Eight to Late

Sensemaking and Analytics for Organizations

On the nature of decision-making in organisations

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Introduction

Decision-making is a key activity at all levels in an organisation. All employees make decisions: from the front-line employee who has to decide how to handle a difficult customer to an executive who has to choose between projects that are competing for funding. Given this it is no surprise that a vast body of knowledge – decision theory – has been developed to support the process of decision making.

Decision theory concerns itself with rational decision making– that is, decisions that are based on an objective evaluation of available options and their consequences, leading to a choice that is made on the basis of such an evaluation alone.  In reality, though, many decisions are not made this way.  In this post I look at the different ways in which decisions are actually made  in organisations,  drawing on a brilliant essay by James March entitled, How Decisions Happen in Organizations.

Decision making as a rational process

The standard view of decision making is that it is a  process of rational choice based on:

  1. Knowledge of alternatives
  2. Knowledge of the consequences of each of the alternatives
  3. Ordered preferences by which  consequences can be evaluated
  4. Rule(s) by which a particular alternative can be selected

In its basic form, decision theory assumes that each of the above is fully known. As March states:

In the most familiar form of the model, we assume that all alternatives, the probability distribution of consequences conditional on each alternative, and the subjective value of each possible consequence are known; we assume a choice is made by selecting the alternative with the highest expected value. This emphasis on expected value may be moderated by a risk preference (i.e.,some value associated with the variability of the outcome distribution).

However, there are a number of challenges to this ideal picture of decision-making. These include:

  1. Uncertainty about consequences of actions: The standard theory of rational choice assumes that decision-makers have knowledge of all possible outcomes of actions. However, this is not possible because humans are boundedly rational – their ability to seek and process information is limited by their cognitive abilities and available resources. Quite often it happens that consequences reveal themselves only after a decision has been made and implemented. As March mentions, “…management requires tolerance of the idea that the meaning of yesterday’s action will be discovered in the experiences and interpretations of today…”
  2. Uncertainty about preferences:  The standard theory assumes that preferences are stable and consistent. Quite often, it happens that preferences change with time and different preferences can be inconsistent with each other.
  3. The role of risk:  Typically, in theories of rational decision making risk appetite (of an individual or organisation) is treated as a single fixed number. In reality, it varies with situational factors such as level of threat to survival, excess resources available etc. Moreover, it also depends on the (often unarticulated) hopes and fears of individuals who are making the decision.
  4. Conflict between decision makers: Rational theories of decision making assume that conflict between decision makers can be resolved by (rationally!) evaluating conflicting alternatives and choosing the best one based on an agreed decision rule. The problem is that in such situations it is often impossible to come up with such a decision rule. Negotiations over criteria can go on interminably and conclude without agreement.  March suggests that the reasons why decisions get made despite this is that people rely on trust and reputation rather than formal agreements in order to reach a consensus.

So as we see, the rational view of decision making has less practical relevance than one might expect. It is part of the story of decision making, but definitely not the whole tale.

Decision making as a rule-based activity

An alternate logic of decision making is that of following rules, obligations and duties; doing what is appropriate rather than what is rational. As March puts it:

Much of the decision-making behavior we observe reflects the routine way in which people do what they are supposed to do. For example, most of the time, the majority of people in organizations follow rules, even when it is not obviously in their self-interest to do so. Much of the behavior in an organization is specified by standard operating procedures, professional standards, cultural norms, and institutional structures. The terminology is one of duties and roles rather than anticipatory, consequential choice.

Within a logic of appropriateness, people make decisions by mapping the aspects of the decision  they are required to make to what is appropriate in such situations. In particular, they consider the following:

  1. Situation: what kind of a situation is this?
  2. Identity: who am I? What kind of position do I hold in the organisation?
  3. Determining an appropriate choice: What should a person like me (or in my position) do in this kind of situation?

In such a process the focus is on doing what is right (as per the rules) rather than searching for rationally determined best choice.

The interesting question is how these rules come into existence.  March describes  three ways in which this happens:

  1. Rules are developed through experience and are modified by feedback on what worked well and what didn’t. In this view organisations create rules.
  2. Rules are selected (rather than developed) based on their suitability for a group or organisation.   In this view, rules have an existence independent of organisations.
  3. Rules spread from organisation to organisation – much like “fads or measles.” In this view, rules are created in  idiosyncratic ways (through an innovative or quirky choices made by an individual, say) and then, if they are successful, are copied others. Many popular management practices have their roots in such fads.

Summarising:  decisions can be based on appropriate choices rather than rational ones.

Decision making as a contingent event

The views of decision making embodied in the logic of rationality and appropriateness assume that the cause-effect relationships between decisions and outcomes are well understood and that organizational rules and hierarchies actually control outcomes. However, in reality things tend to be less straightforward.  For example:

  1. Many things happen at the same time, each competing for the attention of decision makers. The attention a decision maker gives to a problem thus depends on the other things that are on her mind at the time.
  2. Individual perceptions of situations vary, thus making the formulation of a decision problem difficult (in effect, making it a wicked problem).

In cases such as these, the decisions are contingent on factors that have nothing to do with the decision itself.  As examples, an executive who is distracted by personal problems may not give enough attention to a decision problem at hand and a bunch of stakeholders who cannot agree may end up making a decision that cannot be justified via rationality or appropriateness.

Decision making as a byproduct of other factors

The assumption underlying the foregoing discussion is that decisions affect outcomes and hence that decisions matter. However, as March points out:

Descriptions of decision arenas often seem to make little sense in such terms. Information that is ostensibly gathered for decisions is often ignored. Contentiousness of the policies of an organization is often followed by apparent indifference about their implementation. Individuals fight for the right to participate in decision processes, but then do not exercise the right. Studies of managers consistently indicate that very little time is spent making decisions. Rather, managers seem to spend time meeting people and executing managerial performances.

Based on the above, March makes the interesting point decision making is often a ritual activity that has little to do with the actual decision itself. The process of making a choice provides decision makers opportunities to do other things such as:

  1. Presenting and justifying their viewpoints to their peers.
  2. Distributing credit or blame for what has occurred.
  3. Reaffirming loyalties and friendships
  4. Socialising!

An aspect of decision making made highlighted in the previous section is that there are many competing demands on a decision maker’s attention – for example, family, friends or personal goals. This is true in general: in the course of our lives, we are presented with a steady stream of choices, opportunities and problems. The degree to which each of these hold our attention depends on a host of factors including (but not restricted to) our values, duties and priorities. Because of these concurrent or nearly concurrent issues, the attention we give to a decision problem is closely linked to events that have recently occurred or are anticipated in the near future, and the priorities we assign to these.  In such  situations, the logic of decision making is temporal (dictated by time) rather than consequential or rule-based. In other words, our decisions depend on recent events and our immediate (or recent) environment.

Conclusion

In this article I have summarised various views of decision making drawing on the work of James March. We have seen that the official line about decision making being a rational process that is concerned with optimizing choices on the basis of  consequences and preferences  is not the whole story. Our decisions are influenced by a host of other factors, ranging from the rules that govern our work lives to our desires and fears, or even what happened at home yesterday. In short: the choices we make often depend on things we are only dimly aware of.

Written by K

February 23, 2012 at 10:36 pm

8 Responses

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  1. An excellent summary of the referenced paper. Thanks for writing this up. I’ll link to this in my blog.

    Like

    John Goodpasture

    February 24, 2012 at 4:02 am

  2. Thanks John – your feedback is greatly appreciated!

    Regards,

    Kailash.

    Like

    K

    February 24, 2012 at 6:03 am

  3. Thank you, helpful as usual! And thank you for linking to the March paper.

    Like

    Bob

    February 24, 2012 at 8:35 pm

  4. Bob,

    Thanks for reading! I’m glad you found the article useful.

    Regards,

    Kailash

    Like

    K

    February 24, 2012 at 10:42 pm

  5. […] I have discussed in an earlier post, the standard view of decision-making is that choices are based on an analysis of their […]

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  6. Re: Wicked Problems, you might like to know about this recent publication:

    “Wicked Problems – Social Messes: Decision support Modelling with Morphological Analysis”. Springer, 2011.

    You can see a description at:

    http://www.springer.com/business+%26+management/technology+management/book/978-3-642-19652-2

    Regards,

    Tom Ritchey
    SweMorph

    Like

    Tom R.

    August 31, 2012 at 9:24 am

  7. […] as I have discussed in a post on the nature of decision making in organisations, in the case of complex decisions not only is it hard to identify all options and their […]

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  8. […] above is not news to observers and scholars of organisational life – see this post, for example. However, a not-so-well-appreciated dimension to the objective/subjective debate on […]

    Like


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