Decision Making Process

Today I came across an interesting reference while reading a book on organizations (Organizations: Structure, Processes, and Outcomes by Tolbert and Hall). The authors have included a model on decision making by James D. Thompson (founding editor of ASQ), a sociologist who has made tremendous contribution to his field. In his book titled Organizations in Action: Social Science Bases for Administrative Theory, Thompson has proposed a model of decision making under uncertainty as follows:

Decision makers face two types of uncertainties:
1) Uncertainty of beliefs about the cause and effect relationship: refers to beliefs about if we do A we will get B
2) Uncertainty about what outcomes would be most desirable in the context of the problem at hand: refers to preference for outcome B given the fact that by doing A we can get B.

This, according to Thompson, gives rise to four possible decision making strategies as illustrated by a 2 x 2 matrix (certainty-uncertainty) shown below:

1) When we are clear about what action lead to what effect and also clear about what effect (outcome) we want, all we have do is compute. This is very structured and rigid. This is like investing money in bank’s fixed deposit scheme.

2) When we know what action leads to what effect (outcome) but we are not sure about the outcome we want, we need to make a compromise. You know that if invest in stocks you will get higher returns. But you are not sure how to go about investing in stocks that give good returns. So you make a compromise and invest in a Equity Mutual Fund.

3) When, on the other hand, the relationship between cause and effect is not certain but you are very sure what end result you want, you tend to exercise your judgement. Let’s say you are certain that you need 15% return on investment. But you don’t know which asset class will give you 15% ROI. In such a case you will exercise judgement and choose an asset class (say, Gold) which is likely to yield the desired result. This decision strategy is obviously fraught with high risk as there is a possibility of making a wrong judgement.

4) And finally, when both the preferences for outcomes as well as your beliefs about the likely cause effect relation is uncertain, what works best is inspiration. Since you don’t know how much return you want as well as you are unaware about the investment avenues, you are most likely to sit on an idle pile of cash without making any decision as to where to invest your wealth.

This was my attempt to look at Thompson’s Decision Making model through the investment lens. There could be many other ways of looking at it. The decision to pursue MBA, the institutes you choose to apply, the fees you pay and the ROI you get (all of it of course is full of uncertainty) can also be analyzed using this model. Try it and let me know.


Author: anilkshatriyablog

I work as Assistant Professor in the area of Accounting at IMT Nagpur. I love teaching, writing and cycling. I follow a simple principle, 'Help ever, hurt never'.

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