Topic 3. Individual and group decision making

1. Individual decision-making

2. Group decision making: approaches and techniques

3. Advantages and disadvantages of individual and group decision making

4. Leadership styles and decision making

5. Voting rules and the Condorcet Paradox

Making decisions is a large part of managing organizations. Some organizations operate with high emphasis on individual decision-making, while others focus on collaboration and group decision-making processes. Either approach can work. In deciding which approach to choose, it is helpful to understand the specificity as well as pros and cons) of each decision-making approach and how they relate to the organization in question.

1. Individual decision making

Individual decision making assumes that a decision is made by a single person without a group's input. This is the more traditional decision making approach and can work effectively for a manager when the group's input is not required.

The decision-making process is influenced by individual differences of managers. Individual differences include, in particular, professional qualification, intellectual level, personal traits ) (high energy, concern with achievement, independence of judgment (self-confidence, creativity, etc.), moral values, propensity for risk) and others. Each of them has a significant impact on decision making.

Propensity for risk is one specific aspect of personality. Decision makers vary greatly in their propensity for taking risk when exposed to uncertainty. Rational behavior is characterized by individual’s maximizing his/her utility function. Under conditions of risk individuals maximize their expected utility (expected payoff) (Expected utility is calculated taking into account probabilities of certain outcomes. For example, a coin is tossed to decide whether the person receives $100 (heads) or nothing (tails)[1]. The probability of each outcome is 0.5 (50 %). The expected utility is calculated as

EU = $100×0.5+0×0.5=$50

Let us use this example to show three possible attitudes to risk.

A person is said to be:

· risk-averse (or risk-avoiding- if he or she would accept a certain payment of less than $50 (for example, $40), rather than taking the gamble and possibly receiving nothing.

· risk-neutral (- if he or she is indifferent between the gamble and a certain $50 payment.

· risk-loving (or risk-seeking) (- if he or she would gamble even when the guaranteed payment is more than $50 (for example, $60).

Graphically represented corresponding utility functions (the utility of wealth ) will be concave for a risk-averse individual, linear for a risk neutral one, and convex (for a risk-lover (Figure 1).

Figure 1. Utility functions reflecting different attitudes to risk

Decision makers with different propensities for risk will establish different objectives, evaluate and select alternatives differently in the same situation. For example, risk aversion or low propensity for risk is the tendency to choose alternatives that are associated with fewer risks and less uncertainty. Unfortunately, this tendency can cause managers to avoid risky decisions that may produce novel ideas and potentially high payoffs (

Other important factors that influence individual decision making include past experiences, a variety of cognitive biases that affect decision maker’s perception, individual differences, including age and socioeconomic status, and other.

Past decisions influence the decisions people make in the future. When something positive results from a decision, people are more likely to decide in a similar way, given a similar situation. On the other hand, people tend to avoid repeating past mistakes. This is significant to the extent that future decisions made based on past experiences are not necessarily the best decisions.

Perception can be described as the way in which we interpret messages from our senses to provide some order and meaning to our environment. An individual's perception can influence how he/she makes decisions and solves problems. For example, when information about a problem needs to be gathered the individual's perception will have impact on where the information is sought and the type of information regarded as relevant.

Sometimes sticking to (a decision or course of action is important, but sometimes it is a dangerous tendency that results in magnifying (the impact of a poorly made decision. Escalation of commitment) is a tendency to invest additional resources, including time and money, in an apparently failing course of action, influenced by effort and resources already invested.

People escalate their commitment to decisions in their personal lives as well. Many relationships continue not because of an optimistic future outlook but because the individuals involved in the relationship feel they have spent so much time together and their lives have become so intertwined that leaving is too costly.

It is important to understand not only what forces influence a decision maker before a decision is made, but also what happens after a decision has been made. Specifically, behavioral scientists (focus their attention on post-decision anxiety (which is called cognitive dissonance). In other words, the decision maker has doubts and second thoughts (about the choice he/she made. This anxiety or cognitive dissonance will be greater if the decision is psychologically, financially, or strategically important, if the forgone alternatives have many attractive features. The potential for dissonance is influenced heavily by one’s personality, specifically one’s self-confidence and persuasibility

When dissonance occurs, people can reduce it by admitting that a mistake has been made and taking corrective actions. However, many decision makers are reluctant to admit mistakes and try to reduce their cognitive dissonance by the following methods:

1) seeking information that supports their decision;

2) understating the importance of negative aspects and exaggerating the importance of positive aspects of their decision;

3) finding deficiencies in the rejected alternatives.

These ways of reducing cognitive dissonance may be harmful to organizational effectiveness.

Date: 2015-01-29; view: 3853