The Behavioral Aspects of Decision Making and Decision Makers
A. THE DECISION-MAKING PROCESS
Definition
The process of decision-making has been likened to cognitive functions such as reflection, execution, and problem-solving. As a result, there are
numerous interpretations, each serving a distinct purpose. In organizational settings, decision-making is typically defined as the process of
choosing from among several potential actions, each with implications for the future.
Sequence of Decision-Making Steps
Similar to many social endeavors, the process of organizational decision-making can be dissected into a sequence of successive stages.
A. Recognition and Definition of a Problem or an Opportunity.
This initial phase can be triggered by adverse events, perceived risks, or potential opportunities for advancement. To identify and outline these
issues and opportunities, decision-makers rely on various types of information, including environmental, financial, and operational data. Insights
into external environmental conditions may reveal new prospects for products or markets, as well as threats to the current state. Financial or
operational data can alert management to immediate concerns that require attention, such as budget overruns indicating discrepancies
between actual and projected performance in specific departments.
The inclination of decision-makers toward action is influenced by factors such as education, experience, temperament, personality traits, and
other behavioral factors. Some managers prefer to maintain the status quo and only respond to significant unforeseen events. Conversely,
others are sensitive to even minor discrepancies and persist until a satisfactory solution is identified and implemented.
Once a problem or opportunity requiring focus is identified, it is crucial to meticulously define it. In complex situations, this task is most
effectively accomplished by a diverse team with varying educational backgrounds and expertise. Such an approach helps mitigate the limitations
associated with an individual's singular perception of the issue. For example, while elucidating a problem, a marketing manager may attribute it
to sales or sales-related factors, while accountants may point to excessive costs or deficiencies in control. Production personnel might emphasize
flaws in raw materials, overly brief production cycles, or organizational shortcomings.
B. Search for Alternate Courses of Action and Quantification of Their Consequences
Once the problem or opportunity has been defined, the process proceeds to exploring alternative courses of action and assessing their potential
outcomes. During this stage, efforts are made to identify and evaluate as many practical alternatives as feasible. Often, this search commences
by examining analogous issues encountered in the past and the actions taken to address them. If a previous course of action yielded favorable
results, it is likely to be repeated. Conversely, if it was ineffective, the quest for additional alternatives will be expanded.
Quantifiable aspects will be represented through monetary evaluations of the advantages and drawbacks linked with each alternative. These
assessments will undergo refinement and reassessment if the alternative is deemed viable and deserving of further consideration. Non-financial
assessments will be converted into revenue and cost figures whenever feasible. However, not all aspects of an alternative can be quantified. In
such instances, pertinent benefits and trade-offs are documented.
C. Choosing the Optimum or Satisficing Alternative
The most pivotal phase of the decision-making process entails selecting one among the available alternatives. Despite seeming rational, this
decision is often influenced more by political and psychological factors rather than purely economic considerations.
Managers tasked with making the ultimate decision may confront several viable options, each presenting distinct advantages according to the
chosen decision criteria. Additionally, managers are mindful of the "political" implications—both the benefits and costs—associated with each
alternative.
D. Implementation and Follow-Up
The effectiveness of the ultimate decision hinges on the efficacy of its execution. Successful implementation relies on individuals with control
over organizational resources, such as finances, personnel, and information, being fully dedicated to ensuring its success. Ideally, this
authority over resources is wielded by the decision's sponsors. To ensure efficiency in implementation, it is crucial to provide regular
feedback on results and promptly address any unfavorable deviations.
Cognitive Motive
The cognitive drive plays a pivotal role in decision making as it activates the thought process. Within the decision-making framework, two key
components of the cognitive drive are particularly relevant: (1) the need for equilibrium or assurance, and (2) the need for intricacy and
diversity.
Our inherent need for balance drives our longing for predictability, familiarity, and structure, motivating us to ensure that the components of an
idea align consistently. This drive prompts both conscious and unconscious processes to make sense of information that may be uneven,
ambiguous, or uncertain. On the other hand, our complexity drive spurs us to seek stimulation and exploration, prompting both conscious and
unconscious efforts to gather new information from memory or the environment, which the balance drive then organizes.
In decision-making, two key aspects are the level of complexity and the degree of predictability (certainty or uncertainty). When considering
predictability, a distinction can be made between programmed and un programmed decisions. Programmed decisions involve clear decision
rules that can be formulated and applied, whereas un programmed decisions are characterized by inherent unpredictability. In un programmed
decision scenarios, decision rules or criteria emerge gradually through trial and error as the decision-making process unfolds.
The need for equilibrium is rooted in our inclination towards predictability, familiarity, and structure. It drives our inclination to ensure
coherence among the components of a concept. This drive stimulates both conscious and unconscious cognition to decipher imbalanced,
ambiguous, or uncertain information.
Based on the aspects of complexity and predictability, researchers in behavioral science have devised four distinct categories of decision models:
1. Basic programmed decision models
2. Basic non programmed decision models
3. Elaborate programmed decision models
4. Elaborate non programmed decision models
Types of Process Models
1. Economic model
The conventional model presupposes that all human behaviors and choices adhere to perfect rationality and that within an organization, there
exists coherence among different motivations and objectives. It operates under the assumption that all potential options are identifiable and
that the probabilities linked to these options can be precisely computed. Decisions are not influenced by individual preferences but are instead
governed by the consistent objectives of the organization.
Social model
This model stands in stark contrast to the economic model. It posits that humans are fundamentally irrational and that decisions are primarily
shaped by social interactions. It suggests that peer pressure and societal expectations serve as the predominant motivational factors.
Satisficing model
This model, rooted in Simon's notion of the administrative man, offers a more practical and applicable approach. It regards humans as rational
beings capable of thinking, processing information, making decisions, and learning. However, it acknowledges the limitations of human
rationality. Individuals are constrained by their sequential information processing abilities and never have access to complete information,
making it challenging to evaluate extensive data sets. Consequently, human behavior in these circumstances tends towards satisficing rather
than optimizing. People tend to consider a problem resolved as soon as they identify a feasible, "acceptable" solution.
ORGANIZATIONAL DECISION MAKING
The Firm as a Decision-Making Unit
A firm can be likened to a decision-making entity akin to an individual in many aspects. The decision challenges confronting a firm are manifold
and intricate, often involving multiple departments or activities. Some decisions are recurrent or routine, occurring regularly, while others are
unique and nonrepetitive. To manage the multitude of decisions it faces, organizations establish formal or informal "standard operating
procedures" for recurring problems. These procedures aim to yield solutions consistent with overall goals and expectations. These standard
operating procedures essentially become "decision rules" for routine decisions across various domains such as inventory management, costing,
pricing, and order processing. Decisions made based on these predefined decision rules are referred to as programmed decisions.
A. Quasi Resolution of Conflict
An organization comprises individuals with diverse goals that often clash. Given that decision-making entails selecting alternatives that
align with overarching goals and expectations, mechanisms for resolving goal conflicts are essential. Classical decision theory posited
that conflict could be mitigated through the application of local rationality, acceptable sublevel decision rules, and sequential attention
to goals. Local rationality involves breaking down decision problems into subproblems and delegating them to specific subunits within
the organization for resolution.
B. Uncertainty Avoidance
When organizations make decisions, they consistently face uncertainty stemming from both their internal operations and external
environment. Consequently, modern decision theory has dedicated a significant portion of its focus to addressing the challenges of
decision-making under conditions of risk and uncertainty. The remedies proposed predominantly entail quantitative approaches,
involving statistical decision methodologies aimed at determining certainty equivalents (such as expected values) and tools designed to
manage uncertainties (including game theory, simulation, and other probabilistic decision models). Despite these advancements, Cyert
and March discovered that organizational decision-makers often resort to less intricate strategies when confronted with risk and
uncertainty. They characterize the behavior of decision-makers as follows:
(1) Instead of needing to accurately forecast events far into the future, they employ decision rules that prioritize immediate responses
based on short-term feedback, rather than trying to anticipate long-term uncertain occurrences.
(2) Rather than having to predict the future reactions of other elements in their environment, they establish a negotiated environment.
They impose plans, standard operating procedures, industry norms, and contracts designed to absorb uncertainty on that environment.
Essentially, they create a reasonably manageable decision-making scenario by steering clear of planning reliant on predictions or
uncertain future events and by emphasizing planning where the plans can be self-affirmed through some form of control mechanism.
C. Problemistic Search
The key aspect of the decision-making process lies in exploring different options and assessing their potential outcomes. Cyert and
March introduced a theory of organizational search to complement decision-making concepts, employing the term "problemistic
search." They characterized it as the process of seeking a resolution to a particular problem or identifying a response to an opportunity.
This search is purposeful, aimed at achieving a specific objective, rather than being driven by random curiosity or merely seeking
understanding.
D. Organizational Leaming
While organizations don't learn in the same manner as individuals, they do display adaptive behavior facilitated by their employees.
They develop the ability to focus on certain aspects of the environment while disregarding others, as well as to prioritize certain criteria
over others. Once a specific search strategy identifies a viable solution to a problem, organizations tend to replicate that approach when
addressing similar issues in the future.
People- The Organizational Decision Makers
It's crucial to recognize that individuals, rather than organizations themselves, identify and define problems or opportunities, and they seek out
alternative courses of action. Individuals are responsible for selecting decision criteria, choosing between optimal or satisfactory alternatives,
and implementing decisions.
The organizational context in which individuals operate depends on the nature of the decision problem or opportunity at hand. Decision
problems vary in complexity, with some being simple and others complex. Problems are considered complex when they are poorly defined and
lack structure, and when the search for a solution is itself intricate.
Simple, everyday problems are often tackled by individual employees who possess specialized training and experience relevant to the problem
area. For recurring and routine decisions, they typically rely on predefined decision rules or standard operating procedures.
Strengths and Weaknesses of Individuals as Decision Makers
Human rationality stems from their ability to think, make decisions, and learn. However, this rationality is constrained because individuals
typically lack complete information and can only process available information in a step-by-step manner.
Various factors influence the limitations of rational decision-making among individuals:
1. The level of knowledge they have about all potential alternatives and their potential outcomes.
2. Their cognitive styles, which encompass critical thinking, analytical skills, reliance on others, associative capabilities, and more. It's understood
that no single cognitive style is inherently superior, as different approaches may yield acceptable results depending on the specific problem.
3. Their evolving systems of values.
4. Their tendency to prioritize satisfactory outcomes over optimal ones, a phenomenon known as "satisficing." In such cases, individuals seek
outcomes that are satisfactory rather than aiming for the best possible outcome.
The Role of Groups as Decision Makers and Problem Solvers
The group's capacity to critically analyze problems, define and evaluate alternatives, and make sound decisions might be compromised by two
behavioral phenomena: groupthink and the risky-shift or group discussion effect.
A. The Groupthink Phenomenon
Groupthink refers to circumstances in which the desire for conformity within a group discourages individual members from expressing
unpopular ideas or viewpoints. As a result, the group fails to objectively assess unconventional or minority perspectives. Individuals
holding dissenting opinions from the prevailing majority feel compelled to conceal or alter their true beliefs and sentiments. They yield
to group pressure in order to maintain a positive group dynamic and avoid being seen as disruptive. Despite the potential for their
dissent to enhance group discussions, they may lack the courage to oppose the prevailing consensus.
B. The Risky-Shift Phenomenon (Group Discussion Effect)
The phenomenon known as the risky-shift effect, or the influence of group discussion, is another outcome of human interaction. It is
characterized by groups selecting more aggressive and risky options compared to what individuals might choose if they were making
decisions independently. J.P. Campbell et al. describe this phenomenon as follows: "Caution, which members privately feel, may not be
communicated in a group setting, creating the perception that other participants are more daring. Once again, we observe a group
dynamic where participation can result in a smoothing out rather than a sharpening of differences among members."
C. Group Cohesiveness
Group cohesiveness refers to the extent to which members of a group are drawn to one another and share the group's objectives.
Groups characterized by high cohesiveness typically exhibit greater effectiveness in decision-making scenarios compared to groups
marked by internal conflict and a lack of cooperative spirit among members. The level of group cohesiveness is affected by various
factors, including the duration of time spent together by members, the intensity of initiation into the group, the size of the group,
potential external threats, and the group's history of success or failure.
D. Decision Making by Consensus versus Majority Rule
Another contentious issue pertains to whether decisions should be reached through consensus or by majority rule. Consensus in
decision-making is described by Holder as "unanimous agreement among all group members on the decision choice." Typically, achieving
consensus requires extensive discussions and careful evaluation of all advantages and disadvantages. Beyond merely ensuring accuracy,
consensus is believed to encourage individuals to openly share their knowledge and expertise, motivating them to communicate all
pertinent information.
E. Controversy Caused by Superior/Subordinate Relationship
In decision-making groups comprising both superiors and subordinates, conflict is bound to arise due to the differing perspectives
stemming from the distinct information available to superiors and subordinates. The efficacy of the decision-making process heavily
relies on how effectively the superior addresses this conflict. Despite common perceptions, the presence of conflict in decision-making
situations doesn't always undermine group functionality. On the contrary, when managed adeptly and constructively by the superior,
conflict can often lead to improved decision-making outcomes.
F. Influence of Power Bases
In decision-making scenarios, an individual's capacity to influence the outcome often hinges on the authority or power granted by the
organization. The primary components of power typically cited include position power, expert power, resource power, and political
power. It is common for individuals to possess multiple types of power and to deploy them to varying degrees in different decision-
making contexts.
Position power emanates from an individual's position within the organization, which encompasses the authority, responsibilities,
duties, and functions associated with it. While possessing decision-making authority is generally regarded as legitimate and is commonly
leveraged to shape decisions, it does not automatically translate into effective leadership. Particularly in complex and intricate
situations, personal qualities and expertise are more pivotal in fostering effective leadership than mere position power.
NOVICE VERSUS EXPERT DECISION MAKING
The decision-making process is additionally influenced by the level of prior experience in decision-making among the individuals involved. A
recent investigation by Bouwman revealed several noteworthy distinctions in the strategies, approaches, and specific data chosen by experts
and novices when making decisions based on accounting or other financial information.
Examination of Information
Examination was defined as the process of scrutinizing the provided information and selecting only those facts deemed particularly pertinent for
the current decision-making task.
The research indicated that both experienced individuals and newcomers interpret financial information in qualitative terms and employ similar
methodologies (such as calculating ratios, identifying trends, and analyzing cash flow statements). However, there are differences in the
combination of methods used. Experts rely more on heuristics than novices and examine data from a greater number of years. Their analysis is
guided by an intuitive understanding of the company, which furnishes them with a structured checklist to aid their selective data exploration.
Integration of Observations and Findings
In this scenario, integration refers to categorizing observations based on either cause-and-effect relationships or functional aspects of the firm.
Novices tend to connect observations that mutually support each other while disregarding those that do not. Conversely, experts focus
extensively on identifying potential contradictions in observations and findings as a method to uncover underlying issues.
Reasoning
Novices perceive reasoning as determining the timing for identifying which observed facts are the primary issues. Conversely, experts view
reasoning as the process of mentally constructing "a depiction of the current situation." They achieve this by employing systematic techniques
that yield shortcuts while maintaining the logical sequence in their analysis.
THE ROLE OF PERSONALITY AND COGNITIVE STYLE IN DECISION MAKING ___
Given that individuals are the ones making decisions, a considerable amount of research has focused on how psychological differences influence
decision-making.
Individual psychological differences can be categorized into two main groups: personality and cognitive style. Personality pertains to the
attitudes or beliefs held by individuals, while cognitive style refers to the methods or approaches individuals use to receive, store, process, and
transmit information. It's worth noting that individuals with the same personality type may exhibit different cognitive styles, employing diverse
methods when it comes to receiving, storing, and processing information. Similarly, individuals with vastly different attitudes and beliefs may
demonstrate similar cognitive styles. In decision-making situations, personality and cognitive styles interact and can either enhance or diminish
the impact of accounting information.
THE ROLE OF ACCOUNTING INFORMATION IN DECISION MAKING
To enhance the significance of accounting information, accountants have shown growing interest in comprehending the role of accounting
within the broader organizational decision-making process. Management decisions, by definition, influence future events or actions. These
decisions may impact a singular future event or have ramifications for all subsequent events or actions following the decision. Once a decision
has been executed, no event or action can be modified.
Accounting Data as Stimuli in Problem Recognition
Accounting serves as a stimulus in problem recognition by highlighting discrepancies between actual performance and standard or budgetary
objectives, or by alerting managers to their failure to meet predetermined output or profit targets. For instance, a decrease in the inventory
turnover ratio will draw management's focus to inventory levels and sales, while a decrease in accounts receivable turnover may indicate issues
with credit granting or collection practices. However, the effectiveness of periodic accounting ratios, performance reports, and other attention-
directing accounting data in stimulating solutions depends on various factors.
Impact of Accounting Data in the Decision Choice
Not all managers utilize accounting data when assessing the comparative profitability or attractiveness of alternative courses of action. The
importance assigned to accounting information in the final decision-making process varies significantly. This can be influenced by the extent to
which it is perceived to alleviate some of the uncertainties inherent in the decision-making process.
For instance, historical sales and cost data may serve as an initial estimate of future demand for products previously sold. However, for new
products, managers cannot solely rely on accounting information. Instead, they are likely to seek external sources of information, such as their
competitors' experiences with similar products or the potential for generating customer demand for innovative new items (e.g., personal
computers, video recorders, car telephones, etc.).
Behavioral Hypotheses of Accounting Data Impact
In the last twenty years, researchers have proposed theories about the circumstances in which accounting information influences decision-
making processes.
As previously mentioned, accounting information constitutes just one component of the decision-making model. Inputs may include financial
data, non-financial data, or even qualitative factors. It is the responsibility of the decision-maker to determine the relevance of each input.
Accounting information will only impact the outcome of a decision if the decision-maker deems it pertinent to the type of decision being made.
A. Feedback
To comprehend alterations in an accounting method or terminology and to adapt the decision-making criteria accordingly, the decision-
maker needs to be made aware of the change directly or receive some form of indirect notification. Employing internal and external
auditing to verify any substantial modifications in accounting methods or terminology is a method of uncovering discrepancies in the
accounting system's performance compared to its expected or assumed performance.
B. Functional Fixation
This behavioral phenomenon indicates that users of accounting information often fail to delve deeper into the meanings behind the
labels assigned to specific numbers. Once they adopt an accounting term or measurement approach as the framework for organizing
their decision-making process, their behavior is typically resistant to changes in accounting methods or terminology. If outputs from a
different accounting method are labeled with the same terms (such as profits, costs, etc.), individuals who lack understanding of
accounting are likely to overlook the fact that alternative methods were employed in generating the output.
DIAGNOSIS OF THE DECISION DILEMMA AND SUGGESTIONS FOR A BEHAVIORALLY SOUND APPROACH
Aliprandi's uncertainty regarding which decision-making style to adopt is justified. He clearly understands that his initial decision will be closely
scrutinized by managers across the organization and perceived as a reflection of the new organizational culture. This perception will not only
influence their decision-making processes but also impact all other aspects of their work. The manner in which he behaves will be synonymous
with his leadership approach, particularly considering that only Miller, the finance vice-president, and potentially the corporate controller have
prior experience working with him.
