ULMS 351 Psychological Aspects of Decision Making
2014/15 Semester 1
First Tutorial
An introductory note on decision making
The main objective of ULMS351 is to provide students with the concepts and theories relevant to the cognitive and emotional aspects of decision-making at the individual, group and organisational
levels. The focus on the psychological perspective represented in this module is one of a number of theoretical approaches taken by researchers to study decision-making. This note is intended as a
broad introductory mapping of some decision-making theory. To pursue the various arguments in depth, you are advised to consult the extensive reading lists in the module handbook and references at
the end of this note.
First Tutorial Preparation
The purpose of the first tutorial is to help you locate the module topic amongst the range of theoretical perspectives found in the relevant research literature and to consider the organisational
context for the study of decision-making. During the tutorial programme you will also examine specific examples using a psychological approach to analysing practical cases.
Please read this note before you attend your first tutorial. Be prepared to raise any questions that occur to you.
General Introduction
Professor Helga Drummond has made a considerable contribution to our understanding of decision-making, through her empirical research, papers and books, (see your reading list for ULMS351).
It is also useful to recall the work of another eminent member of staff at University of Liverpool, Professor GLS Shackle. Shackle was an economist, who argued that the study of human decision-
making should not be confined to economics but should include human nature and action as a whole. He suggested that the study of decision requires cooperation between philosophers, psychologists,
economists, and historians, each having a contribution to make to our wider understanding of the concept.
This module will focus quite heavily on the psychological aspects of decision-making and a key part of this is to consider the ways that individual psychology can affect how a person makes a
decision. Many of the everyday micro decisions that we make are unconscious and we seem to do so without thinking. These micro decisions are involved in the myriad of things that get us through
the day, from deciding to get up and through until we decide to go to bed. Not all decisions are like that, because often they involve unfamiliar territory and us not knowing quite how the
consequences of our decisions will work out. In such situations we are forced to think more consciously about what we are doing.
In organisations managers have to make decisions that will affect the livelihoods of employees or strategic decisions that will affect the future well being of their organisations. Getting it wrong
here can be catastrophic. We would like to think that all the decisions we make, or are made by other people and that may affect us, are made rationally, that is, for good reasons and that they
do take into account our well being as well as that of others. However, we know that the world doesnt work like this all of the time. One of the problems with so-called rationality, is what
particular form of rationality is in use at the time of a decision? (Townley 2008). Decisions made for different reasons may be based on a rationality that does not meet our own needs or what is
good for us. So who decides what is meant by the good in any particular case? These sort of complex questions are addressed by philosophers, (see for example Blanshard 1961; Von Wright 1963;
Rawls 1971). Of course politicians are another group who presume to know what is good for us!
For the psychologist, individuals are frequently biased, prejudiced, illusory, limited or bounded in their knowledge, self interested and even downright immoral! They would appear to us to be
irrational. The complexity of decision is further compounded by economic environmental uncertainty. It is this complexity that we shall try to explore in this module.The problem of uncertainty in decision-making.
The unpredictability of action is not due to a lack of foresight or planning.(but because action).unleashes a chain of consequences into a web of human relationships that cannot be entirely
constructed in advance. (Fry 2009 on Hannah Arendt).
One of the problems in decision making is that it is a psychic act, however economists have traditionally externalised the phenomenon and explained it as un-problematically rational, assuming
that decisions are made in a known and stable environment in the best interests of all concerned. Shackle realised that a singularly economic approach to decisions is inadequate. Although his
argument is not a psychological he did raise awareness of the need to understand what really goes on in a persons mind, beyond the purely rational, when facing decision uncertainty. Uncertainty is
an area of study that interests many of the scholars you will encounter during this module. Shackle was interested how our popular notion of time as something stretched out behind and in front
of us, like an continuum connecting the past, present and future, complicates the way we deal with uncertainty in decision making.
How can we know the future consequences of what we decide now? There is after all only the present or what Shackle (1969) calls a moment in being, the past is it an extrapolation of what has
gone before like a continuous flow along the time axis, or is there a clear discontinuity between the present moment and the future. The notion of time for Shackle is not a mathematically informed
concept as it is for mathematicians and physicists, where all affecting variables of a particular act are known and measured. For example, when you turn on your mobile phone, the designers have
built in a series of events that will occur over a discrete time axis. During its power up these events are perfectly predictable and as a consequence, your phone will then be ready for use.
Designers can do this because they know exactly how each of the component variables in the phones circuitry will behave and how it will interact with other components and its systems in a designed
environment. This is an environment about which there is an extremely high degree of certainty, due to our scientific knowledge of the laws of physics.
The human future in social and economic systems is not like this, there are no similar laws of behaviour, (although many a tyrant has tried to make it so!). All the variables affecting the
outcomes of our decisions are not known and cannot be predicted because we cannot know how other people in the context of our decision, will react and behave given uncertain environmental dynamics.
This future can only be known in our imagination. Extended time or the calendar axis is a mental construct. Futurity is merely an aspect of the content of thoughts which are actual and in the
present, (Shackle 1969, p 14).Shackles (1969) main thesis is that decisions may be seen as empty decisions and non-empty decisions. The former is where the individual is making a choice amongst available acts and where past
history guides his/her knowledge of choice about which the decision-maker knows completely and for certain what consequences will result from any one of the available acts. In other words perfect
foresight. An example may be following the rules in a game, or bureaucratic procedures. In practice this is what administrators and managers actually do a lot of the time in organisations, where
the institutional logics, (Thornton, Ocasio and Lounsbury 2012), are constructed so that outcomes become more or less predictable.
Non-empty decision-making is, for Shackle (ibid), the interesting and proper object of study. He defines non-empty decision as choice that cannot be explained in every respect as an inevitable
consequence of what went on before; choice is a continuing act of creation not just a choice among options whose consequences are known, for example, an investment decision or a strategic
decision. Shackle regards decision as a cut, a point in time where initiative and imagination results in a truly creative act and its consequences cannot be foreseen. Decision becomes the
unending creation of history and as such the notion of probability as a distributional uncertainty variable is not useful. What is useful in this analysis is the notion of possibility as a
non-distributional uncertainty variable, which means discriminating between outcomes or consequences in degrees of possibility and their alignment with potential surprise. This can range from
no surprise at all to complete surprise, or in other words, the impossible. The decision-maker imagines the outcomes before the act of deciding, which is a solitary moment in which a transition is
created from one situation to another, (a cut), rather than it being an event in a time series as it would be seen by a physicist or a historian. This is an important revision in our familiar
concept of time; the future is there to be created not discovered. Adopting this perspective also explains why we have included an introduction to creativity and creative thinking as a part of
this module.
Decisions in practice.
Decision styles.
We know that some decisions need no conscious consideration from us, yet others need thinking about. Human psychology impacts on both of these and it is this impact that we will be largely
concerned about in this module.
One approach to understanding how different people make decisions is through the Myers-Briggs Personality Type Indicator. This is widely used by organisations as a way of helping people develop
their skills and widen their repertoire in problem solving and relating to others. Some companies use the MBTI in project team creation and development. The MBTI is designed to assess a persons
preferences in the way they use their mind, based on Jungian psychology. Carl Jung (1923) argued that humans are equipped with two distinct and quite different ways of perceiving: sensing and
intuition. Sensing is where we become directly aware of external reality through our five senses; intuition is an indirect perception by means of the unconscious. It appears that these two ways of
perceiving compete with each other for attention and as we grow up we tend develop our preference for one over the other. The sensing types are interested in what is around them in the world and
have little time or inclination in their attention to whatever is not sensed in reality. The intuitive type is more interested in possibilities beyond what is immediately presented by the senses.
In the MBTI these are represented by S and N. These preferences extend to personality traits, which result in a person looking at life and their world in a particular way.
There are also two ways of coming to conclusions from what is perceived, in other words, two different ways of judging. One is through thinking (T) the other is through feeling (F). Most people
would say that they make decisions sometimes by thinking or by a logical and impersonal process and at other times, through feeling or a personal and more subjective value approach. Again we
develop preferences for one of these ways over the other. We might enjoy thinking logically and not really want to trust our feelings; others might be happier drawing on their feelings with the
logic of thinking running in the background as a kind of minority activity.
Two further distinctions in our preferences are labelled Extraversion (E) and Introversion (I). The extraverts main interests are the outer world of people and things, the introvert is mainly
interested in the inner world of concepts and ideas. These are completely independent of the SN and TF preferences and so E and I types may have any combination of S-N or T-F. For example and IST
type might like to organise facts and principles associated with a situation, (useful in Law), whereas the EST type would like to organise the situation itself and to get things going, (useful in
Management).
Finally, another preference used to identify type is a judging attitude or a perceptive attitude. In the judging attitude a person will shut off perception, all the evidence is in, now there is the
need to make a decision. Using the perceptive attitude, a person will keep an open mind, consider the possibility of other options and the likelihood of more information coming to light, preferring
to defer or delay a decision.
These four preferences in the MBTI will appear in any combination and it is clearly of interest to all decision makers to be aware of their personal preferences so that they can not only be self
aware of how they approach problems but also to be able to develop in areas which could bring benefits of a wider range of approaches. A way to think about these is that E&I are about where I use
my functions of S-N and T-F, J&P are about how do I use these functions. An ENFP type prefers to work in the outer world of objects and people (E); perceive possibilities, relationships and
meanings of experience (N); subjectively and personally weigh values of choices and how it matters to others (F); be spontaneous in life, flexible, understanding and adaptive (P).
Decisions in Organizations
You will be aware that an organisation is essentially a decision-making unit and that decisions in organisations are taken by all employees, every day, in the normal course of their work,
irrespective of their position in the hierarchy. The differences between them may be quite varied, and could be seen in terms of whether decisions are routine or non-routine, the potential impact
and consequences of a decision, its time span and its complexity. Then there is the question of the individuals psychological and emotional makeup, which of course bureaucracies are intended to
remove from the decision making process.
Staff may make decisions by following clearly defined procedures or rules (empty decisions) and managers may also decide actions by interpreting broader corporate policies or strategies, where
perhaps a high degree of risk and the use of initiative and imagination are required, (non-empty decisions). A key point being that they are presented with choices in the course of their work,
where the knowledge of how best to make a decision will vary considerably as will the consequences, which will vary over a continuum of absolute certainty to absolute uncertainty, the perfectly
possible to the impossible.
It may be that the further up in the organisation hierarchy an individual is located, the less restrictive is the formal or rule based guidance they can draw upon in their decision-making, but the
greater will be the risks. Many managers find heuristics helpful which are tried and tested models of what to do when facing recognisable or similar problems experienced in the past. Heuristics
are a way of learning and reducing uncertainty inherent in all decisions where choices have to be selected according to the desirability of outcome and preferences of the decision maker. This
approach can save time and effort otherwise needed for the analysis of the problem; it is a handy short-cut for decision makers, (Bazerman and Moore 2009, call this System 1 thinking). The
disadvantage is that heuristics can defer decision makers from spending time on a more thoughtful analysis that may really be required by the situation they are facing.
Another practical problem in organisations is about who decides what, when and under what circumstances. An organisation is a social structure of roles, which by definition are interrelated. Quite
often in practice there can exist a degree of uncertainty and even confusion over who, (and in what role), should be making a decision under any particular set of circumstances. There are a number
of ways of that managers can deal with this problem, such as role clarification (recall that job descriptions are typically static and less useful in helping the job-holder understand the
interactions and dynamics of their role). Management consultants such as Deloittes offer a formal model for role clarification called a Decision Rights Model.
Many so-called team development approaches extend the inter-connectedness of roles in a hierarchy of objectives, roles, decision-making and interpersonal relations. If for example there is
confusion or different perceptions about what the objectives are then this perception will impact on how people interpret their roles, which in turns affects their understanding of who is supposed
to be deciding what and finally creates a deterioration in interpersonal relations. If these practical problems are not understood there is likely that lack of clarity contributes to further
confusion, conflict, political behaviour and ultimately poor or inappropriate decisions being taken that are detrimental to the organisation as a whole.
Individuals may make important decisions in organisations, but groups or teams often make many of the strategic decisions that have a high impact on the organisations strategic well-being. The
issues surrounding group and organisational decision-making will be included later in the lecture programme.Decision Theory some of the main arguments
For many students, especially if they are encountering decision theory for the first time, they may find it helpful to have at least a broad awareness of the main theoretical approaches discussed
in a voluminous literature on the subject. One of the reasons why decision theory can appear complex is because it is multi-disciplinary, meaning that theories are formed within the paradigmatic
limitations of a particular discipline. These differences inevitably lead to arguments and critical evaluations of each others perspective, which further increases confusion for the practitioners,
such as managers, who need and expect help and guidance on how to make good decisions. Economists, psychologists, sociologists, anthropologists and philosophers all have their particular research
paradigms through which they try to understand and explain the nature and practice of human decision-making. This is why Shackle argued for a multi-disciplinary approach to the topic, where each
adds something missed out by others.
In the next section we will briefly review the dominant research perspectives, this should help you to contextualise, locate, compare and evaluate for yourself, the variety of arguments offered by
researchers.
Managerial Rational Model
This is not so much a theoretical approach but it is the standard form of rational decision-making that many practising managers would recognize.
Referred to in Myers-Briggs personality indicator literature as the Zig-Zag model, it comprises 4 basic steps, although there are variations to be found in the management consulting and training
literature.
The Zig-Zag Model
Step 1. Identify/What is the situation? Gather the facts.
Step 2. Find new possibilities. Use your imagination.
Step 3. Analyze logically the effects of acting on each possibility.
Step 4. Weigh the human consequences of acting on each possibility.
On completion of the steps, the decision choice of action would be implemented and evaluated for its effectiveness. Further decisions may then be required depending on the a review of actual
outcomes.
It is called the zig zag model because of the way it aligns to different ways individual personality types use some but not all the steps, effectively short circuiting those steps they consider
unnecessary. For example some decision makers may only pay attention to Step 1 and Step 3, then decide. Other types may be more concerned with imaginative solutions (Step 2) and the consequences of
a decision on people (Step 4).Economics Rational Model
So called rational individuals will act in their best self-interest or where the value or utility of the decision outcome is calculated to maximize benefits and minimize costs. Alternative
courses of action are compared and choice is made according to their preferences, meaning that expected consequences of a decision are evaluated in terms of personal preference. Assumptions may be
made about the future, by calculating the probability or distributional uncertainty variable. For the rational decision maker it may be believed that the future could be predicated on the past.
Shackle (1969) took issue with this view and argued that there is no objective future outside our own minds and the notion of time as an extended calendar axis is a mental construct.
One of the main aspects of attention for us in this module is the apparent distinction between the rational approaches to decisions provided by Economics and the irrational nature of human
decision-making studied from a Psychological perspective. It is argued by economists that rational individuals will act in their best self-interest or according to their preferences, (expected
utility).
Psychological Models
Psychologists such as Dan Kahneman and Amos Tversky, (see your reading list), are more interested in why people often do not appear to make decisions as predicted by the economics model. That is
they appear to act in such a way that a rational observer would consider not to be in their best self-interest. Deviations from the rational, (the extent to which a person can offer reasons for
acting as they did), and understanding why these occur, has been the focus of psychologists, who argue that because people have cognitive biases, illusions and emotions these will cause them to
sometimes act irrationally. Another factor is that individuals will use heuristics (rule of thumb or short-cut models based on learned experience), in their decision making and that these
factors affect an individuals reasoning, especially when a more detailed and in-depth analysis is required before a decision can be made. For more on a critique of rationality versus irrationality
see Sturm (2012).
Bounded Rationality
In summary, economists tell us how decisions should be made; psychologists tell us why they cant be made in the way that economists predict. Sociologists and informed economists, such as James
March and Herbert Simon, have argued that neither the psychological nor economics view is telling the whole story. The economic perspective assumes that all decision makers have perfect knowledge
of all alternatives, consequences and preferences and that these will be considered at the time of decisions being made. Simon suggested the notion of Bounded Rationality (for a good explanation
of this see March 1994), by which he meant that it is impossible for human beings to possess the cognitive power to know everything about everything, decisions will therefore only be
satisficing and made with incomplete knowledge. This being the case, it may not be the cognitive biases or illusions of so-called irrational people who make poor decisions. Perhaps many people
are behaving rationally in their given situation, but are struggling with uncertainty and a limited knowledge, so they are just doing the best they can under difficult circumstances.
Which Rationality?
Barbara Townley (2008) based her analysis of rationality on the work of Michel Foucault and identified three groups of dominant rationalities, which she called Disembedded, Embedded and Embodied.
Within these groups were further identified seven forms of rationality, Economic,, Bureaucratic, Technocratic, Institutional, Contextual, Situational and Embodied or Emotional. This translates into
a further complication, because different decisions may be made within these different rationalities, each having their own logic or reasoning. For example, a decision may appear rational in a
bureaucratic sense, but will seem irrational when considered from a contextual or emotional rationality. Such differences in reasoning will surely create conflict in organisational and social
situations.
In summary, differences in decision-making may be down to personality styles as well as different rationalities in use at the time. See for example Busenitz and Barney (1997).
Philosophy has been there, done that and got the T-shirt!
There is however yet another strand to the debate on decision-making, from the philosophical perspective. This can be useful in helping to understand some of the moral or ethical dimensions of
decision-making, particularly in the context of corporate responsibility.
Philosophical debates focus attention on the morality and justice of decisions, Socrates argued that a person who really understood the difference between good and evil would choose the good,
because this is best for him or her (self interest). So decision consequences that lead to injustices would arise from either ignorance of what is best, or not knowing what is unjust, (bounded
rationality). In somewhat contrary manner, Aristotle argued that the idea of punishment presupposes the likelihood of doing wrong knowingly and the more complete a persons knowledge of the wrong
they are doing should therefore attract a greater punishment. This principle is embedded in the legal system and doing wrong knowingly is called akrasia.
The akratic faces a conflict between their imagination or unconscious phantasy and