Lecture 6

Question 1

Define “decision-making”

Answer 1

The act or process of choosing a preferred option or course of action from a set of alternatives. It precedes and underpins almost all deliberate or voluntary behaviour and can occur unconsciously.

Question 2

Explain how decision are made across the organisation

Answer 2

‘Strategic’ decisions to shape the future and performance of an organisation

Tactical’ decisions’ regarding the organisation of work

Operational’ decisions made under pressure

Question 3

Give 3 models of decision-making

Answer 3

Prescriptive models: Recommend how individuals should behave in order to achieve a desired outcome.

Descriptive model: reveal how individuals actually make (made) decisions.

Explanatory models: look at what decisions were made and aim to provide an explanation of how they occurred.

Question 4

Why are the PDCA and DMAIC models limited?

Answer 4

Because they are limited to describing planning

Question 5

What is PDCA?

Answer 5

Question 6

What is DMAIC?

Answer 6

Question 7

Explain the rational decision-making model

Answer 7

Describes how individuals should behave in order to maximize some outcome.

• Another prescriptive decision-making model

Question 8

Rational choice vs Bounded rationality

Answer 8

Classic decision theory: Decision-makers are rational agents

Formal rationality: Quantitative calculations that are possible and applied

Substantive rationality: Calculations of value (of whatever kind)

Question 9

What is the link between perceptions and decision making

Answer 9

Question 10

What is the attribution theory

Answer 10

When we observe an individual’s behaviour, we attempt to determine whether it was internally or externally caused

Question 11

What 3 factors does attribution depend on?

Answer 11

Distinctiveness: showing different behaviours in different situations

Consensus: responding the same as others in similar situation.

Consistency: acting the same way over time.

Question 12

What are 2 fundamental attribution errors

Answer 12

Underestimating the influence of external factors

Overestimating the influence of internal/personal factors

Question 13

How is attribution an example of bounded rationality

Answer 13

Question 14

How do heuristics relate to biases?

Answer 14

Heuristics enable biases

Heuristics can come at a cost of accuracy

Errors in decision-making due to heuristics

Question 15

What are heuristics

Answer 15

“Rules of thumb” strategies

Reduce effort (information processing)

Often sub-conscious + implicit

Question 16

Name the 13 biases and their description

Question 17

What do Busenitz and Barnez (1997) say about individual differences in decision-making

Answer 17

Heuristics + biases impact strategic decision-making

Heuristics + biases can lead to effective + efficient decision-making (if environment = uncertain / complex)

Heuristics may + useful for entrepreneurs than managers of stable companies

Other indiv. diff. also impact decision-making (ex: sensation seeking)

Question 18

Explain the 3 environmental condition that Busenitz & Barney (1997) describe

Answer 18

Stable equilibrium

Bounded instability (or chaos)

Explosive instability

Question 19

Why are biases important for organizational decision-making?

Answer 19

“reduction in gain” effect amongst bankers & traders

“break even” effect amongst bankers & traders

Question 20

Explain the “reduction in gain” effect

Answer 20

• Trader’s risk aversion lessens as their financial performance (profit)
• Subsides as returns diminishes (and not to pre-profit level)

Question 21

Explain the “break even” effect

Answer 21

• Reduces risk aversion
• Lost money becomes increasingly attractive to win back (uncertain loss) rather than to fold (certain loss)
• Investment account closure research shows similar trend