Learning Objectives

Refer to Pages 137–167.

6.1: Describe why decision making is important to leader effectiveness.

Refer to Page 138.

Managers who collect information and use analytical techniques make decisions that are more effective and profitable. Decision making is a fundamental part of a leader’s job, and followers expect leaders to make the right decisions. As a manager, you will likely be promoted on the basis of your track record for making decisions that positively impact the organization (enhancing profitability, for example). Effective decision making can make or break an organization, and we have all heard the saying “the buck stops here,” which means that leaders must own the decisions they make.

6.2: Explain the rational decision-making model and bounded rationality.

Refer to Page 139.

One prevalent model of decision making presents a series of logical steps decision makers follow to determine the optimal choice. In this model, the problem (or opportunity) is defined, and then information is gathered and analyzed. Based on this information, a broad set of alternatives or possible courses of action are identified. Next, these alternatives are analyzed regarding the feasibility, costs, and benefits. A decision is based on the analysis of the alternative courses of action (i.e., the decision with the lowest costs and greatest benefit). The final step is to develop a specific set of action steps for the implementation of the decision. This model includes a number of assumptions. Decision makers must have complete information, be able to develop an exhaustive list of alternatives, weight them, and then choose a decision with the highest value and/or lowest cost to the organization. Decision makers have limits on their ability to assimilate large amounts of information, and this is known as bounded rationality. What this means is that decision makers simplify complex problems to limit the amount of information processing needed. Within the boundaries of this simplified model, they behave rationally. In addition to limiting the information analyzed, they also limit the number of alternatives considered. They accept the first acceptable alternative they encounter rather than continue their information search, analysis, and alternative generation until they find an optimal one.

6.3: Demonstrate understanding of prospect theory and the impact of framing on decisions with an example.

Refer to Page 141.

Prospect theory is a perspective that highlights the importance of uncertainty and risk to the decision-making process. Prospect theory explains why decisions are sometimes irrational. People put more emphasis on gains rather than losses; they make decisions that increase their gains and avoid loss. According to the theory, people treat the two types of risk (gain vs. loss) in a completely different way to maximize their perceived outcome. However, this may result in irrational decisions that are not based on a correct calculation of expected utility. Framing refers to whether questions are presented as gains or losses. Leaders must pay attention to how decisions are framed when they are presented. Real-world examples illustrate the role of framing in decision making and highlights the importance of considering both the probability of an outcome and the associated gain or loss from the decision. Examples could include a court case, casino gaming, lottery, and insurance.

6.4: Describe the role of intuition in decision making.

Refer to Page 144.

Intuition is when decisions are reached with little apparent effort, and typically without conscious awareness. Intuition has been described as follows: “the essence of intuition or intuitive responses is that they are reached with little apparent effort, and typically without conscious awareness. They involve little or no conscious deliberation.” Four characteristics comprise intuition: “a (1) nonconscious process (2) involving holistic associations (3) that are produced rapdidly which (4) result in affectively charged judgments.” Intuition may be a potential means of helping managers make both fast and accurate decisions. While research on such unconscious thought processes is new, available evidence supports the idea that intuitive processes should be considered part of a leader’s decision making.

6.5: List and explain major decision traps and how to avoid them: hindsight, hubris, and escalation of commitment.

Refer to Page 149.

Hindsight bias, also commonly referred to as the I-knew-it-all-along effect, is well established and has been shown to have far-reaching effects. Hindsight bias is defined as “the tendency for individuals with outcome knowledge (hindsight) to claim they would have estimated a probability of occurrence for the reported outcome that is higher than they would have estimated in foresight (without the outcome information).” Can be overcome by focusing on learning from past mistakes. Overconfidence bias is hubris, or inflated confidence, in how accurate a person’s knowledge or estimates are. Leaders may keep the overconfidence bias in check by assigning a trusted follower to critique the decisions (i.e., play the devil’s advocate role), by being open to different opinions, and by placing limits on their power by having someone else approve decisions (a peer, for example). Reminding oneself of past decision-making errors might be an effective way to keep the power effect on overconfidence in check. Escalation of commitment occurs when individuals continue a failing course of action after receiving feedback that shows it isn’t working. In effect, they try to turn the situation around by investing more after a setback. Can be overcome by: Separate the initial decision maker from the decision evaluator; create accountability for decision processes only, not outcomes; shift attention away from the self; and be careful about compliments.

6.6: Discuss the elements in Amabile’s three-component model of creativity.

Refer to Page 153.

Creativity is a function of three intersecting components: expertise, creative thinking skills, and motivation. Expertise refers to knowledge (technical, processes, and academic). Creative thinking skills are how adaptable and imaginative individuals in the organization are. Finally, motivation refers to the intrinsic form of motivation—the urgent need to solve the problem faced and not the monetary rewards expected.

6.7: Illustrate the role of leadership in supporting innovation of followers.

Refer to Page 158.

Leadership plays a role in enhancing creative problem solving. Employee innovative styles and intrinsic motivation combine with high-quality leader-member exchange to produce more creative performance and inventions from R&D personnel in a large chemical company. Creative problem solving and motivation matter, and leaders play an important role in encouraging their followers to be creative. High expectations for creative performance by a leader relates to employee capacity for creativity. Leader support also increases the degree of confidence employees have in their ability to be creative.