Individual vs Group Decision Making, Biases in Decision Making, General Motors Failure - Term Paper Example

DECISION MAKING IMPORTANCE IN CONTEXT OF MANAGERIAL DECISIONS TABLE OF CONTENTS 1. INTRODUCTION 2. VARIOUS MODELS 3. INDIVIDUAL vs. GROUP DECISION MAKING 4. BIASES IN DECISION MAKING 5. GENERAL MOTORS 6. ANALYSIS OF FAILURE OF GM 7. RECOMMENDATIONS 8. REFERENCES 1. INTRODUCTION Decision Making is a very common term in day to day life. Top managers determine the goals of organization, what services should be offered, how should these operations be financed, which markets to be entered, what should be the locations of plants etc. Middle and lower level managers have to decide about the production schedules, selection of employees, their salaries and compensations etc. Even non-managerial employees also make decisions like which shift to work in, how much effort to put forth at work etc. Also because of empowerment of non-managerial employees they have to take many new decisions of which they were not familiar earlier. Decision making is needed in reaction to occurrence of a problem. This means there is some kind of discrepancy between what was desired and what has been achieved, hence requiring action to minimize the discrepancy. Unfortunately most of the times problems are very complex, to be recognized unanimously as problem. Here comes into play the perception of various individuals and groups. For example, for one company no fall in sales compared to previous year may be satisfactory, but for another it could be disappointing as they target 10% growth. Hence problem needs to be defined. 1.1 Definition of Decision Making Some of the standard definitions of Decision making are as follows: 1. Cognitive process of reaching a decision. 2. Choosing between alternative courses of action using cognitive processes like memory, evaluation etc 3. The process of mapping likely consequences, working out importance of each factor and choosing the best course of action. 1.2 Skills required for Decision making Skills that are required in effective decision making are ability to grasp information, interpret it, process it and transfer it to others. At the same time good analytical skills, communication skills, listening skills are also required. Most importantly, decision making needs commitment to reach to the optimum solution so as to also achieve consensus along with its primary objective. Creativity is another required skill which is least common. 1.2.1 Three Component Model of creativity According to The California Management Review, Vol 40, this Model proposes that individual creativity requires Expertise Expertise is the foundation of all creative work. The potential for creativity is enhanced when individuals have abilities, knowledge, proficiencies. Creativity Skills This includes characteristics associated with creativity, ability to use analogies. Effective use of analogies allows decision makers to apply an idea from one area to another. Intrinsic Tasks Motivation It is desired to work on something because it is interesting, involving, exciting or personally challenging. 1.3 Tools for Decision Making Two tools most frequently used by teams for Decision making are Multivoting and Nominal Group technique. These help to identify and prioritize the various items on the list. Multivoting is done when reducing items on the list is required, whereas Nominal Group technique is used if a more structured approach is needed to generate, clarify and evaluate a list of ideas. 2. Various Models 2.1 Rational Model- There are mainly 6 steps in this model. These are: Defining the problem- It is very important because most of the times either problems are overstated or understated, hence problem is not defined properly Identify the Decision Criteria- Here Decision maker decides what is relevant and important in making the decision depending upon decision maker’s values, interests and preferences. Allocate weights to the Criteria- Above defined criteria need to be prioritized Develop the alternatives- Possible alternatives need to be generated so that they can be listed. Evaluate the alternatives- Now each alternative should be analyzed and evaluated. These are compared according to their strengths and weaknesses on each criterion. Select the best alternative- This step requires computing the optimal decision. 2.1.1 Assumptions of Rational Model- According to J. G. March, some of the assumptions are Problem Clarity i.e. problem is clear and not ambiguous. Known Options i.e. solution seeker is able identify all the alternatives as well as criteria Clear preferences i.e. also able to assign weights to each one of them Constant preferences i.e. preferences do not change No time or cost constraints i.e. solution seeker could gather all possible alternatives as there is no constraint Maximum payoff i.e. alternative yielding highest benefit will be chosen 2.2 Bounded Rationality According to D. Kahneman most of the problem are complex and clearly defined as well as lack clearly defined alternatives. Hence solution seeker simplifies the problem so that it could be readily understood. This happens because limited information processing ability of human being makes it almost impossible to hold all the relevant information and analyze it. Hence people seek to solutions which are satisfying although not optimum. This phenomenon is known as Bounded Rationality. 2.3. SWOT analysis It is based on the concept of analyzing Strengths, Weaknesses, Opportunities and Threats of an organization. The purpose of this analysis is to determine whether organization i9s capable of utilizing opportunity before it. The answer is Yes or No depending upon whether strengths are greater than weaknesses and opportunities are greater than threats. It is one step ahead of traditional SWOT analysis as it uses numbers to arrive at results. Here is one hypothetical situation where one company needs to decide whether to go for the opportunity before it or leave it. It first determines its components required to complete the analysis. Then it ranks each component on a scale of 10. The higher the number, the favorable it is. For example assessing the present value of opportunity, it is given a rating of 8 on 10. Similarly other parameters are considered. Then after total scores of each component is calculated and difference between pairs are calculated to finally add them up. Here difference between Strengths and Weaknesses is favorable by 2 points, whereas between Opportunities and Threats is also favorable by 2 points. Hence the net score is favorable 4 points. The project could be accepted. In case of multiple projects net scores of various projects need to be calculated and highest favorable score be chosen. SWOT ANALYSIS     STRENGTHS WEAKNESSES   1. What is the value of the present opportunity? 1. What are the perceive weaknesses?                   2. What unique resources are available?   2. What resources are inadequate?                   3. What strengths can be acquired?   3. What weaknesses cannot be overcome?                               Score(1-10)     Score(1-10)     1. 8   1. 6     2. 7   2. 6     3. 7   3. 8     Total 22   Total 20             SW Total: 2   OPPORTUNITIES THREATS     1. What is the value of the present opportunity? 1. Are there market-technology conditions that reduce the value?                 2. Is value enhanced by evolving market-technology conditions? 2. What is the level of competition?                   3. Is value enhancing by your organization's core strengths? 3. Will your weaknesses limit your success?                             Score(1-10)     Score(1-10)     1. 9   1. 6     2. 8   2. 8     3. 8   3. 9     Total 25   Total 23             OT Total: 2   Project Score:2+2=4   2.4. Recognition Primed Decision making model Here the Decision maker picks up cues and indicators that help him in recognizing patterns. Based on the pattern he chose the option known as Action script, which they assume will achieve the result. Here options are compared with each other. Now action script is run through a mental simulation i.e. option is chosen and tested based on experience. 2.5. Intuitive Model According to O.Behling and N.L.Eckel, it is an unconscious process based on experience accumulated. It operates in complement to Rational Model. Initially it was thought that this kind of decision making was irrational or ineffective but this has been proved to be false. Various conditions where this model is used are: When a high level of uncertainty exists. When there is little precedent to draw on When variables are less scientifically predictable When there are limited facts When clarity is not emerging When analytical data are of no or little use When there are several plausible solutions to chose between and each one has strong points in favour of it When time is limited When there is not huge pressure to come up with accurate alternative 2.6. Victor Vroom’s normative model Different situations call for different models. Basically there are 5 types of Decision making methods according to them: Autocratic 1- Leader solves the problem using the information available to him. Autocratic 2- Leader obtains necessary information from the group and solves the problem Consultative 1- Leader shares the problem with people individually and never brings them together. He finally himself takes the decision. Consultative 2- Leader discusses problem with the group and seeks suggestions and ideas. Here also leader makes decision himself. Group 2- Leader discusses the problem with the group collectively and arrives at the decision. 3. INDIVIDUAL vs. GROUP DECISION MAKING There is a famous experiment done by Marjorie E Shaw to determine whether individuals in isolation or in groups perform better when given certain task. Shaw’s findings indicate that groups outperform individuals on both experimental sets of problems. Groups not only generated more correct solutions but they are also better at detecting errors in calculations and faulty inferences. In the experiment when groups and individuals were given first set of problems then after groups and individuals were swapped and another problem set was given. Groups however took more time than individuals. Stasser and Dietz-Uhler 2001Superiority of groups to individuals depends on a variety of situational and task factors. Groups don’t perform well when tasks are difficult, complex or unfamiliar. When time is limited groups perform sometimes poorly. Group effectiveness depends on the extent to which the task has a demonstrably correct solution. Intellective tasks yield solutions that can be objectively reviewed and judged as right or wrong, but Judgmental tasks require evaluative judgment for which there is no correct answer. Groups are more superior when performing judgmental tasks. 3.1 ANATOMY OF GROUP DECISION: Functional Theory of group decision mak8ing suggests that skilled decision making groups are more likely to make use of group procedures which in turn enhances the gathering and analysis of information. The various stages arrived at by the groups are as follows: 3.1 Orientation Phase: According to Miller, Galanter here the problem is defined, goals are set and a strategy is developed. One valuable outcome of this period is development of a shared mental model. It is a mental presentation of the problem that is held by all members of the group. Here chances of personal biases are minimized. 3.2 Discussion phase Kowert 2002 said this is the heart of decision making process. Here the group gathers information about the situation, and if a decision must be made, identifies and considers options. A collective information processing approach assumes that people seek out and process relevant information during the group discussion. Three benefits are gained; these are improved memory for information, increased information exchange and better processing of information. Cross cueing and transactive memory systems also improves members’ ability to retrieve important information. 3.2.1 Cross cueing: It is enhancement of recall that happens during group discussion when statements made by others serves as cues for someone. 3.2.2 Transactive memory system: A process by which information to be remembered is distributed to various members who can transfer the information when required. 3.3 Decision Phase A social decision scheme is a group’s method for combining individual’s member’s inputs in a single decision. Some common schemes are 3.3.1 Delegation (Smoke,Zazonc.1962) Here an individual within the group makes decision for the entire group. Its other variants are Dictatorship Scheme: Chairperson makes the final decision Oligarchy Scheme: Coalition Speaks for the group 3.3.2 Statisticized decisions Each members makes decision individually which are then averaged 3.3.3 Plurality decisions Members express preferences by voting. Majority Schemes: 50 percent or more votes are required Borda Count Method: More points are awarded to alternatives that are ranked higher than others. 3.3.4 Unanimous Decisions Issue is discussed until everybody agrees. 3.3.5 Random Decisions Groups leave reason altogether and leaves final decisions to chance. No Decision Reached Decision reached GROUP DECISION MAKING 3.4 Implementation Phase (Lind,Kanfer,Earley1990) Two significant works remain to be done here. First, the decision must be implemented. Second, decision must be evaluated. Research shows when members have active role in decision making implementation is more smooth compared to a situation where members do not have active role. There are three different categories of participation: 3.4.1 No participation: Here people are not involved in the planning and implementation of the changes. 3.4.2 Participation-Through-Representation Here need for change is discussed openly and an informal decision was reached. 3.4.3 Total Participation: Here formally a decision is reached at and unlike the other two categories, all the employees were involved. 4. BIASES INVOLVED IN DECISION MAKING: 4.1 Overconfidence Bias According to Plous, from an organizational stand point individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and abilities. 4.2 Anchoring Bias According to J.S.Hammond, it is a tendency to fixate on initial information. Once set, we can fail to adequately adjust for subsequent information. 4.3 Confirmation Bias According to R.S.Nickerson, it happens because of our gathering of information selectively because of giving undue importance to the outcomes which we favour and neglecting other information. 4.4 Escalation Of Commitment BM Staw says it is the tendency to escalate commitment when a decision represents a series of smaller decisions. It means staying with a decision even when there is evidence of it being wrong. 4.5 Randomness Error B.Fischhoff and P. Slovic it occurs because human beings believe to have control over uncertain and random events. It happens because of our tendency to believe that we can predict the outcome of random events correctly. 4.6 Hind sight Bias RL Guilbalt, Bryant, Brockway, and Posavac showed it is the tendency for us to believe falsely that we would have accurately predicted the outcome an event after that outcome is actually known. 4.6 Shared Information Bias It is the tendency for groups to spend more time discussing information that all members know and less time examining information that only a few member know. According to Stasser, Taylor, Hanna 1989, groups spend too much time examining shared information rather than unshared information. Harmful consequences could be many. The shared information bias reflects the dual purpose of reflection. As a form of Informational influence, discussions help individuals marshal the evidence and information they need to make good decisions. But as a form of Normative influence, discussions give members a chance to influence each other’s opinions on the issue. 60 50 40 GDSS 30 20 FACE TO FACE 10 0 Pre Discussion Post Discussion Shared Information Bias can be avoided using information technology be means group decision support system (GDSS). Groups that met in traditional face to face group session fell into the trap of shared information bias but groups that met via computer (GDSS) were successful in avoiding shared information bias and hence were able to process hidden information also. 5. GENERAL MOTORS GM was founded in year 1908 in Michigan as a holding company for Buick, controlled by William Durant. It acquired some of the well known brands of the world. It acquired Oldsmobile in 1909.I n 1909 it brought it Cadillac, Elmore, Oakland. Because of accumulating huge amounts of debt, finally in 1910 Durant lost GM’s control to a trust. Then after he started Chevrolet. Secretly, he increased stake in the GM and dramatically he once again captured GM. But again owing to decreased sales and debt, he lost control over GM at which point Alfred Sloan took his position. In 80s GM employed more than 3lac, operated in around 140 countries. But at present it employs around 244500 people and manufactures automobiles and trucks in 34 countries. After World War 2, GM continued to be the giant for many decades and was no 1 for consecutive 77 years (from 1931-2007) in terms of sales. In 2008 GM sold around 8.5 million automobiles and trucks. It had 463 subsidiaries. In America alone it employed 90000 people. Apart from this it provides healthcare and pension benefits to around 4.9 lac retired workers. It buys parts used as raw material worth 50b$ from around 11000 vendors. Salaries worth 476m$ were paid by it every month. Toyota took over it in 2008 because of sales collapse owing to many reasons. But it was only the beginning of difficulties for this giant. On June 1st General Motors applied for Chapter 11 protection from its creditors, triggering the biggest industrial bankruptcy in history. Against assets of $82.2 billion, GM has liabilities of $172 billion. A year ago, its CFO Henderson tried to raise 3b$ trough sale of securities, but was not successful. It happened because of consecutive failures of many big investment banks which shook trust of the investor’s world over. After Lehmann Brothers’ failure its financial crisis loomed large as it had no financial resources to continue its mammoth operations in spite of dwindling sales world over because of not only economic slowdowns in most of the world’s economies but also increased competition from other automakers like Toyota. Even it tried to raise some cash by selling it s Hummer SUV to China, but the sale was grossly undervalued. Increasing costs, falling sales, increasing instability all led to fall in its share price to the level of 3$ in last November. In 2007, because of some reforms on the front of providing health benefits to lacs of workers, its share price rose to high of 43$, because of transferring liabilities to a trust. Also new workers need to be paid at rates similar to that paid by rivals such as Honda and Toyota. Other reasons to trust GM were that it was slowly nearing Toyota in terms of efficiency.GM was also making some good cars now like Buick Enclave and the award-winning Chevrolet Malibu and Cadillac CTS. One big reason to be optimistic about its future was its electric car Chevrolet Volt with a “range-extending” internal-combustion engine, due to be launched in 2010, which made Toyota’s Prius hybrid look a bit dated. One more reason that was important was its sales outside North America. But by the end of 2007, because of falling real estate market economy was under pressure. Falling house prices indirectly affected sales of General Motors after the burst of housing market bubble. Because of the over ambitious policies of US GOVT. to make available house to every US citizen, combined with lax regulations guiding banks, banks were allowed to make loans worth billions of dollars to people with low credit rating, NINJA that is NO INCOME NO JOB OR ASSET. The basic assumptions behind granting billions of dollars of loans to people of subprime category was that housing prices will continue rising forever but because of certain clauses like ARM that is ADJUSTABLE RATE MORTGAGES, people started defaulting on housing loans. Simultaneously housing prices started coming down resulting in a situation where collateral was less valuable than the principal. This Scenario resulted in mass default rendering banks insolvent. This situation harmed GENERAL MOTORS in more than one ways. Because of loan crises most of the banks were struggling with liquidity problem. Hence they were not allowing loans to people with below average credit ratings. Earlier same people had access to loans to buy motor cars. Secondly because of mass default on housing loans consumer sentiment came down, hence directly affecting sales of GENERAL MOTORS resulting in huge inventory pile up. Another reason that hampered sales of GM was rising petrol prices. Most of the vehicles manufactured by GENERAL MOTORS were luxury, gas guzzling vehicles. In the scenario of rising Oil Prices and continuous opposition from environmentalist sales were confirmed to fall. Further swapping gas guzzlers for smaller vehicles reduced their scrap value; hence the leasing arm of GENERAL MOTORS was under huge losses. 6. ANALYSIS OF GM’s FAILURE GM’s failure is said to be one of the biggest in US history. The reasons which have been provided for its failure point to failure of management policies. Management was illusionary about its future based on performance of past decades where it faced no competition from any quarter of the world. It assumed that conditions will remain same forever. But car makers like Toyota, Volkswagen etc got ahead in the race in front of GM. This all happened because of failure on management’s part to change the giant along with changing times. Some of the huge mistakes management did were- 4 Focus on luxury vehicles 5 Allowing its size to hide inefficiencies in its operations 6 No effort to control rising costs 7 Allowing impractical perceptions regarding future to continue 8 With time it didn’t changed as the norms were becoming tighter regarding pollution. 6.1 BIASES IN MANAGEMENT DECISION MAKING 6.1.1 RANDOMNESS ERROR It is the tendency of decision making groups to assume that it has control over future. The thinking here is that one can control the future events more than anyone else. Hence underestimation of rare events is done. But this is a huge mistake. The same mistake was done was GM managers as they didn’t tried to predict any unfavorable event that could change the current state of affairs against GM. 6.1.2 OVERCONFIDENCE BIAS No problem in judgment and decision making is more prevalent and more catastrophic than Overconfidence. This was the problem of continuing with decisions that were taken earlier and yielded profit then. But as rules and regulations were changing there was huge pressure on GM to cut its emissions and at the same time continue with sales. Had it thought the consequences before and took step in anticipation it would have not lost its no 1 slot to Toyota from where its problems begin. 6.1.3 CONFIRMATION BIAS It refers here to specific case of selective perception. It was the fault in GM’s decision maker’s perception which made them make policies as if everything will continue as they wanted. 6.1.4 ESCALATION OF COMMITMENT It is continuing with policies even when they are bringing losses. It’s more a kind of Inertia to resist change. Assumption here is that good managers are consistent with their policies. 6.1.5 HINDSIGHT BIAS It happened almost in 1923 when GM almost entered into bankruptcy. Again many times it faced uncertain events like rising fuel prices, but instead of anticipating them and getting prepared, it assumed that those events were predictable; hence it underestimated severity of such events. 7. RECOMMENDATIONS Given various kinds of biases which may creep into while decision making it is important to take preventive measures to avoid them. As if they enter into decision making body they either underestimate the problem or wrongly define the problem, which may result into severe consequences. While decision making in a group members often suffer from certain illusions. Illusion of invulnerability- Here it means members often overestimate their abilities to the extent that they start believing that they are infallible. Closed mindedness- Members often become insulated to others views and because of lack of creativity no new ideas come into picture. Hence a kind of status quo is maintained. Pressures toward uniformity- It means members may be either by themselves or by external factors or agents motivated to arrive at uniform decision and hence dissent is not allowed. Structural faults in the decision making body- It means that decision making body itself is structured in a way so as not to allow creative ideas to come out. Cognitive Limitations- Groups arrive at decisions through processes which are very complex. Members have initial preferences, gather information and then use it to combine it in a single group choice. But these ordinary seeming tasks demand too much cognitive effort on part of members. People use information available to them inappropriately, putting too much emphasis on interesting information and ignoring relatively boring or statistical information. According to Arkes 1993, Brownstien 2003, Plous 1993 people, hence make mistakes. This all happens because people are generally not immune from biases. Norbert Kerr and his colleagues (N.L.Kerr, Maccoun, Kramer, 1996) summarized 3 general potential biases categories. These are- 1. Sins of Commission- It is error in how information is used because of Belief perseverance (reliance on information that has already been reviewed and found to be inaccurate) , Sunk cost bias (reluctance to abandon a course of action once investment has been made into it), Extra evidentiary bias (using information that once has been told explicitly to ignore . 2. Sins of Omission- It is error caused by overlooking useful information such as Base rate bias (failure to pay attention to information about general tendencies, Fundamental attribution error (stressing dispositional causes when making attribution about the cause of people’s behavior. 3. Sins of Imprecision- It is because of errors on account of Heuristics (reliance on mental rules of thumb), like Availability Heuristic (basing decision on information that is readily available),Conjunctive bias (failing to recognize probability of 2 events occurring together will always be less than the probability of occurring of just one event, Representativeness Heuristic ( excessive reliance on salient but misleading aspects of a project. Hence some recommendations are: Preventive Groupthink This means dissenters are encouraged so as to allow arguments on every possible alternative. Here premature seeking of concurrence is often discouraged. Often it happens that group never reaches on 100 % consensus. Here usually closed style of Leadership is also discouraged. Generally, Leader refuses to voice his opinion in the beginning itself. A full analysis of pros-cons of each alternative is done. Groups meet often without top management. Specific dissenters known as Devil’ advocate assume important role. Correcting Misconceptions and Biases- Members are encouraged to willingly accept their shortcomings so that they can welcome good and creative ideas of other members as well as non members. Here, generally group members’ statements are verified first then taken as fact and accepted. Even suggestions from lower level staff is also welcomed and discussed. If it is deemed proper it is not uncommon to accept it. Use of effective decision making techniques- Members discuss wide range of alternative actions; consider potential effects of each, deliberately reconsider them and often consult experts. 8. References 1. D.Kahneman(2003) ‘Maps of Bounded Rationality: Psychology for behavioural economics’-The American Economic Review 93,no.5, pp 1449-75 2. Donelson R. Forsyth(2006), University of Richmond, Group Dynamics,4e,Thomson Wadsworth 3. H.A.Simmon (1997) Administrative behaviour,4e,New York free press 4. J.G.March(2002),A Primer on Decision Making,(New York free press.1994), pp.2-7,D.Hardman,C.Harries,”How Rational are we”,Psychologist,Feb 2002.pp 76-79 5. J.S.Hammond(1999) .Keeney, H. Raiffa,Smart Choices,Boston:HBS press, p191 6. S.Plous(1993),The Psychology of Judgement and Decision making, New York: McGraw Hill, p 217 7. Stephens P. Robbins(2006), Timothy A. Judge-Organisational Behavior,12e,Prentice-Hall of India Private limited 8. The Decline and Fall of General Motors, Derek Backon, http://www.economist.com/opinion/displaystory.cfm?story_id=13783014 9. http://en.wikipedia.org/wiki/Decision_making 10. http://www.decision-making-confidence.com/decision-making-models.html 11. http://www.business-analysis-made-easy.com/Decision-Making-Models.html 12. http://www.business-analysis-made-easy.com/Sample-SWOT-Analysis.html Read More