Managers are looking to make the best possible decision.
- Managers are capable of eliminating misperceptions and biases.
- There are no cost or time constraints.
In a perfect world, where all of those assumptions are met, this model is how the decision making process works best. But we know that those assumptions can’t all be met. And that’s why we have the bounded rationality model.
Bounded Rationality Model
The bounded rationality model assumes numerous organizational and individual factors restrict rational decision making. This is the version of decision making that occurs most often in organizations, because the assumptions of this model are much closer to the truth:
- Early alternatives and solutions are quickly adopted because of perceptual limitations.
- Managers often don’t have access to all the information they need.
- Managers are not aware of all the alternatives and can’t predict the consequences of each one.
- Organizational goals constrain decisions.
- Conflicting goals of multiple stakeholders can force a compromise of a decision.
Because a human being is limited in the amount of information he or she can process, when a complex decision needs to be made, he or she will reduce the problem to a manageable size. By limiting the number of choices and the amount of necessary information, the product is a decision that’s acceptable and satisfactory. This is sometimes referred to as the Satisficing model.
In the bounded rationality model, the same steps are used in the decision making process, only instead of reviewing all information and all alternatives, those aspects are limited to the amount the decision maker is willing to gather.
Linear Model of Decision Making
Linear decision making involves listing positive and negative factors of each decision alternative. If you’ve ever made a list of pros and cons around a certain decision, then you’ve embarked on linear decision making.
In order for it truly to be linear decision making, the decision maker must then assign a numerical “weight” to each of his pros and cons, and arrive at a total score for each side. For instance, let’s say you were trying to decide if you should or should not hire a very experienced but very expensive candidate for a position in your office. Your linear decision making model might look like this:
|Reasons to Hire Candidate||Reasons to Not Hire Candidate|
|Very experienced in an area where it’s difficult to find experience||3||Another candidate might be able to be hired cheaply and trained||–2|
|Would not lose as much productivity because candidate has experience||3||Wouldn’t be promoting from within but rather hiring from outside||–3|
|Candidate would be a good fit with the group culturally speaking||1||Candidate has done some job hopping recently||–3|
|Searching for another qualified candidate, even if he has to be trained, may take a while.||2||Did not impress all the managers that interviewed him.||–3|
You’ve assigned the most important reasons a 3 on the positive side, and a –3 for the most important reason on the negative side. This makes it easy for you to tally up both sides and add them together. A positive score suggests you should hire the candidate, and a negative score suggests you should not. Looks like you’re not hiring this candidate!
Intuitive Decision Making
Intuitive decision making is a model that assumes managers make decisions by relying on past experience and their personal assessment of a situation. This model of decision making is often used when there are high levels of uncertainty or complexity around a particular problem, or when the decision is novel and the managers don’t have past experience with this kind of problem.
If managers are faced with uncertain, complex situations and they can’t get the right information to make a good decision quickly, they are apt to rely on hunches and intuition. Given the choice between this model and a linear model (like the one discussed above), managers should reach for the linear model.
Garbage Can Model
The garbage can model is one where managers use information about problems, participants, solutions and opportunities haphazardly to generate ideas and potential decisions. Unlike the other decision making models we discussed, the garbage can model does not always lead to satisfactory solutions, because the problem does not always precede alternatives and solutions.
For instance, the corporate office of an organization might have been recently informed of the benefits of going to an “open environment” where people can talk and collaborate freely. Senior management may get behind this idea and start looking for ways to knock down cube walls and make their environment more collaborative before it’s even been determined that their office has issues being collaborative.
As you can see in Figure 2, there is no sequence of steps the way there is in rational decision making, but rather the decision comes by looking at independent streams of events.
These are five well-known models for decision making. Now we’re going to take a look at some of the rules and biases in decision making that, when you’re aware of them, will lead you to stronger decision making skills.
Biases in Decision Making
There are two types of decisions—programmed and non-programmed. A programmed decision is one that is very routine and, within an organization, likely to be subject to rules and policies that help decision makers arrive at the same decision when the situation presents itself. A nonprogrammed decision is one that is more unusual and made less frequently. These are the types of decisions that are most likely going to be subjected to decision making heuristics, or biases.
As we become more embroiled in the rational decision making model—or, as we discussed, the more likely bounded rationality decision making model—some of our attempts to shortcut the collection of all data and review of all alternatives can lead us a bit astray. Common distortions in our review of data and alternatives are called biases.
You only need to scroll through social media and look at people arguing politics, climate change, and other hot topics to see biases in action. They’re everywhere. Here are some of the more common ones you’re likely to see:
The overconfidence bias is a pretty simple one to understand—people are overly optimistic about how right they are. Studies have shown that when people state they’re 65–70% sure they’re right, those people are only right 50% of the time. Similarly, when they state they’re 100% sure, they’re usually right about 70–85% of the time.
Overconfidence of one’s “correctness” can lead to poor decision making. Interestingly, studies have also shown that those individuals with the weakest intelligence and interpersonal skills are the most likely to exhibit overconfidence in their decision making, so managers should watch for overconfidence as a bias when they’re trying to make decisions or solve problems outside their areas of expertise.
The anchoring bias is the tendency to fix on the initial information as the starting point for making a decision, and the failure to adjust for subsequent information as it’s collected. For example, a manager may be interviewing a candidate for a job, and that candidate asks for a $100,000 starting salary. As soon as that number is stated, the manager’s ability to ignore that number is compromised, and subsequent information suggesting the average salary for that type of job is $80,000 will not hold as much strength.
Similarly, if a manager asks you for an expected starting salary, your answer will likely anchor the manager’s impending offer. Anchors are a common issue in negotiations and interviews.
The rational decision making process assumes that we gather information and data objectively, but confirmation bias represents the gathering of information that supports one’s initial conclusions.
We seek out information that reaffirms our past choices and tend to put little weight on those things that challenge our views. For example, two people on social media may be arguing the existence of climate change. In the instance of confirmation bias, each of those people would look to find scientific papers and evidence that supports their theories, rather than making a full examination of the situation.
Hindsight bias is the tendency we have to believe that we’d have accurately predicted a particular event after the outcome of that event is known. On the Saturday before a Super Bowl, far fewer people are sure of the outcome of the event, but on the Monday following, many more are willing to claim they were positive the winning team was indeed going to emerge the winner.
Because we construct a situation where we fool ourselves into thinking we knew more about an event before it happened, hindsight bias restricts our ability to learn from the past and makes us overconfident about future predictions.
Representative bias is when a decision maker wrongly compares two situations because of a perceived similarity, or, conversely, when he or she evaluates an event without comparing it to similar situations. Either way, the problem is not put in the proper context.
In the workplace, employees might assume a bias against white males when they see that several women and minorities have been hired recently. They may see the last five or six hires as representative of the company’s policy, without looking at the last five to ten years of hires.
On the other side of the coin, two high school seniors might have very similar school records, and it might be assumed that because one of those students got into the college of her choice, the other is likely to follow. That’s not necessarily the case, but representative bias leads a decision maker to think because situations are similar, outcomes are likely to be similar as well.
Availability bias suggests that decision makers use the information that is most readily available to them when making a decision.
We hear about terrorism all the time on the news, and in fictional media. It’s blown out of proportion, making it seem like a bigger threat than it is, so people invest their time and efforts to combat it. Cancer, however, kills 2,000 times more people. We don’t invest in that, it doesn’t get enough news coverage, and it’s not as “available” in our mind as information. Hence, the availability bias.
This is an increased commitment to a previous decision in spite of negative information. A business owner may put some money down on a storefront location to rent DVDs and Blu-rays, start purchasing stock for his or her shelves and hire a few people to help him or her watch the cash register. The owner may review some data and stats that indicate people don’t go out and rent videos too much anymore, but, because he or she is committed to the location, the stock, the people, the owner is going to continue down that path and open a movie rental location.
Managers sometimes want to prove their initial decision was correct by letting a bad decision go on too long, hoping the direction will be corrected. These are often costly mistakes.
If you are certain your lucky tie will help you earn a client’s business at a meeting later today, you’re committing a randomness error. A tie does not bring you luck, even you once wore it on a day when you closed a big deal.
Decisions can become impaired when we try to create meaning out of random events. Consider stock prices. Financial advisors feel they can predict the flow of stock prices based on past performance, but on any given day, those stock prices are completely random. In reality, these advisors were able to predict the direction of stock prices about 49 percent of the time, or about as well as if they’d just guessed.
In the case of the lucky tie, that’s more a superstition. Decision makers who are controlled by their superstitions can find it difficult or impossible to change routines or objectively process new information.
Managers who can objectively collect data and arrive at alternatives without being affected by these biases are already head-and-shoulders above other decision makers who aren’t aware of these pitfalls. Finding unique solutions to unique problems requires a little something more, though. Creativity in decision making can take you to the next step. We’ll talk about that next.
Creativity in Decision Making
If a decision maker is going to produce novel alternatives when solving a problem, then he or she is going to need a little creativity to help the process along. Creativity allows the decision maker to more fully appraise and understand the problem . . . sometimes in ways others can’t see it.
Creativity is the ability to link or combine ideas in novel ways, and their unique alternatives have to be considered useful to others. Creativity is also known as divergent or lateral thinking. Lateral thinking moves away from the linear approach that’s advocated in rational decision making. Some researchers feel that employee and manager creativity is the hallmark of an organization’s success—that solving old organizational issues in new ways creates organizational effectiveness.
If creativity is the key to organizational effectiveness, then how do we get some of that? Is there a way that organizations can foster creativity for the benefit of decision making?
First, it’s important to note the characteristics of creative people, so we can understand what we’re aiming for in our creative environment. Creative decision makers seem to have an ability to sift through the massive amounts of information that can be reviewed when making a decision, and decide what information is and isn’t relevant. Still, they listen to all sources to understand where problems are emerging. And when they’re ready, they present a solution that’s bold and well informed. They don’t rely on the rational decision making model . . . they rely on something more than that. Creativity.
Four characteristics that creative leaders seem to have in common:
- Perseverance in the face of obstacles and adversity
- Willingness to take risks
- Willingness to grow and openness to experience
- Tolerance of ambiguity
- Effective use of analogy to apply a known situation to an unknown situation
Organizationally (and individually) speaking, there are certain factors that, when they exist, tend to point to a more creative atmosphere.
- Questioning attitude. Organizations that don’t invite the questioning of values, assumptions or norms are not likely to be very creative. Organizations need to continually question the long-held beliefs of their industry if they’re going to stay ahead of the curve and come up with creative ways to bring services and products to their customers.
- Culture. Our traditional values are sometimes at odds with the creative solutions we might come up with to solve organizational problems. If an organization’s culture puts too much emphasis on tradition, they’re likely to stifle creativity around problem solving.
- Leadership. Similar to culture, leaders who are bound to traditional characteristics of the leader-follower relationship, who don’t promote questioning attitudes or invite their employees to challenge the status quo, will not do much to foster a creative environment.
- Attitude toward risk. Finally, employees who are afraid to try something new will never put their creative solutions into action! Just as one of the characteristics of a creative leader is a willingness to take risks, so must employees feel comfortable doing so in an organization.
Overall, creativity is likely to flourish in an environment that’s open and encourages participation. Keeping everyone on an even playing field, with no organizational encouragement for an “us versus them” type of environment will increase dialogue and keep ideas flowing.
The Three Components of Creativity
Studies show that most individuals have the capability of being at least moderately creative, so if organizations want to help individuals develop their creativity, they can leverage the three components of creativity. The three components of creativity suggest that creativity lies at the intersection of motivation, expertise and developed creative thinking skills.
Expertise—technical, procedural and intellectual knowledge—is the foundation for all creative work. You wouldn’t expect someone who knows very little about software programming to come up with creative solutions to problems. The potential for creativity in a given area is enhanced when the individual has an exceptional grasp of the information around a problem or issue. Organizations can have a positive impact on increasing employee expertise with training, mentorship programs, etc.
Creative thinking skills encompass all those personality traits we talked about earlier that are common to creative leaders. Organizations, when cognizant of the traits that foster creativity, can interview and select candidates for hire that have these characteristics.
Motivation here means that an individual wants to work on a particular task because it’s interesting and engaging. An individual who is more intrinsically motivated is likely to have an easier time developing creativity than one who is more extrinsically motivated. Motivation determines the extent to which an individual will engage his expertise and creative thinking skills.
Brainstorming and Cooperative Exploration
Organizations can also stimulate creativity by employing the practices of brainstorming and cooperative exploration.
Brainstorming is a creative process in which individuals generate a large number of ideas without censorship. No idea is a bad one! If you’re looking to bring new customers into a retail store, the idea of “training monkeys to ring up purchases” is on the table until it’s time to review and determine which ideas are actually viable. The benefit of brainstorming is that a group of people can build on each other’s ideas, no matter how ridiculous, and perhaps eventually come up with viable solutions.
Cooperative exploration requires individuals to consider a problem from different points of view. Individuals taking part in a cooperative exploration might find themselves arguing for points that they do not believe. But the process requires that individuals work the problem from all angles to ensure that they received the best point of view.
In the cooperative exploration, the following positions are taken by the participants:
- Neutral. Individual does not take sides, and just considers the facts.
- Emotional. Individual only considers the emotional aspects of the issue—who gets hurt? What emotions may be triggered?
- Negative. Individual only considers the negative—what will go wrong and what if the solution doesn’t work.
- Positive. Individual only considers the positive aspects of the issue.
- New solution. Individual only considers the new creative possibilities, or the “what ifs”
- Holistic. Individual considers the entire issue, asking “What’s the big picture?”
By encouraging participants to consider these different viewpoints, the model encourages lateral and divergent thinking.
Creative thinking and creative decision making can keep an organization ahead of its competitors. Now, let’s talk about how different organizations put all these aspects of decision making together and actually make decisions with them.
Group Decision Making
We already discussed how groups and teams can be more creative than individuals. If an organization is looking to get really creative solutions to an issue, assigning a group might be the best alternative. The combined expertise of group members helps them define problems better, then develop and analyze better alternatives.
Groups rely on the same decision making models that individuals use. They can use linear models to analyze positive and negative alternatives, and use intuition when there’s no past history of the situation. Similarly, though, groups also fall victim to decision making biases. In fact, their structure can present special challenges:
- Groups are subject to groupthink and conformity pressures.
- Groups have internal structures that affect the way individuals participate, and that can hinder the decision making process.
- Groups develop norms that could have an impact on decision making, either helping it or damaging it.
Thankfully, there are some tools available to groups to help them avoid biases and other pitfalls. These models reduce fear and conformity, discourage censorship and can increase the number of quality alternatives the group develops.
Nominal Group Technique
The nominal group technique is a structured group process of generating and ranking problem solving ideas. It’s “nominal” because the technique actually reduces interaction between the group members at some stages.
As you can see in the model, the steps of the nominal group technique are:
- Step 1. Individuals in the group are given a problem. Each individual writes down his or her alternatives to that problem.
- Step 2. All of the alternatives submitted by the individuals are shared with the group and written down.
- Step 3. Without disclosing who came up with what alternative, the group discusses each idea, narrows the list.
- Step 4. The group votes on that narrowed-down list of alternatives to determine which are the best.
The process can be repeated more than once to reach an agreement on the solutions to the problem. The key to the success of this technique is to limit the interaction between the group members during the initial alternative-gathering stage. The technique does, however, require a manager or facilitator that can manage the process well.
The Delphi Technique
The Delphi technique obtains opinions about an issue through a series of formal surveys and rating scales. A facilitator or a small group might get together and develop a questionnaire that asks the opinions of others on a particular topic. When those responses are returned, the group or facilitator summarizes those responses, then develops a more focused questionnaire. This can be repeated several times, though usually twice is enough to get to the heart of the issue.
The Delphi technique can be used with large groups of people and assures anonymity, thereby reducing conformity pressure. It’s efficient, reduces interpersonal conflict and can easily be done using technology (email, survey tools, etc.). It is time consuming, though, and ultimately, decisions can’t be made using this technique alone.
There are other group support systems available to help with group decision making. Groupware is software designed to enhance and support group interaction. Computer-aided decision systems is a type of software that collects data from group members to be used in decision making. In both cases, these systems can be helpful but should not be the only means by which group members interact and develop alternatives.
How Does an Organization Actually Make a Decision?
So far, we’ve discussed the methods by which individuals and groups can make decisions, the obstacles they will face and how those obstacles can be minimized to generate the best, most creative alternatives to a problem. But is that actually how decisions are made within an organization?
Like we mentioned earlier, the decision making model that is most commonly used by organizations is the model of bounded rationality. While the rational decision maker requires that an individual or group evaluate all the alternatives, the likelihood that all alternatives will be considered, or even conceived of, is pretty small. There are just things you won’t think of on your own, alternatives that are floating out there that will never get dragged into the conversation.
The most that organizations can hope for is that individuals and groups think of as many alternatives as they can. That’s really what bounded is all about.
What other ways do organizations help or hinder the decision making process? Here are a few:
- Performance evaluations. Employees want to deliver on what’s expected of them. For instance, if managers don’t want to hear anything negative, employees will do their best to stifle any negative information. This can lead to the evaluation of limited numbers of alternatives.
- Reward systems. An organization’s reward system can affect decision making processes by suggesting to their employees which selections are preferable. An organization that rewards risk aversion will not be considering too many alternatives that have a measurable amount of risk. One that promotes and supports risk will have the opposite result.
- Formal regulations. An organization sometimes outlines the function of a job a little too clearly, leaving little room for personal interpretation. Retail workers, like a cashier or stock person, have little autonomy to come up with solutions to address problems they face every day.
- Time constraints. Organizations are impatient! They set deadlines for reports, budgets, performance evaluations…and frequently those deadlines don’t allow enough time for creative alternatives to grow.
- Historical precedence. Organizations do a have a past history of decisions and their results, and even the newest manager can draw from those lessons when making a decision.
Successful organizations do their best to minimize the structural and hierarchical obstacles and clear the way for innovative decision making. As Marcia Blenko, leader of Bain & Company’s Global Organization Practice, wrote,
Ultimately, a company’s value is no more (and no less) than the sum of the decisions it makes and executes. Its assets, capabilities, and structure are useless unless executives and managers throughout the organization make the essential decisions and get those decisions right more often than not.
With co-writers Michael Mankins and Paul Rogers, Blenko went on to explain that a CEO’s best move is to reorganize a company in a way that promotes the most innovative and quickest decisions, because that’s how organizations compete and win today. In their research, they rated decision quality and effectiveness of organizations and found that there was a 95% correlation between quality decisions and financial success.
What about organizations that aren’t solely focused on financial success? Nonprofit organizations can surely benefit from an organizational structure that promotes better, quicker, more innovative decisions. But their mission is not profit—it’s social benefit.
Where nonprofits have their own set of hindrances, the more successful nonprofits are able to systemize their decision making models and repeat them. Their objectives center chiefly around operations and fundraising, and the decisions they make center around those two things. On the other side of the coin, they are subject to impact from both the internal and the external environments. Decision makers aren’t always clearly defined in a non-profit, either, which can make it difficult when a contingency of the organization needs someone to make a final call.
Organizations can do their best to foster innovative decision making by providing the right tools and removing the obstacles that are likely to hold up the process.
- Blenko, Marcia W., Michael Mankins, and Paul Rogers. "The Decision-Driven Organization." Harvard Business Review. June 2010. Accessed April 15, 2019. https://hbr.org/2010/06/the-decision-driven-organization. ↵
- Ibid. ↵