MGMT20001 Chapter Notes - Chapter 7: Subjective Expected Utility, Decision-Making, Bounded Rationality
25 May 2018
School
Department
Course
Professor
Involves identifying, selecting and applying the best possible alternative
-
Decision making is the conscious process of making choices among alternatives with the intention of
moving towards some desired state of affairs
Subjective expected utility (SEU) is the probability (expectancy) of satisfaction (utility)
resulting from choosing a specific alternative in a decision
○
Selects the choice with the most satisfactory consequences through the calculation of
subjective expected utility (SEU)
-
The expected satisfaction or valence of the outcomes (utility)
○
The probability of those good or bad outcomes occurring (expectancy) by choosing that
particular alternative
○
All rational choice decisions rely primarily on two pieces of information
-
The rational choice paradigm is the view in decision making that people should, and typically do, use
logic and all of the available information to choose the alternative with the highest value
A problem is a deviation between the current and the desired situation
○
An opportunity is a deviation between current expectations and a potentially better
situation that was not previously expected
○
Identify problem or opportunity
1.
Programmed decisions follow standard operating procedures - optimal solution
has been identified and documented
▪
Non-programmed decisions require all of the steps because the problems are new,
complex or ill-defined
▪
Meta-decisions about whether to solve the problem alone or involve others, whether to
assume the decision is programmed or non-programmed
○
Choose the best decision process
2.
Begins by searching for read-made solutions
○
If an acceptable solution cannot be found, a custom-made solution is designed or an
existing one is modified
○
Discover or develop possible choices
3.
Requires all possible information about all possible alternatives and their outcomes
○
Select the choice with the highest value
4.
Implement the selected choice
5.
Evaluate whether the gap has been narrowed
○
Evaluate the selected choice
6.
Rational choice decision-making process:
Impossible to apply in reality because people are not and cannot be perfectly rational
-
Problems with the rational choice paradigm:
Rational Choice Paradigm of Decision Making
Monday, 12 March 2018
5:21 PM
OB Page 1
Employees point to external factors rather than their own faults
○
Suppliers market their new products as unique opportunities and competitor products
as problems
○
Decision makers fall prey to constructed realities
○
Stakeholder framing - stakeholders highlight or hide information
-
People fall into this trap because they have been reinforced by past successes
○
Decision makers are comforted by closure to problems
○
Solution-focused problems - describing the problem as a veiled solution
-
Result may be a misguided effort to solve an ill-defined problem or resources wasted on
a poorly identified
○
Decisive leadership - announcing problems or opportunities before logically assessing the
situation
-
Screening out information that threaten their self-concept
○
More common when decision makers have limited options to solve the problem
○
Perceptual defence - blocking out bad news as a coping mechanism
-
Mental models may blind decision makers from seeing unique problems or
opportunities
○
If an idea doesn't fit the mental model, it may be quickly dismissed as unworkable or
undesirable
○
Mental models - decision makers are victims of their own problem framing due to existing
mental models
-
Problems with problem identification:
Becoming aware of the problem identification biases
-
Leaders require considerable willpower to resist the temptation to look decisive when a more
thoughtful examination of the situation should occur
-
Create a norm of "divine discontent" - never satisfied with the status quo, creating a mindset
that more actively searches for problems and opportunities
-
Discussion of the situation with colleagues
-
More effective identification:
Identifying Problems and Opportunities
Monday, 12 March 2018
5:35 PM
OB Page 2
Have well-articulated and agreed-on organisational goals
-
Efficiently and simultaneously process facts about all alternatives and the consequences of
those alternatives
-
Choose the alternative with the highest pay-off
-
The rational choice paradigm of decision making assumes that decision makers:
Bounded rationality is the view that people are bounded in their decision-making capabilities,
including having access to limited information, limited information processing and a tendency
towards satisficing rather than maximising when making choices
Organisational goals are often ambiguous, in conflict and lack full support
-
Problems with goals:
Evaluate a few alternatives
○
Only some of the main outcomes of those alternatives
○
Decision makers have limited information-processing abilities
-
New alternatives are compared to an implicit favourite (a preferred alternative that the
decision maker uses repeatedly as a comparison with other choices)
○
Tend to ignore problems with the implicit favourites and the advantages of the
alternative
▪
Over-weight factors on which the implicit favourite is better
▪
People distort information to support their implicit favourite over the alternative choices
○
Decision makers evaluate alternatives sequentially
-
Tend to compare alternatives rather than evaluate against objective criteria
▪
Anchoring and adjustment heuristic - a natural tendency for people to be influenced by
an initial anchor point such that they do not sufficiently move away from that point as
new information is provided
○
Easier to remember emotional events
▪
Easier to recall recent events
▪
Availability heuristic - a natural tendency to assign higher probabilities to objects or
events that are easier to recall from memory, even though ease of recall is also affected
by non-probability factors
○
Representativeness heuristic - a natural tendency to evaluate probabilities of events or
objects by the degree to which they resemble (are representative of) other events or
objects rather than on objective probability information
○
Decision heuristics distort either the probability of outcomes or the utility of those outcomes
-
Problems with information processing:
Selecting the first alternative that exceeds a standard of acceptance for their needs and
preferences
○
Occurs because alternatives present themselves over time
○
When presented with a large number of choices, people may not make a decision
at all
▪
People lack the capacity and motivation to process the huge volume of information
required to identify the best choice
○
People engage in satisficing - selecting an alternative that is satisfactory or good enough,
rather than the alternative with the highest value
-
Problems with maximisation:
An opportunity is usually experienced as an exciting and rare revelation, so decision makers
have an emotional attachment to the opportunity
-
Motivates decision makers to apply the opportunity and short-circuit any detailed evaluation
-
Evaluating opportunities:
Searching for, Evaluating and Choosing Alternatives
Monday, 12 March 2018
5:48 PM
OB Page 3
Document Summary
Decision making is the conscious process of making choices among alternatives with the intention of moving towards some desired state of affairs. Involves identifying, selecting and applying the best possible alternative. The rational choice paradigm is the view in decision making that people should, and typically do, use logic and all of the available information to choose the alternative with the highest value. Selects the choice with the most satisfactory consequences through the calculation of subjective expected utility (seu) Subjective expected utility (seu) is the probability (expectancy) of satisfaction (utility) resulting from choosing a specific alternative in a decision. All rational choice decisions rely primarily on two pieces of information. The expected satisfaction or valence of the outcomes (utility) The probability of those good or bad outcomes occurring (expectancy) by choosing that particular alternative. A problem is a deviation between the current and the desired situation.
