Chapter 3 Making Decisions

Learning Objectives
3.1 Describe the eight steps in the decision-making 3.3 Classify decisions and decision-making styles.
process. 3.4 Describe how biases affect decision making.
3.2 Explain the four approaches managers can use 3.5 Explain how technology can improve decision
when making decisions. making.

A bad decision can be costly for a company. As the COVID-19 pandemic

closed fitness centers and gyms in 2020, the high-end exercise equipment
company Peloton Interactive reacted to the surge in sales with a bad decision:
to invest in manufacturing to meet the increased demand. As a result, the
company spent millions on a factory it would never use. Company leadership
misjudged the surge in demand for its stationary bikes and made the decision
to build permanent production capacity. However, after the spike in sales in
2020, demand for the exercise equipment began to decrease, and a year later
sales were down by more than 40 percent. In response, the company not only
stopped building the new factory, but also laid off hundreds of workers.1
Decision making is the essence of management. Although some risk taking
in management is necessary, all managers would like to make good decisions
because they’re judged on the outcomes of those decisions. The leaders at Peloton
Inc. made a quick decision and misjudged the spike in sales. In this chapter, we
examine the concept of decision making and how managers make decisions.

Management Myth: Managers mostly just rely on “gut instincts” when making decisions.
Management Reality: Managers can make better decisions by understanding the decision-making
process.

THE Decision-Making Process

LO3.1 Describe the eight steps in the decision-making process.
decision Managers at all levels and in all areas of organizations make decisions; that is, they
A conclusion or resolution made after make choices among alternatives. For instance, top-level managers make decisions
considering alternatives
about their organization’s goals, where to locate manufacturing facilities, what new
markets to move into, or whether to cancel hit TV shows. Middle- and lower-level
 Chapter 3 Making Decisions 47

managers make decisions about production schedules, product quality problems,

pay raises, and employee discipline. Our focus in this chapter is on how manag-
ers make decisions. But making decisions isn’t something that just managers do.
All organizational members make decisions that affect their jobs and the organiza-
tion they work for.
Decision making is best understood as a process rather than just a choice.
Even for something as straightforward as deciding where to go for lunch, you do
more than just choose burgers or pizza or tacos. Granted, you may not spend a
lot of time contemplating your lunch decision, but you still go through the pro-
cess when making that decision. This eight-step process is as relevant to personal problem
decisions as it is to corporate decisions. We’ll use an example—a manager decid- A discrepancy between an existing
ing on which electronic standing desk to purchase—to illustrate the steps in the and a desired condition
process.

Step 1: Identify a Problem

Every decision starts with a problem, a discrepancy
between an existing and a desired condition.2 Let’s work
through an example. Amanda is a manager of a large cus-
tomer service center looking for new standing desks for
employees. The company is aware that employees’ overall
well-being is negatively affected by sitting for long peri-
ods and wants to select new desks that offer employees
the opportunity to stand during different times of the day.
Amanda needs to decide which standing desk the company
should purchase.
How do managers identify problems? Unfortunately,
in the real world, problems don’t come with neon signs
flashing “problem.” In this example, Amanda learned of
employee challenges of sitting for long periods from a well-
ness survey, but problems are not always obvious. Managers When making a decision about which standing desk to purchase, you can consider
have to be cautious not to confuse problems with symptoms decision-making criteria such as durability and height range.
of the problem. For instance, is a 5 percent drop in sales a Source: Andrey_Popov/Shutterstock
problem? Or are declining sales merely a symptom of the real problem, such as poor-
quality products, high prices, bad advertising, or shifting consumer preferences?

Step 2: Identify Decision Criteria

Once a manager has identified a problem, they must identify the decision criteria decision criteria
important or relevant to resolving the problem. Whether explicitly stated or not, every Criteria that define what’s important
or relevant to resolving a problem
decision maker has criteria guiding their decisions. In our example, Amanda decides
after careful consideration that the electronic control to move the desk up and down,
height range, durability, and ability for each employee to customize the desk are the
relevant criteria in her decision.3

Step 3: Allocate Weights to the Criteria

Rarely are the relevant criteria equally important. So the decision maker needs to
weight the items in order to give them the correct priority in the decision. How? A sim-
ple way is to give the most important criterion a weight of 10 and then assign weights
to the rest using that standard. Of course, you could use any number as the highest
weight. The key is assessing the relative importance of the criteria. The weighted crite-
ria for our example are shown in Exhibit 3-1.

Durability 10 Exhibit 3-1

Height range 8
Important Decision Criteria
Electronic control 6
Customization 4
48 Part 1 Introduction to Management

Exhibit 3-2 Electronic

Possible Alternatives Durability Height Range Control Customization
Uplift V2 7 8 6 9
Fully Jarvis 6 9 5 8
Vari Electric 8 7 7 5
NewHeightsXT 10 10 8 7
VertDesk v3 9 6 10 6

Step 4: Develop Alternatives

The fourth step in the decision-making process requires the decision maker to list via-
ble alternatives that could resolve the problem. In this step, a decision maker needs to
be creative, and the alternatives are only listed—not evaluated just yet. Our manager,
Amanda, has identified five standing desk options.

Step 5: Analyze Alternatives

Once alternatives have been identified, a decision maker must evaluate each one. How?
By using the criteria established in step 2. Exhibit 3-2 shows the assessed values that
Amanda gave each alternative after doing some research on them. (Note: This is just
an example. Our apologies to any standing desk manufacturer that might disagree
with Amanda’s analysis.)
Keep in mind that this data represents an assessment of the five alternatives using
the decision criteria, but not the weighting. When you multiply each alternative by the
assigned weight, you get the weighted alternatives, as shown in Exhibit 3-3. The total
score for each alternative, then, is the sum of its weighted criteria.
Sometimes a decision maker might be able to skip this step. If one alternative
scores highest on every criterion, you wouldn’t need to consider the weights because
that alternative would already be the top choice. Or, if the weights were all equal, you
could evaluate an alternative merely by summing up the assessed values for each one.
(Look again at Exhibit 3-2.)

Step 6: Select an Alternative

The sixth step in the decision-making process is choosing the best alternative or the
one that generated the highest total in step 5. In our example (Exhibit 3-3), Amanda
would choose the VertDesk v3 standing desk because it scored higher than all of the
other alternatives (222 total).

Step 7: Implement the Alternative

In step 7, the decision is put into action by conveying it to those affected and get-
ting their commitment to it. Research evidence indicates that if the people who must
implement a decision participate in the process, they’re more likely to support it than
if you just tell them what to do.4

Exhibit 3-3 Height Electronic

Evaluation of Alternatives Durability Range Control Customization Total
Uplift V2 70 64 36 38 208
Fully Jarvis 60 72 30 32 194
Vari Electric 80 56 42 20 198
NewHeightsXT 100 80 48 28 212
VertDesk v3 90 48 60 24 222
 Chapter 3 Making Decisions 49

Step 8: Evaluate Decision Effectiveness

The last step in the decision-making process involves evaluating the outcome or result
of the decision to see whether the problem was resolved. If the evaluation shows that the
problem still exists, then the manager needs to assess what went wrong. Was the problem
incorrectly defined? Were errors made when evaluating alternatives? Was the right
alternative selected but poorly implemented? In this example, Amanda can evaluate
the employees’ satisfaction with the desks, and in the long term she could look at
employee wellness measures.

APPROACHES to Decision Making

LO3.2 Explain the four approaches managers can use when
making decisions.
Although everyone in an organization makes decisions, decision making is particu-
larly important to managers. As Exhibit 3-4 shows, it’s part of all four managerial
functions. That’s why managers—when they plan, organize, lead, and control—are
called decision makers.
The fact that almost everything a manager does involves making decisions doesn’t
mean that decisions are always time-consuming, complex, or evident to an outside
observer. Most decisions are routine. For instance, every day of the year you make a
decision about what to wear. It’s no big deal. You’ve made the decision thousands of
times before. It’s a pretty simple decision and can usually be handled quickly. It’s the
type of decision you almost forget is a decision. And managers also make dozens of
these routine decisions every day; for example, which employee will work what shift
next week, what information should be included in a report, or how to resolve a cus-
tomer’s complaint. Keep in mind that even though a decision seems easy or has been
faced by a manager a number of times before, it’s still a decision. Let’s look at four
perspectives on how managers make decisions.

Planning Exhibit 3-4

What are the organization’s long-term objectives?
Decisions Managers
May Make
What strategies will best achieve those objectives?
What should the organization’s short-term objectives be?
How difficult should individual goals be?

Organizing
How many employees should I have report directly to me?
How much centralization should there be in an organization?
How should jobs be designed?
When should the organization implement a different structure?

Leading
How do I handle employees who appear to be unmotivated?
What is the most effective leadership style in a given situation?
How will a specific change affect worker productivity?
When is the right time to stimulate conflict?

Controlling
What activities in the organization need to be controlled?
How should those activities be controlled?
When is a performance deviation significant?
What type of management information system should the organization have?
50 Part 1 Introduction to Management

Managers must make decisions as they plan, organize, lead, and control.
Source: fizkes/123RF

Rationality
rational decision making We assume that managers will use rational decision making; that is, they’ll make
Deciding on choices that are logical and logical and consistent choices to maximize value.5 After all, if managers are anything,
consistent and maximize value they should be rational. This should include, for example, not allowing emotions or
expediency to influence their choices.

ASSUMPTIONS OF RATIONALITY What does it mean to be a “rational” decision

maker? A rational decision maker would be fully objective and logical. The problem
faced would be clear and unambiguous, and the decision maker would have a clear
and specific goal and know all possible alternatives and consequences. Finally, making
decisions rationally would consistently lead to selecting the alternative that maximizes
the likelihood of achieving that goal. These assumptions apply to any decision—
personal or managerial. However, for managerial decision making, we need to add
one additional assumption—decisions are made in the best interests of the organi-
zation. These assumptions of rationality aren’t very realistic. Managers don’t always
act rationally, but the next concept can help explain how most decisions get made in
organizations.

Bounded Rationality
Despite the unrealistic assumptions, managers are expected to be rational when mak-
ing decisions.6 They understand that “good” decision makers are supposed to do cer-
tain things and exhibit logical decision-making behaviors as they identify problems,
consider alternatives, gather information, and act decisively but prudently. When they
do so, they show others that they’re competent and that their decisions are the result of
bounded rationality intelligent deliberation. However, a more realistic approach to describing how managers
Decision making that’s rational but make decisions is the concept of bounded rationality, which says that managers make
limited (bounded) by an individual’s ability decisions rationally but are limited (bounded) by their ability to process informa-
to process information tion.7 Because they can’t possibly analyze all information on all alternatives, managers
satisfice
satisfice rather than maximize; that is, they accept solutions that are satisfactory and
To choose solutions that are satisfactory sufficient or “good enough.” They’re being rational within the limits (bounds) of their
and sufficient or “good enough” ability to process information. Let’s look at an example.
 Chapter 3 Making Decisions 51

Suppose you’re a finance major and upon graduation you want a job, preferably
as a personal financial planner at a major investment bank with a minimum salary of
$65,000 and within 100 miles of your hometown. After your first few interviews, you
accept the first job offer you receive, to be a business credit analyst—not exactly a
personal financial planner but still in the finance field—at a regional bank fifty miles
from home at a starting salary of only $57,500. If you had done a more comprehen-
sive job search, you would have discovered a job in personal financial planning at
an investment bank seventy-five miles from your hometown and starting at a salary
of $65,000. Exactly what you wanted! But you weren’t a perfectly rational decision
maker because you didn’t maximize your decision by searching all possible alterna-
tives and then choosing the best. Because the first job offer was satisfactory (or “good
enough”), you behaved in a bounded-rationality manner by accepting it.

Intuition
When Travis Kalanick, former CEO of Uber, conceived of the idea of surge pricing,
many of his executives and a good portion of customers thought it was a stupid idea.8
Charging customers more for service when demand is highest or driving more difficult
seemed foolish and sure to alienate customers. When all your competition has uniform
pricing, modifying Uber’s prices to match demand seemed irrational and certain to
kill business. But Kalanick stuck to his guns, and his decision proved smart. Business
boomed, and dynamic pricing is now an accepted aspect of Uber’s business model.
And companies across other industries have adapted the model, including Disney.
Like Travis Kalanick, managers often use their intuition to help their decision
making. What is intuitive decision making? It’s making decisions on the basis of intuitive decision making
experience, feelings, and accumulated judgment. Researchers studying managers’ use Making decisions on the basis of
of intuitive decision making have identified five different aspects of intuition, which experience, feelings, and accumulated
judgment
are described in Exhibit 3-5.9 How common is intuitive decision making? One survey
found that almost half of the executives surveyed “used intuition more often than
formal analysis to run their companies.”10
Intuitive decision making can complement both rational and bounded-rational
decision making.11 First of all, a manager who has had experience with a similar type
of problem or situation often can act quickly with what appears to be limited infor-
mation because of that past experience. Alternatively, recent research suggests that in
highly uncertain situations where further data gathering won’t make the right decision

Exhibit 3-5
What Is Intuition?
Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive Decision Making,” Academy of Management Executive,
October 1999, 91–99.

Managers make
decisions based on
their past experiences
Managers make Managers make
decisions based on decisions based on
ethical values or culture feelings or emotions
Experience-based
decisions
Values or ethics- Affect-initiated
based decisions decisions

Intuition

Subconscious Cognitive-based
mental processing decisions

Managers use data from Managers make

subconscious mind to decisions based on skills,
help them make decisions knowledge, and training
52 Part 1 Introduction to Management

any clearer, intuition can be useful.12 In addition, evidence indicates that individu-
als who experienced intense feelings and emotions when making decisions actually
achieved higher decision-making performance, especially when they understood their
feelings as they were making decisions. The old belief that managers should ignore
emotions when making decisions may not be the best advice.13

Evidence-Based Management
Much of Amazon’s success can be directly attributable to its reliance on data-driven
decisions.14 For instance, based on what customers have bought in the past, the items
in their virtual shopping cart, what items a customer has ranked or reviewed after pur-
chase, and what products a customer has viewed when visiting its site, Amazon is able
to provide relevant recommendations to customers and increase sales.
The logic of data-driven management decisions owes a lot to medical research. If
a patient is exhibiting unusual physical symptoms, doctors will rely on the best avail-
able evidence for proper diagnosis and treatment. The same applies to every decision
maker. Any decision-making process can be enhanced through the use of relevant and
reliable evidence, whether it’s buying a cell phone plan or deciding on a new office
evidence-based management location. That’s the reasoning behind evidence-based management (EBMgt), the
(EBMgt) systematic use of the best available evidence to improve management practice.15 And
The systematic use of the best available
that evidence might be hard computer data, the opinions of experts, or the prior expe-
evidence to improve management
practice rience of colleagues. In essence, EBMgt is an attempt to operationalize rationality.
EBMgt is obviously relevant to managerial decision making. Its four essential ele-
ments are (1) the decision maker’s expertise and judgment; (2) external evidence that’s
been evaluated by the decision maker; (3) opinions, preferences, and values of those
who have a stake in the decision; and (4) relevant organizational (internal) factors such
as context, circumstances, and organizational members. The strength or influence of
each of these elements on a decision will vary with each decision. Sometimes, the
decision maker’s intuition (judgment) might be given greater emphasis in the decision;
other times it might be the opinions of stakeholders; and at other times, it might be
ethical considerations (organizational context). The key for managers is to recognize
and understand the mindful, conscious choice as to which elements are most impor-
tant and should be emphasized in making a decision. Using evidence-based manage-
ment helps overcome individual biases and limitations of human judgment.16

TYPES of Decisions
LO3.3 Classify decisions and decision-making styles.
In a very simple sense, the problems managers encounter can be classified as routine
and familiar or new and unusual. In response, managers will use one of two different
types of decisions.

Structured Problems and Programmed Decisions

Some problems are straightforward. The decision-maker’s goal is clear, the problem is
familiar, and information about the problem is easily defined and complete. Examples
might include when a customer returns a purchase to a store, when a supplier is late with
an important delivery, how a news team responds to a fast-breaking event, or how a
structured problems college handles a student wanting to drop a class. Such situations are called structured
Straightforward, familiar, and easily problems because they’re straightforward, familiar, and easily defined. For instance, a
defined problems
restaurant server spills a drink on a customer’s coat. The customer is upset and the man-
ager needs to do something. Because it’s not an unusual occurrence, there’s probably
some standardized routine for handling it; for example, the manager offers to have the
programmed decision coat cleaned at the restaurant’s expense. This is what we call a programmed decision,
A repetitive decision that can be handled a repetitive decision that can be handled by a routine approach. Because the problem is
by a routine approach
structured, the manager doesn’t have to go to the trouble and expense of going through an
 Chapter 3 Making Decisions 53

involved decision process. The “develop-the-alternatives” stage of the decision-making

process either doesn’t exist or is given little attention. Why? Because once the structured
problem is defined, the solution is usually self-evident or at least reduced to a few alter-
natives that are familiar and have proved successful in the past. The spilled drink on the
customer’s coat doesn’t require the restaurant manager to identify and weigh decision procedure
criteria or develop a long list of possible solutions. Instead, the manager relies on one of A series of sequential steps used to
respond to a well-structured problem
three types of programmed decisions: procedure, rule, or policy.
A procedure is a series of sequential steps a manager uses to respond to a rule
structured problem. The only difficulty is identifying the problem. Once it’s clear, An explicit statement that tells managers
so is the procedure. For instance, a supply-chain manager receives a request from what can or cannot be done
a warehouse manager for 15 tablets for the inventory clerks. The purchasing man-
policy
ager knows how to make this decision by following the established purchasing
A guideline for making decisions
procedure.
A rule is an explicit statement that tells a manager what can or cannot be done. unstructured problems
Rules are frequently used because they’re simple to follow and ensure consistency. For Problems that are new or unusual and
example, rules about lateness and absenteeism permit supervisors to make disciplinary for which information is ambiguous or
incomplete
decisions rapidly and fairly.
The third type of programmed decision is a policy, a guideline for making a deci- nonprogrammed decisions
sion. In contrast to a rule, a policy establishes general parameters for the decision Unique and nonrecurring decisions that
maker rather than specifically stating what should or should not be done. Policies require a custom-made solution
typically contain an ambiguous term that leaves interpreta-
tion up to the decision maker. Here are some sample policy
statements:
• The customer always comes first and should always be
satisfied.
• We promote from within, whenever possible.
• Employee wages shall be competitive within community
standards.
Notice that the terms satisfied, whenever possible, and competi-
tive require interpretation. For instance, the policy of paying
competitive wages doesn’t tell a company’s human resources
manager the exact amount they should pay for a specific job,
but it does guide the manager in making the decision.

Unstructured Problems and

Nonprogrammed Decisions
Not all the problems managers face can be solved using pro-
grammed decisions. Many organizational situations involve
unstructured problems, new or unusual problems for
which information is ambiguous or incomplete. At the onset
of the COVID-19 pandemic, grocery store managers were
faced with several unstructured problems. How can we keep
our employees safe? How can we meet the needs of our cus-
tomers who aren’t able to come into our store? How do we
keep our shelves stocked when our suppliers aren’t able to
ship us products?
When problems are unstructured, managers must rely
on nonprogrammed decision making in order to develop
unique solutions. Nonprogrammed decisions are unique
and nonrecurring and involve custom-made solutions.
Grocery store managers decided on a variety of custom-
made solutions to address the problems created by the pan-
During the COVID-19 pandemic, many small grocery stores made non-programmed
demic. For example, even smaller grocery stores decided to decisions about how to service their customers, resulting in some stores offering a
offer some kind of curbside pickup process for customers curbside pickup process.
to purchase groceries without coming in the store. Source: Steve Skjold/Alamy Stock Photo
54 Part 1 Introduction to Management

Exhibit 3-6 Characteristic Programmed Decisions Nonprogrammed Decisions

Programmed Versus
Type of problem Structured Unstructured
Nonprogrammed Decisions
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or incomplete
Goals Clear, specific Vague
Time frame for solution Short Relatively long
Solution relies on . . . Procedures, rules, policies Judgment and creativity

Comparing Decision Types

Exhibit 3-6 describes the differences between programmed and nonprogrammed
decisions. Lower-level managers mostly rely on programmed decisions (procedures,
rules, and policies) because they confront familiar and repetitive problems. As manag-
ers move up the organizational hierarchy, the problems they confront become more
unstructured. Why? Because lower-level managers handle the routine decisions and
let upper-level managers deal with the unusual or difficult decisions. Also, upper-level
managers delegate routine decisions to their subordinates so they can deal with more
difficult issues.17

Decision-Making Styles
Put Maria and Jessica into the same decision situation, and Jessica almost always
seems to take longer to come to a solution. Jessica’s final choices aren’t necessarily
always better than Maria’s, she’s just slower in processing information. Additionally, if
there’s an obvious risk dimension in the decision, Maria seems to consistently prefer
a riskier option than does Jessica. What this illustrates is that all of us bring our indi-
vidual style to the decisions we make.
Research on decision styles has identified four different individual approaches to
making decisions.18 The basic foundation of this model is recognition that people dif-
fer along two dimensions. One of these dimensions is an individual’s way of thinking.
This builds on our previous discussion of approaches to decision making by propos-
ing that we have a preferred or fallback style. Some of us tend to be more rational and
logical in the way we think or process information. Rational types look at informa-
tion in order to make sure that it’s logical and consistent before proceeding to make a
decision. Others tend to be more creative and intuitive. Intuitive types don’t have to
process information in a certain order but are comfortable looking at it as a whole.
The other dimension describes an individual’s tolerance for ambiguity. Again,
some of us have a low tolerance for ambiguity and prefer order and certainty in the
way we structure information so that ambiguity is minimized. In contrast, some of
us can tolerate high levels of ambiguity and can process many thoughts at the same
time. When these two dimensions are diagrammed, they form four styles of decision
making (see Exhibit 3-7). These are directive, analytic, conceptual, and behavioral.
People using the directive style have low tolerance for ambiguity and seek ratio-
nality. They are efficient and logical, but their efficiency concerns result in decisions
being made with minimal information and with few alternatives assessed. Directive
types make decisions fast and they focus on the short run.
The analytic type has a much greater tolerance for ambiguity than do directive
decision makers. This means that analytic types are more comfortable than directives
when uncertainty is involved in a decision. Analytic managers would be best character-
ized as careful decision makers with the ability to adapt to or cope with new situations.
Individuals with a conceptual style tend to be very broad in their outlook and con-
sider many alternatives. Their focus is long range, and they are very good at finding
creative solutions to problems.
The final category—the behavioral style—characterizes decision makers who work
well with others. They’re concerned with the achievement of peers and those working for
 Chapter 3 Making Decisions 55

High Exhibit 3-7

Decision-Style Model
Source: A. J. Rowe and J. D. Boulgarides,
Analytic Conceptual

Tolerance for ambiguity

Managerial Decision Making (Upper Saddle
River, NJ: Prentice Hall, 1992), 29.

Directive Behavioral

Low

Rational Intuitive
Way of thinking

them and are receptive to suggestions from others, relying heavily on meetings for com-
municating. This type of manager tries to avoid conflict and seeks acceptance by others.
Dominant Style
Although these four categories are distinct, most managers have characteristics that
Backup Style
fall into more than one. It’s probably best to think in terms of a manager’s dominant
style and their backup styles. Some managers rely almost exclusively on their dominant
Some managers
style; however, more flexible managers can make shifts depending on the situation. exclusively rely on
Business students and people in the managerial ranks tend to score highest on the dominant style, others
analytic style. That’s not surprising given the emphasis that formal education, particu- adapts to situations.
larly business education, gives to developing rational thinking. For instance, courses
in accounting, statistics, economics, and finance all stress rational analysis.

Learning from
FA I L U R E James Dyson: A Man of a Thousand Failures
Sir James Dyson is a firm believer in failure. In fact, he says something that no one
it’s an essential part of his success. He has successfully could have devised, some-
internalized the famous quote by Thomas Edison: “I have thing that hasn’t existed
not failed. I’ve just found 10,000 ways that won’t work.” before and solves prob-
Dyson’s revolutionary Dual Cyclone vacuum cleaner, lems that haven’t been
which came out in 1993, was 15 years in the making. He solved before. Dyson
says he created 5,126 versions, which all failed, before he recognizes that the cre-
made one that worked. And although Dyson has found ative process inherently
success with other products, such as its hand dryers, comes with setbacks and
the company developed many products that never made dead ends, but he accepts
it to market. But even failed products help the company those setbacks and dead
learn. For example, the futuristic-looking Dyson Zone head- ends as worth the effort in
phones released in 2023 were born from a previous failure. order to create something
The noise-canceling, high-fidelity headphones that include revolutionary. And Dyson’s
an air purification mask came from technology that was approach proves that
originally developed for Dyson’s failed attempt at an elec- you can consistently cre-
tronic car. ate innovative products if
Sir James Dyson invented many
Dyson says he hires people who “embrace the fact you’re willing to let people
products and technologies by
that failure is interesting.” He views it as the essence fail in the process.19 understanding that to create something
of creativity. He argues that creativity means creating revolutionary, you must accept
setbacks and failures.
Source: ROUX Olivier/SAGAPHOTO.
COM/Alamy Stock Photo

M03A_ROBB0647_16_SE_C03A.indd 55 11/12/23 8:30 PM

56 Part 1 Introduction to Management

DECISION-MAKING Biases and Errors

LO3.4 Describe how biases affect decision making.
heuristics When managers make decisions, they may use shortcuts, or heuristics, to simplify or
Shortcuts that managers use to simplify speed up their decision making. Heuristics can be useful because they help make sense
or speed up decision making
of complex, uncertain, and ambiguous information.20 Even though managers may use
heuristics, that doesn’t mean those shortcuts are reliable. Why? Because they may lead
to errors and biases in processing and evaluating information. Exhibit 3-8 identifies
12 common decision errors of managers and biases they may have. Let’s look at
each.21

1. Overconfidence bias: Occurs when decision makers think they know more
than they do or hold unrealistically positive views of themselves and their
performance.
2. Immediate gratification bias: Occurs when decision makers want immediate
rewards and would like to avoid immediate costs. For these individuals, decision
choices that provide quick payoffs are more appealing than those with payoffs in
the future.
3. Anchoring effect: Occurs when decision makers fixate on initial information
as a starting point and then, once set, fail to adequately adjust for subsequent
information. First impressions, ideas, prices, and estimates carry unwarranted
weight relative to information received later.
4. Selective perception bias: Occurs when decision makers selectively organize
and interpret events based on their biased perceptions. This influences
the information they pay attention to, the problems they identify, and the
alternatives they develop.
5. Confirmation bias: Exhibited when decision makers seek out information that
reaffirms their past choices and discounts information that contradicts past
judgments. These people tend to accept at face value information that confirms
their preconceived views and are critical and skeptical of information that
challenges these views.

Exhibit 3-8 Overconfidence

Common Decision-Making Biases

Hindsight Immediate Gratification

Self-serving Anchoring Effect

Sunk Costs Selective Perception

Decision-Making
Errors and Biases

Randomness Confirmation

Representation Framing

Availability
 Chapter 3 Making Decisions 57

6. Framing bias: Occurs when decision makers

select and highlight certain aspects of a
situation while excluding others. By drawing
attention to specific aspects of a situation
and highlighting them, while at the same time
downplaying or omitting other aspects, they
distort what they see and create incorrect
reference points.
7. Availability bias: Happens when decision makers
tend to remember events that are the most recent
and vivid in their memory. This distorts their
ability to recall events in an objective manner
and results in skewed judgments and probability
estimates.
8. Representation bias: Occurs when decision
makers assess the likelihood of an event based
on how closely it resembles other events or sets In annual performance reviews, many managers fall victim to the availability bias when they
of events. Managers exhibiting this bias draw focus on recent employee behaviors rather than behaviors over the entire year.
analogies and see identical situations where they Source: New Africa/Shutterstock
don’t exist.
9. Randomness bias: Describes the actions of decision makers who try to create
meaning out of random events. They do this because most decision makers have
difficulty dealing with chance even though random events happen to everyone,
and there’s nothing that can be done to predict them.
10. Sunk costs error: Occurs when decision makers forget that current choices can’t
correct the past. They incorrectly fixate on past expenditures of time, money,
or effort in assessing choices rather than on future consequences. Instead of
ignoring sunk costs, they can’t forget them.
11. Self-serving bias: Exhibited when decision makers are quick to take credit for
their successes and to blame failure on outside factors.
12. Hindsight bias: The tendency for decision makers to falsely believe that they
would have accurately predicted the outcome of an event once that outcome is
actually known.

Managers avoid the negative effects of these decision errors and biases by being
aware of them and then not using them! Fortunately, some research shows that
training can successfully help employees to recognize particular decision-making
biases and reduce subsequent biased decision making over the long term.22 Beyond
that, managers also should pay attention to how they make decisions and try to
identify the heuristics they typically use and critically evaluate the appropriateness
of those heuristics. Finally, managers might want to ask trusted individuals to help
them identify weaknesses in their decision-making style and try to improve on those
weaknesses.
Although these individual strategies can help overcome biases in the decision-
making process, organizational leaders can also improve decisions by looking at how
decisions are made and taking steps to eliminate the biases that might be present.
For example, leaders can establish criteria for certain types of decisions to make sure
that decision makers aren’t focusing on just one potential outcome. Or they can pro-
vide decision makers diverse sources of information, such as organizational data and
stakeholder perspectives, to make sure that decisions aren’t made based on limited
information.23
58 Part 1 Introduction to Management

USING TECHNOLOGY to Improve Decision Making

LO3.5 Explain how technology can improve decision making.
The last 20 years have seen a dramatic change in the ability of managers to access data
and information. A major impetus for this change has been technology. For example,
retail giant Walmart has engaged data and technology to keep ahead of competitors.
In 2017 the company established Data Café, an integrated data analytics hub that
connects more than 200 internal and external data sets such as customer profiles and
transaction data. In 2019 the company started experimenting with artificial intelli-
gence solutions through its Intelligent Retail Lab. Embracing technology to sup-
port decision making has helped Walmart innovate with solutions such as sensors on
shelves to track inventory. This innovation not only allows the shelves to be restocked
in real time but also collects data to be used later to make decisions to improve cus-
tomer satisfaction and reduce costs.24
We conclude this chapter by exploring the use of technology to support and
improve organizational decision making.

WORKPLACE CONFIDENTIAL Making Good Decisions

Life comes with tough decisions. And so do jobs. The tough inaction. Too often we focus only on the risks associated
decisions start with choosing whether to accept an initial with change. You’re less likely to get caught up in deci-
job offer. They often continue with deciding who to befriend sion inaction if you also address the risks related to doing
and trust at work, whether or not to join a new work team or nothing.
accept a promotion to a new city, how to respond to a situa- We should also take a look at arguably the three most
tion that might compromise your ethics, or how to relay bad critical errors you’re likely to make in your decision making:
news to your boss. overconfidence, a short-term focus, and the confirmation
Let’s begin with the basic tenet that you can’t avoid tough bias. Although each is briefly mentioned in this chapter, let’s
decisions by ignoring them. The decision to do nothing is still take a closer look at them.
a decision. It’s a decision to maintain the status quo. It has been said that no problem in judgment and deci-
You can maintain the status quo by following either of sion making is more prevalent and more potentially cata-
two paths—one active and the other passive. You can ratio- strophic than overconfidence. Almost all of us suffer from
nally assess your current situation, identify your options, it. When we’re given factual questions and asked to judge
carefully review the strengths and weaknesses of these the probability that our answers are correct, we tend to be
options, and conclude that no new alternative is superior to far too optimistic. In general, we overestimate our knowl-
the path you’re currently taking. This active approach is fully edge, undervalue risk, and overestimate our ability to control
consistent with rational decision making. Our concern here, events.
however, is with the passive approach—where the current Studies have found that when people say they’re
path is followed only because you fail to consider your other 65 percent to 70 percent confident that they’re right, they’re
options. You don’t, for instance, want to find yourself regret- actually correct only about 50 percent of the time. And when
ting having spent 20 years in a go-nowhere job that you dis- they say they’re 100 percent sure, they tend to be only
liked because you avoided looking for other opportunities. 70 percent to 85 percent correct.
How do you counter the nondecision decision? The first To reduce overconfidence, begin by recognizing this
step is awareness. You can’t opt out of decisions by ignor- tendency and expect it to most likely surface when your
ing them. To do so is merely choosing to continue along confidence is extremely high or when accurate judgments
the path you’re on. That path may be the one you want, but are difficult to make. Next, adjust your confidence aware-
the astute decision maker recognizes that there are costs ness to reflect your level of expertise on an issue. You’re
associated with maintaining the status quo as well as with most likely to be overconfident when you’re considering
change. You also need to directly challenge the status quo. issues outside your expertise. Finally, directly address this
It’s not merely enough to know that doing nothing is a deci- bias by challenging yourself to look for reasons why your
sion. You also need to occasionally justify why you shouldn’t predictions or answers might be wrong.
pursue another path that’s different from the one you’re A lot of us suffer from the tendency to want to grab for
currently following. For example, why aren’t you looking immediate rewards and avoid immediate costs. If it feels
for other job opportunities? Finally, consider the costs of good, we want to do it now; if it implies pain, we want to
 Chapter 3 Making Decisions 59

postpone it. This immediate gratification bias explains why it’s Finally, the rational decision-making process assumes
so hard to diet, quit smoking, avoid credit card debt, or save that we objectively gather information. But we don’t. We
for retirement. Each comes with an immediate reward— selectively gather information so it confirms our current
tasty food, an enjoyable cigarette, an immediate purchase, or beliefs, and we dismiss evidence that challenges those
extra disposable money to spend. And each delays its costs beliefs. We also tend to accept at face value information that
to some nebulous future. confirms our preconceived views, while being critical and
If you see yourself as vulnerable to the immediate grati- skeptical of information that challenges these views.
fication bias, what can you do? First, set long-term goals Overcoming this confirmation bias begins by being hon-
and review them regularly. This can help you focus on the est about your motives. Are you seriously trying to get infor-
longer term and help you to justify making decisions whose mation to make an informed decision, or are you just looking
payoff may be far into the future. If you don’t know where for evidence to confirm what you’d like to do? If you’re seri-
you want to be in 10 or 20 years, it’s easier to discount your ous about this, then you need to purposely seek out contrary
future and live for the moment. Second, pay attention to both or disconfirming information. That means you have to be pre-
rewards and costs. Our natural tendency is to inflate immedi- pared to hear what you don’t want to hear. You’ll also need
ate rewards and underplay future costs. For instance, think to practice skepticism until it becomes habitual. In the same
about what it would be like to be retired with no savings and way that a defense attorney seeks contradictory evidence to
trying to live on a $1,200-a-month Social Security check. Or disprove a plaintiff’s case, you have to think of reasons why
look around for examples of people who didn’t plan for their your beliefs might be wrong and then aggressively seek out
future and now are suffering the consequences. evidence that might prove them to be so.25

Big Data
Big data is a term that refers to huge and complex sets of data.26 These data sets big data
are composed of so much information that traditional data-processing application Huge and complex sets of data
software is unable to deal with them. For instance, cloud-computing capacity now
can allow a room full of legal opinions to be put online. It used to take a lawyer
several days or even weeks to find relevant cases to support a client’s case, but now
it can be done in seconds. Similarly, football and basketball coaches and manag-
ers are using big data to guide drafting decisions and even play calling. Although
big data is captured in organizations and can support decision making, we are just
beginning to understand the impact that the use of big data has on overall organi-
zational performance. Emerging evidence does show that organizations that collect
a variety of types of data and invest the time into analyzing the data have improved
performance.27

Artificial Intelligence
Big data has opened the door to widespread use of artificial intelligence (AI). As
noted in Chapter 1, AI is using the power of computers to replicate the reasoning
functions of humans.28 It goes well beyond the simple “if-then” processing of com-
puter software. AI has the ability to learn and solve complex problems.
You already know how big data and AI are changing the lives of consumers with
products like Siri, Google Maps, Uber, and self-driving cars. But big data and AI,
along with machine learning, deep learning, and analytics, are rapidly changing how
managers make decisions.
Managers can use AI to either augment or automate decision making.
Augmenting means the manager still makes the decision, but it is supported by AI
software that provides the manager insights or guidance. For example, a lawyer
could use an AI program to draft legal contracts. The lawyer then remains involved
in the decision making by finalizing each contract, deciding which clauses to leave
in or take out of it. In other cases, AI could be used to automate decision mak-
ing. A lawyer could use a different AI software program to automate the contract
review process in a larger organization that has to process a lot of contracts. The
AI program could review contracts and automatically approve any that meet all
requirements.29
60 Part 1 Introduction to Management

Machine Learning and Analytics

machine learning AI increasingly facilitates machine learning and deep learning. The former is a
A method of data analysis that method of data analysis that automates analytical model building.30 It’s a branch
automates analytical model building of AI based on the idea that systems can learn from data, identify patterns, and
make decisions with little or no human assistance. You probably already realize
that Netflix uses AI and machine learning to make suggestions to you on what to
watch based on what you have watched in the past. But Netflix also uses machine
learning to help shape production offerings of original content produced by its
studio.31
Amy Hood, CFO at Microsoft, is credited with reshaping the way her com-
pany allocates spending and wins contracts by using machine learning tools.32 For
instance, she analyzed historical data from 750,000 customers to forecast sales
opportunities for each product, customer, and city worldwide. Another system
Hood installed predicts which customers need more attention and which are at risk
of defecting.
Deep learning is a subset of machine learning.33 It uses algorithms to create a
hierarchical level of artificial neural networks that simulate functions of the human
brain. Imitating the human brain, the nodes are connected like a web. This enables
machines to process data in a nonlinear fashion. A deep-learning system, for instance,
has allowed computers to identify skin cancers at a level equivalent to the best experts.
A deep-learning system was fed more than 100,000 images of malignant melanomas
and harmless moles. The AI program was then put up against 58 highly experienced
dermatologists. The AI program found 95 percent of the 300 melanomas versus
87 percent found by the doctors.34
Amy Hood, CFO at Microsoft, uses big data ChatGPT, a chatbot that uses deep learning to digest large quantities of text data,
to determine how to allocate spending and
is another AI tool that can support managerial decision making. The tool’s ability
forecast sales opportunities for the company.
Source: Jason Redmond/Reuters to interact with natural language can allow managers to pose questions and receive
responses more quickly than traditional analytic tools allow.35
A final term you should know is analytics. This is the use of mathematics, sta-
deep learning tistics, predictive modeling, and machine learning to find meaningful patterns and
Use of algorithms to create a hierarchical knowledge in a data set.36 The use of data analytics to help organizations achieve
level of artificial neural networks that their goals is probably best illustrated in the sports industry. In 2003, the book
simulate functions of the human brain Moneyball: The Art of Winning an Unfair Game, by Michael Lewis, gave the pub-
analytics lic a glimpse into the use of data analytics in professional baseball when about
The use of mathematics, statistics, 10,000 data points were available. Twenty years later, advancing technology such
predictive modeling, and machine as wearable devices have given baseball managers more than 10 billion data points
learning to find meaningful patterns and to work with to help make decisions on everything from player acquisition to fan
knowledge in a data set
retention.37

Technology and Human Judgment

When Google launched its new AI technology Bard in a Twitter ad in 2023, the com-
pany learned a tough lesson on the importance of human judgment. The inaugural
advertisement for the new chatbot responded inaccurately to a question about the
discovery of exoplanets. Social media users quickly pointed out the error, and in
the hours that followed, the stock value of Alphabet, Google’s parent company,
dropped by nearly $100 billion in response! Ironically, some social media users sug-
gested the company could have fact-checked Bard on Google.38
Although human judgment is far from perfect, it is likely not wise for companies
to rely entirely on AI for decision making, especially for unstructured or uncertain
decision environments. Some organizations are using decision-making approaches
that integrate human judgment and AI. Using AI to augment decisions, as noted pre-
viously, could take advantage of the strengths of both approaches while mitigating the
risks of relying on either. For example, AI can be used to confirm or test a decision
made by a human expert, or AI could support the expert by generating a number of
decision alternatives.39
 Chapter 3 Making Decisions 61

Marc Benioff, CEO of the cloud-based software com-

pany Salesforce, says that AI has changed the company’s
decision-making processes, thereby strengthening manage-
ment decisions. Salesforce’s AI software, called Einstein,
helps executives make decisions by providing information
and suggestions, but the managers ultimately make the deci-
sions. Benioff reports that Einstein has helped eliminate
bias in the decision-making process by limiting discussions
driven by personal agendas or organizational politics.40
We can state, unequivocally, that AI usage among all
businesses is sure to expand in the near future. And with
this trend toward using technology to access and interpret
information, managers will be less dependent on inconsis-
tent and incomplete data. There will be less need to rely only
on intuition. And, maybe most exciting, because AI soft-
Marc Benioff, CEO of Salesforce, has embraced the use of AI in managerial
ware can learn through experience, decisions will increas-
decision making.
ingly reflect the values and goals of the manager. The result Source: Abaca Press/Alamy Stock Photo
will be managerial decisions that more closely approach the
assumptions of rationality.

Chapter 3 PREPARING FOR: Exams/Quizzes

CHAPTER SUMMARY by Learning Objectives

LO3.1 DESCRIBE the eight steps in the decision-making process.
A decision is a choice. The decision-making process consists of eight steps: (1) iden-
tify the problem; (2) identify decision criteria; (3) allocate weights to the criteria;
(4) develop alternatives; (5) analyze alternatives; (6) select an alternative; (7) implement
the alternative; and (8) evaluate decision effectiveness.

LO3.2 EXPLAIN the four approaches managers can use when

making decisions.
First, the assumptions of rationality are as follows: the problem is clear and unambigu-
ous; a single, well-defined goal is to be achieved; all alternatives and consequences are
known; and the final choice will maximize goal achievement. Second, bounded rationality
says that managers make rational decisions but are bounded (limited) by their ability to
process information. Satisficing happens when decision makers accept solutions that are
good enough. Third, intuitive decision making means making decisions on the basis of
experience, feelings, and accumulated judgment. And fourth, using evidence-based man-
agement, a manager makes decisions systematically based on the best available evidence.

LO3.3 CLASSIFY decisions and decision-making styles.

Programmed decisions are repetitive decisions that can be handled by a routine
approach and are used when the problem being resolved is straightforward, familiar,
and easily defined (structured). Nonprogrammed decisions are unique decisions that
require a custom-made solution and are used when the problems are new or unusual
(unstructured) and for which information is ambiguous or incomplete. Individuals’
decision-making styles can be classified according to two dimensions: way of thinking
(rational or intuitive) and tolerance for ambiguity (low or high). These dimensions
result in four styles of decision making: directive, analytic, conceptual, and behavioral.