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Leadership Theories And Approaches Commerce Essay

The Hawthorne Studies were, without question, the most important contribution to the developing organizational behaviour. These were series of experiments conducted from 1924 to the early 1930s at Western Electric Company’s Hawthorne Works in Cicero, Illinois. The studies were initially devised as a scientific management experiment to assess the impact of changes in various physical environment variables on employee productivity. Other experiments looked at redesigning jobs, making changes in workday and workweek length, introducing rest periods, and introducing individual versus group wage plans. The researchers concluded that social norms or group standards were the key determinants of individual work behaviour. Although not without critics (of procedures, analyses of findings, and the conclusions), the Hawthorne studies did stimulate an interest in human behaviour in organizations.

Early studies were based on two theories:

1. Trait Theories (focuses on leader qualities/traits)

2. Behaviour Theories (focuses on leader actions/behaviour)

Trait Theory/Approach: the basic focus was on the traits of leaders. Leaders are born with certain traits which make them leaders. Common believes were that “Leaders are born, not made.” And Leaders possess certain traits that make them leaders Theories that attempt to isolate characteristics that differentiate leaders from non-leaders. Attempts to identify traits consistently associated with leadership have been more successful.

1.2 EVALUATE THE IMAPACT OF MANAGERIAL STYLE ON ORGANISATIONAL EFFECTIVENESS

MANAGERIAL STYLES . managerial styles refer to a manager’s behaviour.

AUTOCRATIC , DEMOCRATIC

An Autocratic leader will not A democratic entertain any suggestions or leader can win the initiative from subordinates. cooperation of his Under this type of group and can leadership, one person motivate them decides for the whole group. effectively and An autocratic leader does positively. not trust anybody.

PATERNALISTIC, LAISSEZ FAIRE A free rein leader will A paternalistic leader takes leave the group care of his followers entirely to itself in the way the head such as a leader of the family takes allows maximum care of the family members freedom to subordinates.

Analyse how motivational theory can inform employee motivation.

Maslow’s Hierarchy Of Needs SELF- ACTUALIZATION ESTEEM NEEDS LOVE NEEDS SAFETY NEEDS PHYSIOLOGICAL NEEDS

A Hierarchy Of Work Motivation SELF- ACTUALIZATION Personal growth, realization of potential ESTEEM NEEDS Titles, status symbols, promotions, banding SOCIAL NEEDS Formal and informal work groups or teams SECURITY NEEDS Seniority plans, union, health insurance, employee assistance plans, severance pay, pension BASIC NEEDS Pay

Hezerberg’s two factor theory Hygiene factors in job Motivators factors in job ,Organisational policies ,Achievement ,Quality of supervision ,Recognition ,Working conditions ,Work itself ,Base salary or wage ,Responsibility ,Relationship with peer ,Advancement ,Relationship with ,Growth subordinates ,Status ,Security High Job dissatisfaction Job satisfaction High

ERG & MC CLLELAND THEORYERG Theory. Mc Clleland’s Theory of needs :– Existence needs. Need for achievement .Desire for physiological • The desire to do something and material well-being. better or more efficiently, to– Relatedness needs. solve problems, or to master• Desire for satisfying complex tasks .interpersonal Need for affiliation).relationships. – • The desire to establish and– Growth needs. maintain friendly and warm• Desire for continued relations with others. personal growth and – Need for power development. • The desire to control others, to influence their behaviour, or to be responsible for others.

Analyse theories relating to work relationships and interaction.

POWER

The Meaning of Power Power is the capacity of a person, team, or organization to influence others. The potential to influence others People have power they don’t use and may not know they possess Power requires one person’s perception of dependence on another person. With power you can…• Intercede favourably on behalf of someone in trouble• Get a desirable placement for a talented subordinate• Get approval for expenditures beyond the budget• Get items on and off agendas• Get fast access to decision makers• Maintain regular, frequent contact with decision makers• Acquire early information about decisions and policy shifts. Types of Individual Power: A Summary Individual Power Position Power Personal Power • Referent power• Legitimate power • Expert power• Reward power• Coercive power

Behaviour theories.

Behavioural Theories are a combination of industrial economics and organisation theories. The behaviours of the organisation that are below the optimal standards are caused by uncertainties as well the objectives of the different groups in the organisation that are at variance with one another. The main argument of Behavioural Theories is that it is the groups that are internal to the organisation that influence the behaviour of the company and not the role of the management as advocated by the management theories.

Behavioural Theories: Types

There are many Behavioural Theories that relate to the firm behaviour. The main among these Behavioural Theories are: Simon’s Model of ‘Satisficing’ Behaviour; and Simple model of Behaviourism developed by Cyert & March.

Social constructivism-- Social constructivism focuses on the artefacts that are created through the social interactions of a group. It emphasized the profound influence of social contexts in the advances in the levels of knowing.

2.1 Organisational structure

GEOGRAPHIC STRUCTURE • Each region of a country or area of the world is served by a self-contained division • Managers locate different divisions in each of the world regions where the organization operates •Generally, occurs when managers are pursuing a multi-domestic strategy

GLOBAL MATRIX STRUCTURE  An organizational structure that simultaneously groups people and resources by function and product - The structure is very flexible and can respond rapidly to the need for change - Each employee has two bosses (functional manager and product manager) and possibly cannot satisfy both

GROUP STRUCTURE • Each product division, not the country or regional managers, takes responsibility for deciding where to manufacture its products and how to market them in foreign countries

PRODUCT TEAM STRUCTURE Members are permanently assigned to a cross-functional team and report  only to the product team manager or to one of his subordinates Cross-functional team – group of managers brought together from different  departments to perform organizational tasks

FACTORS AFFECTING ORGANIZATIONAL STRUCTURE

THE ORGANIZATIONAL ENVIRONMENT Human Resources  Managers must take into account all four factors (environment, strategy, technology and human resources) when designing the structure of the organization.

ENVIRONMENT The quicker the environmental changes the more problems face managers Structure must be more flexible when the environmental change is rapid ,Different strategies require the use of different structures , A differentiation strategy needs a flexible structure, low cost may need a more formal structure Increased vertical integration or diversification also requires a more flexible structure.

TECHNOLOGY

Technology The combination of skills, knowledge, tools, equipment, computers and machines used in the organization More complex technology makes it harder for managers to regulate the organization

ORGANIZATIONAL STRUCTURE Organizational Design Six key Elements

Work Specialization -Division of Labour -The Degree to which Tasks/ Activities in an organization are divided into Separate Jobs. -A Job is broken down in Steps and each Step is done by a different person

Work Specialization Human Diseconomies from Specialization came to be known as BOREDOM, FATIGUE, STRESS, LOW PRODUCTIVITY, POOR QUALITY, INCREASED ABSENTEEISM and HIGH TURNOVER

DEPARTMENTALIZATION It is the basis of grouping the Jobs Ways of Classifying and Grouping Work Activities a. FUNCTIONAL: Groups Jobs by Functions Performed. It is the most popular way to GROUP ACTIVITIES

DEPARTMENTALIZATION- FUNCTIONAL: … Can be Used in ALL types of Organizations, Only the Functions Change to Reflect the Organization’s Activities It puts together Efficiencies due to similar

ORGANIZATIONAL STRUCTURE: Bureaucracy The primary Strength lies in its Ability to Perform Standardized Activities in a highly Efficient Manner Putting Like Specialists together in Functional Depts. Results in economies of scale Minimum duplication of Personnel and Equipment

MATRIX STRUCTURE It has Ability to Facilitate coordination When the organization has a multiplicity of complex and Interdependent activities The dual line of Authority reduce the Tendencies of departmental members to become so busy protecting their interests over the organization’s overall goals.

ORGANIZATIONAL STRUCTURE Organizational Design . SIZE AND STRUCTURE -Large Organizations….Mechanistic --the Relationship is not Linear 3. TECHNOLOGY and STRUCTURE a. Unit Production b. Mass Production c. Process Production -More Routine the Technology… -More Non-routine the Technology…

2.2 culture theory

Organizational culture is the collective behaviour of humans who are part of an organization and the meanings that the people attach to their actions. Culture includes the organization values, visions, norms, working language, systems, symbols, beliefs and habits. It is also the pattern of such collective behaviours and assumptions that are taught to new organizational members as a way of perceiving, and even thinking and feeling. Organizational culture affects the way people and groups interact with each other, with clients, and with stakeholders.

Impact of Organizational Culture and Objectives on Leadership and Management

The performance of organization judges the manager. The way, in which standards are set by managers, integrate and coordinate workgroups, create decisions, and propose organization has an impact on performance. Additionally it is clear patently from the anecdotal proof and research that organization with high performance have a system of values that encourage the goals of organization. The expressions of these values are in implicit and explicit manner through managers are supposed to be there in working of every member in the staff. The suitable behavior should be modeled by managers; it is considered as very logical for concluding that the all the staff members of an organization understand the required values and integrate them in work live will help in achieving the objectives in more effective manner. There is a complex relationship between culture and leadership. Leadership is considered as an activity that has an influence on culture, “the management of meaning” as Richard (2010) showed it. This doesn’t mean that culture is drastically changed or created by leadership, just that leadership is a manifestation of culture that has an influence on the manifestations of other culture, like shared objectives’, environment and technologies’ understandings.

The relation between organizational and the leadership culture, various sort of emphasis and relations are met with the criteria of likelihood. The circles of management in pro-leadership like practitioners, consultants, and numbers of famous academic leaderships are observed as possessing an extensive impact on the values of culture and directions of the members of an organization. The strongest case for the creation or change in organization driven by leaders is made by the support of charismatic people in the organization. A highest position is required to become a candidate for the marker “charisma”. An individual who exercises the extra ordinary pressure would cause the emergence of charismatic leadership, characteristically being capable of getting support for fundamental idea, practiced by a person, being capable typically for getting support for a basic idea, some times in the crisis’s light, from the dedicated followers’ group who are less or more captivated by the main person (Michael, 2005). They are being willed for suspending the critical disbelief and thinking and developing the well built faith plus emotional energy in charismatic leader’s project. The establishment of some new things is involved in the charismatic leadership. The examples that are considered as most familiar are from the religious and political circles.

2.3 culture and structure

McDonalds is a chain of fast food restaurants which is continuously dealing with customers. The customer service has to be top notch with respect to quality in place, customer service and management. The skills of employees must be developed in a way that they conform to company’s policies and strategies. If the employees are not trained, they can not retain their performance according to expectations of customers and the company at the same time (Bowen 2007). Training of employees is also essential to deliver the same quality service in every country. The taste of food has to be consistent globally to retain the brand name repute. The scope of this study is to explore the training and development practices of human resource management. The impact of training and development on profitability is the focus of this thesis. There search is limited to McDonalds outlets in United Kingdom. The time for this research is limited from 4to 6 months because it is purely an academic project. 1.6. Problem statement: This research is focused on the problem statement of: “The needs of employees and their personal development goals must be planned to align with successful training and development of employees.”

The needs of employees and their growth plan must be figured out to know if the employee has the capability and motivation to go any further in his career or not. The training is an expensive process. In order to prepare an employee to face the future challenges, s/he has to be upgraded in their various skills. 1.7. Background of Research: The values of McDonalds are customers come first, commitment to people, ethical business, returning back to the communities, growing profitably, and perpetually improving (Jack 2012).In order to abide by these values and meeting the quality terms with dedicated training, coaching, mentoring, and learning to develop are crucial. The customers look for quality food, and excellent customer service whereas the company is looking for customers and well trained staff to deal with customers courteously (Site ground 2011). The staff’s skills need to be improved in their communication, courtesy, keeping restaurant culture friendly and relaxed. The basic purpose of training is to make employees learn new ways of dealing with challenging situations effectively and efficiently (Shaw 2010).The employees’ needs and requirements about their personal growth plan are most important to knowhow motivated they are to grow in their profession. Some of the employees are after tangible benefits like salary, some are after intangible benefits like big post in a well known organization in the world(Bainbridge 2011). They keep their self esteem satisfied. Not only their plans need to be known but the qualification of the employee matters. The major concern of trainers is to see if the trainee has the capability to implement all the knowledge in the real life situations or not. The need assessment of employees before training is inexpensive way of filtering who has the competence to be a valuable asset to the company (Shaw 2010) .The performance of employees is directly related to training and development. Some employees like to work hard to be selected for a training. They see the incentive of promotion, more salary and credential of the training from a company in the end. These incentives satisfy their self esteem and they work harder to show their best performance (Wilson 2005).The training leads to development of employees and company at the same time. This mutual benefit becomes the core competence for an organization. Profits are the outcomes of the excellent performance of employees which is achieved by enhanced skills. Training is about whole person development not just one skill. Unlike the traditional way of training, the trainings focus on transforming

the person into an employee with a realistic corporate attitude to develop. The expectations about a person do not change over time (Alan 2010). 1.8. Company Profile: McDonalds is the world famous and a leading food service retailer. There are more than 33,000restaurant operating in 119 countries. The mission and aim of the restaurant is to improve the social and environmental performance (McDonalds 2012). More than 80% restaurants are franchises. The first McDonalds was opened by McDonald brothers in 1940. In 1954 Ray Kroc was appointed the first franchisee by Mac and Dick(McDonald brothers) in San Bernardino, California. He later in a year opened a restaurant in Des Plaines, Illinois and set the base for McDonalds corporation in Chicago. The good service and development created the company motto to be quality, service and cleanliness by1957. In next two years the company managed to open their 100th restaurant (McLibel 2006).In 1961, Ray Kroc took over the company by buying all rights to the company and hamburger university opened in Elk Grove. In two years, the company sold one billion hamburgers, managed to open the 500threstaurant, Ronald McDonalds made a debut and 500th student graduated from his university. The income reached to one million dollars by then. In 1964, the fillet to fish sandwich was introduced. In1965, the corporation went public. The stock price range varied from 15-33.5. In 1966, McDonalds was listed on New York’s exchange. In 1967, McDonalds stepped out of United States and moved to Canada and Puerto Rico. By 1968, Big Mac was launched and the 1000th restaurant was opened in Des Plaines, Illinois (McLibel 2006).By 1970, there was one McDonald’s restaurant in every city. The chain spread steadily. Golden Arches appeared in three continents when the stores opened in Holland, Japan, and Suburb of Sydney. In 1979,a McDonalds opened in Brazil and spread Ronald McDonald to South American states. By 1992,McDonalds was present in six continents of the world. The restaurants opened in Morocco, Casablanca and then in four years the company expanded to the exactly 100th country. According to a claim, McDonald’s opens its another restaurant in every three hours (James 2009).The restaurant was already spread to 31,966 locations in 118 countries. Only 45% of these are US restaurants. The daily customers are more than 58 million. According to The Economist dubbed the Big

9. Mac Index to how the global ranking of currencies that purchase power at local Mickey D’s. the biggest seller of McDonalds is France (James 2009). 1.9. Expected Research Methodology: The research methodology of this thesis is going to be a mixed research methodology. It will get the benefits of both qualitative as well as quantitative researches. The data collection will be done through both qualitative and quantitative sources of data. The research approach will be deductive to critically investigate and analyse the affects of training and development on profitability of McDonalds. There search philosophy of positivism will be most useful for this study because it will comprehensively described the objective aspects of research. The data collection will be carried out through secondary and primary sources of data. The secondary sources of data will be the use of case studies, electronic libraries and journals to explain the phenomenon. The primary data will be collected through surveys and questionnaires. The research will be empirical. 1.10. Research Layout: The dissertation is carried out sequentially in the form of chapters that represent progress. The layout of this research is given below: 1.10.1. Chapter One: The first chapter entails the introduction of dissertation. The research problem statement, research question, aims, purpose, objectives, company profile, rationale of study, and complete layout of the research is explained in this chapter. The research background explains the reason why the research is being carried out. 1.10.2. Chapter Two: The second chapter explains how the previous researches are evident in contribution towards the problem statement. The literature about training and development is critically evaluated through pedagogical evidences. Through theoretical framework the topic of dissertation is investigated. 1.10.3. Chapter Three: The chapter three elaborates the research methodology for this thesis. This chapter gives complete information about research methodology, paradigm, philosophy, strategy and data collection methods. The complete research analysis process is described how it is analysed.

Task 3

3.1 Innovation and creativity in Organisation

Organizations are becoming increasingly interested in creativity and innovation, in part as a response to the pressures associated with globalization, competition, economic factors and technology changes. Many organizations see creativity as an opportunity to maintain a competitive advantage and most organizations and researchers alike, evaluate creativity in terms of an original or innovative result (Reiter-Palmon & Allies, 2004). Originality, however, is only one aspect of creativity. An outcome or result is interpreted as creative if it is both novel and appropriate (Amabile, 1996).

Common conceptualizations of creative problem solving include the idea generation and selection processes. There is often, however, no explicit realization of problem identification and construction, information search or implementation planning and monitoring processes—even though implementation planning and monitoring is vital to a successful idea. The implementation planning and monitoring phase is also referred to as innovation. Though there are multiple definitions of innovation, they all include the implementation of an idea, process or product (Reiter-Palmon, Herman & Yurkovich, 2006).

3.2 Organisation learning.

Transformational leaders use organizational learning to achieve continuous performance improvements in their organization. Meanwhile underperforming organizations don’t even have processes in place to learn from their mistakes. They keep repeating the same mistakes over and over. This leads to recurring performance issues such as product quality problems, delayed product introductions and operational inefficiencies that diminish the return on investment.

In his book, “The Fifth Discipline” Senge makes it clear that the ability to learn faster than your competition may be the only sustainable advantage for your organization in the long run.

In this video from Harvard Business Publishing, David Garvin and Amy Edmondson, Professors at Harvard Business School discuss the importance of learning in organizations and how managers at all levels can stimulate learning.

3.3 Team Working.

—Teams of people working together for a common purpose have been a centerpiece of human social organization ever since our ancient ancestors first banded together to hunt game, raise families, and defend their communities. Human history is largely a story of people working together in groups to explore, achieve, and conquer. Yet, the modern concept of work in large organizations that developed in the late 19th and early 20th centuries is largely a tale of work as a collection of individual jobs. A variety of global forces unfolding over the last two decades, however, has pushed organizations worldwide to restructure work around teams, to enable more rapid, flexible, and adaptive responses to the unexpected. This shift in the structure of work has made team effectiveness a salient organizational concern. Teams touch our lives everyday and their effectiveness is important to well-being across a wide range of societal functions. There is over 50 years of psychological research—literally thousands of studies—focused on understanding and influencing the processes that underlie team effectiveness. Our goal in this monograph is to sift through this voluminous literature to identify what we know, what we think we know, and what we need to know to improve the effectiveness of work groups and teams. We begin by defining team effectiveness and establishing the conceptual underpinnings of our approach to understanding it. We then turn to our review, which concentrates primarily on topics that have well-developed theoretical and empirical foundations, to ensure that our conclusions and recommendations are on firm footing. Our review begins by focusing on cognitive, motivational/affective, and behavioural team processes—processes that enable team members to combine their resources to resolve task demands and, in so doing, be effective. We then turn our attention to identifying interventions, or ‘‘levers,’’ that can shape or align team processes and thereby provide tools and applications that can improve team effectiveness. Topic-specific conclusions and recommendations are given throughout the review. There is a solid foundation for concluding that there is an emerging science of team effectiveness and that findings from this research foundation provide several means to improve team effectiveness. In the concluding section, we summarize our primary findings to highlight specific research, application, and policy recommendations for enhancing the effectiveness of work groups and teams.

3.4 Change management process

The change management process is the sequence of steps or activities that a change management team or project leader would follow to apply change management to a project or change. Based on Prosci's research of the most effective and commonly applied change, most change management processes contain the following three phases:

Phase 1 - Preparing for change (Preparation, assessment and strategy development)

Phase 2 - Managing change (Detailed planning and change management implementation)

Phase 3 - Reinforcing change (Data gathering, corrective action and recognition)

Many managers assume that if they communicate clearly with their employees, their job is done. However, there are many reasons why employees may not hear or understand what their managers are saying the first time around. In fact, you may have heard that messages need to be repeated 6 to 7 times before they are cemented into the minds of employees. That is because each employee’s readiness to hear depends on many factors. Effective communicators carefully consider three components: the audience, what is said and when it is said.

For example, the first step in managing change is building awareness around the need for change and creating a desire among employees. Therefore, initial communications are typically designed to create awareness around the business reasons for change and the risk of not changing. Likewise, at each step in the process, communications should be designed to share the right messages at the right time.

Communication planning, therefore, begins with a careful analysis of the audiences, key messages and the timing for those messages. The change management team or project leaders must design a communication plan that addresses the needs of front-line employees, supervisors and executives. Each audience has particular needs for information based on their role in the implementation of the change.

4.1 Approches to organisational decision making

When we are making decisions in the real-world organizations, there are two factors that the models and tools don’t take into account:

The relative urgency of the decision – how fast must it be made.

The importance of engagement – how important is it that people agree with, support and will implement the decision.

And without weighing these two factors into your decision-making process you won’t make the best decisions.

The urgency or speed hints at the relative need for the deeply-involved tools from the start. The weighing factor here is – how soon is this decision required? When the urgency level is high and we need to get on with it, the complex tools at our disposal are superfluous. This might seem to be an obvious statement, yet it needs to be said, because at times the process gets in the way of the decision.

The relative importance of buy-in and agreement of others is the other factor to weigh. If the decision needs to be made quickly, engaging others for their ideas or data might take too long; yet when we ask people for input or involve them in the decision-making process, we get more ownership and buy-in.

Organizational decision making is about more than the processes and data (as important as they are), it is also about the speed with which the decision must be made and how important it is that people are ready to comply, act and implement that decision.

The messiness comes, in part, because speed and buy-in are competing factors. We can raise buy-in with time spent, and buy-in may suffer when speed is of the essence.

4.2 Approaches to risk and uncertainty in decision making

Decision making

It identifies the key stages comprising ‘good practice’ in decision-making. It covers the whole decision-making process, from problem identification through to implementation and monitoring of the decision. As shown in the figure, these are: Structuring the problem:

• Stage 1 Identify problem and objectives;

• Stage 2 Establish decision-making criteria,

receptors, exposure units and risk assessment

end points;

Analysing the problem: (tiered stages)

• Stage 3 Assess risk;

• Stage 4 Identify options;

• Stage 5 Appraise options;

Decision-making:

• Stage 6 Make decision;

Post-decision actions:

• Stage 7 Implement decision;

• Stage 8 Monitor, evaluate and review

Approches

Decision making is studied from a number of different theoretical approaches. Normative theories focus on how to make the best decisions by deriving algebraic representations of preference from idealized behavioural axioms. Descriptive theories adopt this algebraic representation, but incorporate known limitations of human behaviour. Computational approaches start from a different set of assumptions altogether, focusing instead on the underlying cognitive and emotional processes that result in the selection of one option over the other. This review comprehensively but concisely describes and contrasts three approaches in terms of their theoretical assumptions and their ability to account for behavioural and neurophysiological evidence from experimental research. Although each approach contributes substantially to our understanding of human decision making, we argue that the computational approach is more fruitful and parsimonious for describing and predicting choices in both laboratory and applied settings and for understanding the neurophysiological substrates of decision making. Copyright © 2010 John Wiley & Sons, Ltd.

Decision making Under risk and uncertainty

Many studies of decision making under risk have described decisions to participants in which the choice is between a certain outcome and a two-outcome gamble of equivalent (or slightly higher) expected value where one of the possible outcomes is zero. Where gains are concerned, people typically prefer sure things to gambles, except where the gamble has a small probability of winning (and hence the outcome is high). The opposite is true where losses are involved: people choose gambles over certain losses, except where the probability of the worst outcome is very small. For decisions involving uncertainty there are no stated probabilities, but when analyses based on people's judged probabilities have shown similar results.

However, other studies have examined how people make decisions about options where they have previously experienced outcomes, but do not know the objective features of the options (a key study is: Hertwig, Barron, Weber, and Erev, 2004). In these studies, participants continually chooose between two unlabeled buttons, where the chosen button delivers an outcome to the participant. After a series of sampling trials, participants are then asked to make a choice between the two buttons. These studies have reported opposite results to those based on described decisions: risk aversion for low probability gains and high probability losses, and risk-seeking for high probability gains and low probability losses. Hertwig et al suggested that two theories of decision making might be necessary to account for the results.

However, according to a new study by Liat Hadar and Craig Fox (2009), a single theory may suffice for both described and experienced decisions. They suggest that the results from the two types of decision may diverge when there is an information asymmetry between them. Notably, in studies of experienced decisions, some participants never experience non-zero outcomes when they select the (unlabelled) button representing binary outcomes where one outcome is infrequent.

In Study 1, Liat and Hadar had 111 participants sample information, but whereas some received information directly in the form of numbers (outcomes), others received symbols (events) and were later told what numbers they represented. During the final choice phase that followed sampling, some participants were shown buttons labelled only with the outcomes/events they had actually experienced, whereas others were provided with labels of all possible outcomes/events. One option always had a slightly higher expected value than the other.

The provision of information as outcomes or events made no difference to people's decisions. However, there was a difference depending on whether people received complete information in the choice phase. Similar choices were made by people who experienced all outcomes/events or who were made aware of all the possibilities: these participants tended to choose the higher expected value button. However, people who did not experience all outcomes/events and were not informed about all possibilities tended to choose the lower expected value button; that is, they tended to underweight low probability options.

In a second study, Hadar and Fox investigated the possibility that always-experienced outcomes are less frequently interpreted as certain when all previous lottery choices have resulted in zero or nonzero outcomes. This was exactly what they found and it could explain why previous studies of decisions from experience have reported risk-seeking behaviour for high-probability gains.

4.3 Effectiveness of organisational decisions

>Decision quality matters–but it's not all that matters. Companies have to make the right decision more often than not. But they also have to make decisions quickly, execute them effectively and avoid spending too much or too little effort in the process.

>Winners focus on the decisions that matter most. They identify the big, high-value decisions that every organization must make, and they ensure that those decisions work well. But they also understand that small everyday decisions–the kind that are made over and over again, often by people on or near the frontline–can matter as much as the big ones.

>Companies can "reset" decisions that are sources of trouble. A systematic process of analyzing the what, who, how and when of each troubled decision can put people on the path to good, speedy decision making and execution.

>The best companies build an integrated organizational system geared to support key decisions. These companies address both the "hard" issues, such as defining decision roles and processes in the corporate center, regional and divisional centers, and operating units, as well as the "soft" ones, such as talent management, leadership behaviors and organizational culture.

>Lasting impact requires embedding new decision capabilities and behaviors. Companies need to equip people at all levels with the skills and abilities to decide and deliver, day in and day out.

References

Hadar, L., and Fox, C.R. (2009). Information asymmetry in decision from description versus decision from experience. Judgment and Decision Making, 4 (4), 317-325.

Hertwig, R., Barron, G., Weber, E. U., & Erev, I. (2004). Decisions from experience and the effect of rare events in risky choice. Psychological Science, 15, 534–539.

POSTED BY DAVID HARDMAN AT 15:38 35 COMMENTS

LABELS: DECISION MAKING, DESCRIPTION, EXPERIENCE, RISK ATTITUDE, RISK AVERSION, RISK-SEEKING

SATURDAY, 13 JUNE 2009

Valuing risky prospects below their worst outcome

How much would you pay for a $50 gift certificate for Barnes and Noble (US bookstore)? How much for a £100 gift certificate? And what would you pay to take part in a lottery where there was a 50/50 chance of winning one or other gift certificate? In earlier research, Gneezy, List, and Wu (2006) found that people were willing to pay an average of $26 for the $50 gift certificate, but those who were presented with the lottery prospect were only willing to pay $16 - despite the fact that the lottery is actually a better prospect than the $50 gift certificate. They found similar results for other single vs lottery prospects, an effect they referred to as the uncertainty effect.

Simohnson (2009) has suggested that the uncertainty effect reflects direct risk aversion. Theories of decisions under risk, such as expected utility theory and prospect theory, assume that utility does not increase linearly with value; rather, successive marginal increases in value evoke smaller increases in utility. However, the uncertainty effect cannot be explained by decreasing marginal utility. Simohnson suggests that people may simply not like uncertainty, and that the mere presence of uncertainty leads people to devalue the available options, i.e. direct risk aversion.

However, one potential problem with the earlier research was that people in the lottery condition got to see both outcomes, whereas those who were asked to value the smaller outcome were not also asked to value the larger outcome (or even shown it). It could be that people devalue the smaller outcome when they see it in the context of the larger outcome. Therefore, Simohnson repeated the earlier research, but asked those in the non-lottery condition to value both the smaller and the larger outcome. He also clarified a potential problem with the wording of the probabilities in the earlier study. As previously, participants attached less value to the lotteries than to the smallest individual outcome within each lottery. An analysis of responses to comprehension questions also indicated that the results could not be explained by a failure to understand the problems.

In short, these results provide evidence that direct risk aversion leads people to value prospects below the value of their worst outcome.

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