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MGT 3303, Managerial Decision Making 1

Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to:

3. Explore the psychological aspects of decision-making. 3.1 Describe the competitive escalation paradigm. 3.2 Explain how to avoid escalation of commitment in a decision-making scenario.

5. Explain how motivation and emotion impact managerial decision-making. 5.1 Analyze how motivation and emotion influence decision-making. 5.2 Illustrate how to minimize the effects of motivation and emotion on the decision-making process

of a current company. 5.3 Exemplify what happens when emotions collide with cognition.

Reading Assignment Chapter 6: Motivational and Emotional Influences on Decision Making Chapter 7: The Escalation of Commitment Unit Lesson Nonrational Decision-Making The emotional aspects of decision-making have been left out of the discussion so far. These aspects are not rational in the sense that they do not rely on logic or objectivity, but emotions are still important influences in the choices we make. One common element is risk tolerance or how well you handle uncertainty. For example, choosing to join a start-up may promise a big upside reward when compensation comes in the form of stock options that become valuable when the company is acquired. However, that comes at the cost of lower cash compensation with no certainty of higher reward; there is the risk that the company will fail to find a market for its goods or services and go out of business, rendering the stock options worthless. Your willingness to take on some risk will shape your decision. Other emotions can come into play. For instance, you may want to be close to friends and family or work for a company that gives you a sense of status or prestige. There may even be an emotional component to the criteria you have used (e.g., how you will feel about yourself if you accept a job at a company that pays more than the others even though you do not agree with some of its business practices). You also have to approach decisions knowing that you do not always have full and accurate information. That does not mean you should choose based on assumptions or instinct but, rather, that it is not possible to have confidence that you have perfect information—only the best that is available at the time of the decision. You cannot fully know what it is like to work at a job until you have actually done so. People can tell you what it is like, but you may perceive it differently. In that sense, the information you based your analysis on was limited by what was knowable; some things are only learned through experience. The ability to make decisions can improve as you are given more opportunities to make decisions. Stating goals, identifying alternatives and criteria, analyzing those alternatives, and finally making a choice all rely on a mix of skills, aptitudes, and heuristics that enable us to make sense of the options. These can be developed over time to improve your judgment and ability to make the right decision.

UNIT IV STUDY GUIDE Motivation, Emotion, and Commitment in Decision-Making

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Motivation and Emotions in Decision-Making The textbook gives some illustrations; one is called the footbridge dilemma, and the other is called the trolley dilemma. It outlines several different scenarios where you must decide to push one person off the bridge or pull a switch in order to save five people. It is quite interesting to read about how your emotions play into your decision. These examples lead to the explanation of two approaches to this type of decision-making. One is the utilitarian approach, which states that you should do what is good for the largest number of people. The other is called the deontological approach, which says that you should use your judgment in decision-making based on morals and beliefs that adhere to rules and duties in your society (Bazerman & Moore, 2013).

People’s emotions come into play and are a major factor in these scenarios. On one hand, you could argue it is better to kill one person to save five people. On the other hand, is it right for you to kill a person no matter what may happen to the other five people? As you study the examples, you will see that sometimes we follow our emotions and sometimes we do not; we may not apply our emotions in the decision-making process in a manner we might have chosen if we had longer to think about the decision. Because of temporary emotions or motivations (e.g., addiction, hunger, sexual stimulus), we may make impulse or inconsistent decisions that are not congruent with our long-term best interest. We will address three ways that emotions and motivation affect our decisions. First, we will discuss the dilemma of doing what we want to do versus doing what we should do. Second, we will discuss fairness perspectives that lead to self- serving decisions. Third, we will discuss how emotions influence our judgment (Bazerman & Moore, 2013).

When Emotions and Cognition Collide We have studied heuristics and how we automatically make decisions without much thought. In this unit, we will add strength to that theory by discussing the multiple-selves theory and the battle between our want self and our should self. These theories tie directly to the System 1 thinking and System 2 thinking covered previously. Some people constantly battle with their choices for food and exercise. The want self tells them to eat a large ribeye steak, potatoes with gravy, bread, a second helping of potatoes, and then a large helping of blueberry crunch for dessert. The should self says, “Wait a minute; slowly eat a small piece of steak, green beans, salad with a tablespoon of dressing, a small scoop of dessert, and no second helpings.” The want self says they can skip the exercise today and start back tomorrow. The should self says take a brisk 30-minute walk, stretch, do push-ups, and then lift weights for 15 minutes. Which self wins? They both do at times. The more a person puts controls in place to limit the want self and encourage the should self, the more successful he or she will be at doing the things that should be done. Many people battle with finances (e.g., spending needlessly and saving little). If we would put controls in place to limit credit cards, pay off balances every month, as well as have an automatic deduction for 401(k)s and savings, we would spend less and save more. Click here for an exercise about the multiple-selves theory. Be sure you have reviewed Chapter 6 before taking this quiz. Another concept we need to understand is referred to as discounting (Bazerman & Moore, 2013). The choices you make are a tradeoff between now and sometime in the future; therefore, the future choice should be discounted to some degree based on time (how far away the result of the choice is). Exponential discounting means discounting the same percentage for each future period. Hyperbolic discounting compares everything to the current time, and all future gains or losses are worth less than they are right now. These theories

In the trolley dilemma, a person has to decide whether to pull a lever that would kill one person to save five other people. What would you do? (Backer, n.d.)

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support that we are biased toward the present (Bazerman & Moore, 2013). They also support that when we make decisions about the future, our focus is on what we should do, but when we make decisions about today, we are more likely to do what we want to do. These differences between decisions made at different times (present versus future) go back to the vividness of events in the present that we discussed in Unit III. Earlier we discussed that our brains are activated in a different area for immediate reward than for a delayed reward. The result is that our brain dramatically overweighs the present reward and neglects the good that could result from the delayed reward. An example would be to buy a new car or keep the current one a few more years. A new car is great for looks, comfort, and features, but what about the higher payment and spent savings? An ice cream would really be a sweet- tasting splurge, but what about the potential weight gain or extra gym time or the increase in cholesterol or sugar levels? Most people find it hard to override the present reward and wait for the future, or delayed, reward. In 2008, the world experienced a financial crisis when the U.S. housing market crashed. This was a classic example of the tendency to overly discount the future value of mortgages. None of the responsible parties (borrowers, lenders, or politicians) anticipated the consequences of the short-term decisions that were made. What we need to learn from this want versus should self-awareness is to control our destructive impulses in short-term decisions. We should use our should self to plan and develop schemes in advance to control the want self. We need to have inflexible pre-commitment routines or plans in place that will make us effective decision makers. We need to acknowledge that we have internal inconsistencies, and the two competing selves cannot both be good for us (Bazerman & Moore, 2013). Set a date or time for when you should make a new car purchase unless you have a major breakdown or wreck. Establish periods to wait in between ice cream cone splurges, and stick to them. Simple but consistent strategies will result in more long-term benefits. We all have self-serving reasoning that biases our decisions. When we studied the confirmation heuristic in Unit II, we learned that when we receive information that is favorable, we accept it more readily. If we receive unfavorable or negative information, we are much more critical in our evaluation process of that information. Very smart and well-meaning people make biased decisions every day while they continue to believe that they are being fair and objective in their decision-making. They also feel and believe they are being ethical in their decision-making. For their behavior to be legally unethical, they must knowingly engage in unethical or criminal behavior (Bazerman & Moore, 2013). Emotional Influences on Decision-Making Some theories suggest that when we are in a good mood, we rely more heavily on heuristics, which results in System 1 thinking and, therefore, making more biased decisions. When we are in a bad mood, we tend to move toward System 2 thinking and are more deliberate, using our judgment in our decisions with less bias. The textbook argues that there is too much evidence to the contrary and that this is not true (Bazerman & Moore, 2013). Basic emotions such as happiness, sadness, fear, disgust, and anger are the same in every culture. These basic emotions activate stimuli in us that prepare us to respond in a certain way. Fear stimuli prepare us to flee. Disgust stimuli prepare us to purge. Sadness causes a focus on self. Anger stimulates us in a variety of ways including increasing confidence and decreasing risk sensitivity. Other emotions associated with our social characteristics include compassion and pride. These are more complex but are still associated with a particular mindset (Bazerman & Moore, 2013). All of these emotions can affect our mindset. For more information on this topic, watch the following short video. BBC Worldwide Learning. (2015, November 24). The importance of emotions in decision making and

personality [Video]. http://link.galegroup.com.libraryresources.columbiasouthern.edu/apps/doc/LSRCRZ030527188/AON E?u=oran95108&sid=AONE&xid=a564b1e6

Click here for a transcript of this video. One’s emotional state can play a part in the endowment effect, which states that the value of something is higher if you own it (Bazerman & Moore, 2013). If you are not careful, emotions can negatively affect financial

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decisions. Our perception of risk is tied to our emotions. The happier we are, the more optimistic we are. If we are sad, then we tend to be more pessimistic. Fear and anxiety can create risk-averse behavior, and anger can create risk-acceptance behavior. Weather has an influence on the mood and perceptions of a person. Cloudy days versus sunny days make a difference in how happy a person feels. Our swings in mood are because of the same mental processes that cause the confirmation heuristic studied in Unit II (Bazerman & Moore, 2013). We are better at remembering information that is consistent with our mindset than we are with remembering information that is inconsistent with our mindset. The anticipation of regret can drive our behaviors through emotions as well. Even if we cannot stop ourselves from feeling, we can limit how much we let our emotions affect us negatively and in the decisions we make. We sometimes are unaware of the influence of emotions in our decision-making. When we are angry, it is best to pause before making what could be irrational decisions based in our anger. Being aware of our emotional state is the key to controlling how our emotions can affect our judgment and bias our decisions. If we identify our emotions and their sources, we have a better chance of neutralizing their effects. An additional strategy for managing the negative impact of emotions in decision-making is assigning accountability to decision makers. If decision makers have to justify their decisions and be held accountable, they are more likely to use a rational approach (System 2 thinking) in the decision-making process and less likely to let emotions control the process (System 1 thinking) (Bazerman & Moore, 2013). Even though it is difficult to control our emotions, if we understand how they can influence our decisions, we can improve the process of decision-making. Motivation and the Escalation of Commitment We will now focus on a series of choices rather than a single choice. Most critical managerial decisions are the result of a series of choices. A particular type of bias associated with a series of choices is referred to as an escalation of commitment bias (Bazerman & Moore, 2013). This bias suggests that we have a tendency to escalate our commitment to our initial decision. Once we have made a decision, we will have to make other decisions related to our initial decision. Each subsequent decision supporting our initial decision means we have invested more time and energy based on our first decision. Now, we are vested in our initial decision. Therefore, if the initial decision was a bad decision, we may still have a tendency to justify our initial decision and look for supporting or confirming evidence that the decision will eventually be a good one. Inertia pushes us to continue on course because we feel we have too much invested to quit. Is it irrational to continue on the same course of action when evidence shows otherwise? We have to know when to quit. Persistence can lead to substantial rewards, but it can also lead to wasted time, energy, resources, and money. We need to hone our abilities so we can better determine which situations will payoff versus those that will not. In order to do so, we need to be able to understand that nonrational escalation (commitment to a course of action beyond a point that a rational model would pursue) has to be stopped. We have to realize that everything invested so far is considered a sunk cost and is not recoverable (Bazerman & Moore, 2013). These costs should not be considered for future decision-making. We should now only be evaluating the future costs and benefits of the alternative actions necessary for the best long-term commitments. The primary reason for escalation is self-justification. Once we make an initial decision on a course of action, anything negative is feedback that we do not want to hear. We tend to escalate our commitment to the initial decision by highlighting the positive feedback and ignoring the negative feedback while hoping that this action will lead to success. Individuals are more likely to escalate commitment than groups, but groups will escalate to a greater degree than individuals (Bazerman & Moore, 2013). It is important that managers be aware of the difficulty of separating initial decisions from future decisions. Managers should take steps to prevent nonrational escalation of commitment by providing a separation of duties for subsequent decisions or assigning different individuals or groups to evaluate future decisions that are based on the initial decision.

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In the previous paragraphs, we discussed unilateral escalation, which is associated with an individual or group decision. Now we turn to competitive escalation, which is caused by competition between individuals or groups. Competition feeds the escalation process (Bazerman & Moore, 2013). A strategy to identify competitive traps is to consider the perspective of the other decision makers and to try to accurately predict their decisions. Another strategy is to collude with the other decision makers to create win-win situations for all. Communication is the key to this success. In a

competitive situation, if we fail to see the perspective of others in the decision-making process, it can lead to financial loss. In a competitive situation, we somehow forget that our original objective was to make money, but our competitive spirit can change our objective to winning (which means beating the other decision makers). Our desire to win serves as an additional motivation. Psychological factors feed nonrational escalation in our decisions. One of the first steps to prevent that is to identify those factors. If you remember in Unit I, we discussed that we have a tendency to pay closer attention to confirming information than disconfirming information. We also discussed how we protect our initial decisions by seeking out supporting information about those decisions. Since we have chosen a particular path, we will then selectively filter information so we can maintain our commitment to that path. To offset our tendencies, we need to vigilantly search for disconfirming information to counterbalance the confirming information we intuitively seek (Bazerman & Moore, 2013). This is especially true in serial decisions where we have a natural tendency toward escalation. We also need to establish monitoring systems that help us keep a proper perspective and put a check on our perceptions when making a decision. A good way to do that is to seek an outside opinion to evaluate the alternatives to make sure we are not filtering out disconfirming information. This will help us reduce or eliminate our escalatory behavior. Another factor in escalation is considered as saving face. We may stick to a bad decision because we fear the opinions that others may have of us. We think that others will think badly of us for changing our minds or not sticking to our decisions. The key here is to make the best decision for the future, regardless of the decisions made in the past. We have already talked about sunk costs. Our focus should be our future costs and benefits. Businesses need to develop systems that reward good decisions, not decisions that foster status quo or nonrational decision-making. They should also constantly reassess the rationality of future commitments and learn to identify and address failed strategies in the early stages (Bazerman & Moore, 2013). This strategy can be accomplished if they keep motivations, emotions, and commitment in proper perspective.

Click here to test your knowledge of concepts learned in this unit. Be sure you have reviewed Chapters 6 and 7 before taking this quiz.

References

Bazerman, M. H., & Moore, D. A. (2013). Judgment in managerial decision making (8th ed.). Wiley. Backer, K. (n.d.). Yellow electric streetcar on tracks [Image]. Dreamstime. http://www.dreamstime.com Flynt. (2013, August 1). Business competition tug of war [Photograph]. Dreamstime.

http://www.dreamstime.com

Competition adds to the escalation process. (Flynt, 2013)