Why do organizations face challenges in group decisions?

The difficulty with collaborative decision-making is that it involves individuals!
Collective decision making is an important but tricky subject that can be extremely challenging. There is no shortage of tools and tricks that have been developed to help the process; however, they often are dependent on individuals behaving rationally.

When we say “rationally”, we are referring to the theory in economics that assumes that individuals always make decisions that provide them with the highest amount of personal utility. This assumes individuals can manage their emotions and is unaffected by them.

When it comes to challenges of group decisions, it is important to consider that each team member brings their own biases, and the group has its own dynamics. The byproduct of these factors is how decisions are often made. The field of behavioral economics recognizes that since individuals are emotional and prone to distraction, they do not always behave in ways that are consistent with some of the group decision frameworks.

What are some of the group decision challenges? Groupthink, Social Loafing, and Prospect Theory

In this video we discuss Groupthink and Social Loafing.

The psychological phenomenon known as Groupthink describes situations in which group members make unreasonable or dysfunctional decisions out of a desire for harmony or uniformity. A group’s cohesion, or desire for cohesion, may lead to a tendency for its members to reach a consensus at any cost. As a result, disagreements are reduced, and a conclusion without thorough deliberation is reached by the group.

On the other hand, Social loafing is the tendency for people to put in less effort when working together than when working alone. This phenomenon is comparable to people’s propensity to participate in group decisions, yet mainly rely on a select group of people to make the decision.

In addition to those, one key concept is the Prospect Theory, also known as “loss aversion.” Prospect theory is a behavioral economics theory that describes how people make decisions under conditions of risk. It was developed in the late 1970s by psychologists Daniel Kahneman and Amos Tversky.

How does prospect theory affect decision making?

The concept is that individuals place different values on prospective gains and losses. In fact, we tend to place a greater value on the risk of loss than the prospect of gain, which significantly impacts how we make decisions.

According to prospect theory, people’s decision-making is influenced by the perceived value of potential outcomes rather than their objective value. This means that people are more likely to take risks to avoid losses than to achieve gains, and that they are more sensitive to losses than to equivalent gains.

Prospect theory also suggests that people are more likely to make decisions based on the “reference point” or the starting point for the decision, rather than the overall value of the potential outcomes. This can lead to people making irrational or suboptimal decisions, because they are overly influenced by the potential for loss or the fear of missing out on a potential gain.

Prospect theory has had a significant impact on economics, psychology, and business, and it has been widely studied and tested in various contexts. It has been used to explain a range of phenomena, including why people are more likely to make risky decisions when they are facing a potential loss, and why they are more likely to make risky decisions when they have a lot to gain.

Overall, prospect theory provides a useful framework for understanding how people make decisions under conditions of risk. It can be a valuable tool for predicting and influencing decision-making in various settings.

It explains how people make asymmetrical assessments of their losses and gain knowledge. The prospect theory, which has applications in behavioral finance and economics, tries to represent actual human behavior as opposed to the decision-making of entirely rational agents as in anticipated utility theory.

How prospect theory could become a group decision challenge?

In the group context, this applies to how individuals decide what or who to support during the process. In this case, the potential loss or gain of credibility or supportiveness is often considered. Our reputation as a credible team member is a highly valued asset. How we are seen in the group decision making context is an additional consideration that influences the group members’ behaviors. As a result, prospect theory also impacts the decision-making process as well as the group dynamics.
Kahneman and Tversky, the team that researched this phenomenon, stated that “losses loom larger than gains.” The more that individuals are aware of the factors driving their behaviors, the better they can create an optimal environment for the desired objective.

Why is collective decision making considered beneficial?

Due to the biases, individual participant’s insights and expertise are not fully leveraged during the decision-making process. Their expected contributions are often why they are selected to join the group in the first place. If done correctly, the process not only draws out an individual’s thoughts but also combines it with the others.

We need to understand that there are many factors at play outside the actual decision-making process in effort to increase the likelihood of selecting the most optimal choice.