Session 10: Perception and Decision making


Attribution theory is an attempt to explain the ways we judge people differently, depending on the meaning we attribute to a behavior such as determining whether an individual’s behavior is internally or externally caused. It tries to explain the ways we judge others behavior and come to conclusions. Attribution theory suggests that when we observe an individual’s behavior we attempt to determine whether it was internally or externally caused.

Internally caused behaviors are those an observer believes to be under the personal behavioral control of another individual. Externally caused behavior is what we imagine the situation forced the individual to do. If an employee is yelling at a woman on the streets, we attribute it as internally or externally caused behavior. If it is internal, we say, this employee is an angry man. If it is external, we say, this woman irritated this employee.

That determination, whether it is internally or externally caused, depends largely on three factors

  • Distinctiveness
  • Consensus
  • Consistency

Distinctiveness: it refers to whether an individual displays different behaviors in different situations.

Example: Is the employee who yelled at a woman on the streets, yells at people generally on different occasions such as during group meetings or at workplace?

If it is yes, we may conclude that the behavior is internally caused.

Consensus: if everyone who faces similar situation responds in the same way, we can say the behavior shows consensus.

Example: Every person who encounters this woman is getting irritated? If it is yes, we may say, this employee’s yelling behavior is externally caused.

Consistency: it shows the consistency in the person’s actions.

Example: He regularly shouts whenever he sees this woman

Mr.Rex performed a difficult task of launching a new product during COVID and his actions were well appreciated in the organization (internal attribution).

Distinctiveness: Mr.Rex does a good job with any work he gets, not just this product launch (Low)

Consensus: Lot of people tried but Mr.Rex was the only successful person (low)

Consistency: Mr.Rex is generally good with product launches (high)

However, attribution is not exempt from making errors. Errors and biases distort attributions. They are;

Fundamental attribution error: the tendency to underestimate the influence of external factors and overestimate the influence of internal factors when making judgments about the behavior of others. This can explain why a sales manager attributes poor performance of her sales agents to laziness rather than to a competitor’s innovative product line.

Self-serving bias: the tendency for individuals to attribute their own successes to internal factors and put the blame for failures on external factors. This can explain why students say, question paper is difficult for low grades and attribution of hard work to good grades.

Perception and Decision making: The link

Ideally decision making would be an objective process, but the way individuals make decisions and the quality of their choices are largely influenced by their perceptions. Decision making comes as a reaction to the problem. Problem is a state of discrepancy that exists between the current state of affairs and some desired state, requiring us to consider alternative courses of action.

If your phone is damaged, you need to choose either a new phone or you need to get it repaired. Then you have a problem of making a right choice for these options and which we call as the process of decision making.

I. Common biases and errors in decision making

Decision makers tries to be rational in bounded sense, however, they tend to make lot of errors in their judgment while making decisions. Some of them are;

  1. Overconfidence bias: we tend to be overconfident about our abilities and the abilities of others; also, we are usually not aware of this bias. When you are too confident, you may miss a few blind spots as well. Overconfidence bias isa tendency to hold a false and misleading assessment of our skills, intellect, or talent. In short, it’s an egotistical belief that we’re better than we actually are. It can be a dangerous bias and is very prolific in behavioral finance when we study the psychology of investors. This danger also includes the subsequent effects on the markets.


The Challenger space shuttle ended in disaster on a fateful day in 1986 killing all seven crew members. The disaster occurred due to the malfunction of a part called the O-ring. The manufacturer of O-ring had recognized the risk of malfunction, but the group believed in the success of the mission. In a similar case, space shuttle Columbia broke into smithereens killing all seven crew members when re-entering the atmosphere. During the launch, NASA engineers noticed a piece of insulation foam breaking off the tank and hitting the wing.

  1. Anchoring bias

It is a tendency to fixate on initial information and fail to adequately adjust for subsequent information. The mind gives a disproportionate amount of emphasis to the first information it receives in employment interviews. Hence, advertisers, politicians and managers use anchors to persuade people. Whenever you negotiate, you use anchoring too. Think about salary negotiation, whatever the package you pitch in the beginning will have the biggest impact.


Psychologist Robert Levine gave an example once, of how a cable provider leveraged anchoring to influence their customers. The goal of the company was to raise prices on its monthly subscription without losing subscribers whilst also making it appear that they were better off. Initially, there was a rumor going around that the new monthly rates were going up by $10. But later, in the company’s website, they denounced the rumor and added that their subscribers should relax as ‘basic cable rates are only increasing by $2 a month!’ 

As a result, their subscribers who were already anchored on $10, did not view the $2 increment nearly as catastrophic!

Some of them rationalized:

“A $2 increase isn’t so bad, let’s not forget it was supposed to go up by 10!”

  1. Confirmation bias

It is the tendency to seek out information that reaffirms past choices and to discount information that contradicts past judgments. It represents a case selective perception.  We seek out and accept information that reaffirms our past choices and current views and we discount information that contradicts or challenges them. We even tend to seek sources most likely to tell us what we want to hear and we give too much weight to supporting information and too little to contradictory.


The confirmation bias affects the way people view political information. For example, people generally prefer to spend more time looking at information which supports their political stance, while neglecting information that contradicts it.

  1. Availability bias

It is our tendency to base judgments on readily available information. A combination of readily available information and our previous direct experience with similar information has a particularly strong impact on our decision making. Also, events that evoke emotions are particularly vivid or more recent tend to be more available in our memory. This can lead us to overestimate the chances of unlikely events such as being in an airplane crash, suffering from complications from medical treatment or getting fired. Availability bias can also explain why managers give more weight in performance appraisals to recent employee behaviors than to behaviors of 6-9 months earlier.


More people are afraid of flying than they are driving a car. But if flying a plane were as dangerous as driving, things would have gone to a different level. It is just that media gives more attention than usual traffic accident and it evokes fear among people.

  1. Escalation of Commitment

It is an increased commitment to a previous decision despite negative information. It refers to our staying with a decision even if there is clear evidence that it is wrong. Evidence indicates that it occurs when individuals view themselves as responsible for the outcome. The fear of personal failure even biases the way we search for and evaluate information so that we choose only information that supports our dedication. It doesn’t matter whether we chose the failing course of action or it was assigned to us-we feel responsible and escalate in either case. Also, the sharing of decision authority-such as when others review the choice we made-can lead to higher escalation. The desire to consider yourself as a good person can lead you to experience escalation toward a prosocial goal.


Consider the Deep Tunnel project in Chicago, a plan to make a major addition to the city’s sewer system that will eventually improve its capacity to handle major storms. Although the project has absorbed millions of dollars, it won’t deliver any benefits until the entire new system is completed. Unfortunately, as each year passes, the expected date of completion recedes into the future while the bill for work to be finished grows exponentially. Of course, no one would have advocated the project if the true costs had been known at the outset. Yet, once begun, few have argued to kill the project (HBR, 1987).

  1. Randomness Error

The tendency of individuals to believe that they can predict the outcome of random events is randomness error. Most of us like to think we have some control over our world. Decision making suffers when we try to create meaning in random events, particularly when we turn imaginary patterns into superstitions.


This can be completely unnatural such as “I never make important decisions on Friday the 13th” or they can evolve from a reinforced past pattern of behavior like “Tiger Woods often wears a red shirt during a gold tournament’s final round because he won many junior tournaments wearing red shirts.”

  1. Risk aversion

The tendency to prefer a sure thing over a risky outcome is risky aversion.


A person is given the choice between two scenarios, one with a guaranteed payoff and one without. In the guaranteed scenario, the person receives $50. In the uncertain scenario, a coin is flipped to decide whether the person receives $100 or nothing. The expected payoff for both scenarios is $50, meaning that an individual who was insensitive to risk would not care whether they took the guaranteed payment or the gamble. However, individuals may have different risk attitudes. A person is:

  • risk-averseif he or she would accept a payoff of less than $50 (for example, $40), with no uncertainty, rather than taking the gamble and possibly receiving nothing.
  • risk neutralif he is indifferent between the bet and a certain $50 payment.
  • risk-seeking(or risk-loving) if the guaranteed payment must be more than $50 (for example, $60) to induce him to take the guaranteed option, rather than taking the gamble and possibly winning $100.

The average payoff of the gamble, known as its expected value, is $50. The dollar amount that the individual would accept instead of the bet is called the certainty equivalent, and the difference between the certainty equivalent and the expected value is called the risk premium.

  1. Hindsight Bias

It is the tendency to believe falsely, after the outcome is known, that we would have accurately predicted it. When we have feedback on the outcome, we seem good at concluding it was obvious.


The original home video rental industry, renting movies at brick-and-mortar stores, collapsed as online distribution outlets ate away at the market. Some have suggested that if rental companies like Blockbuster had leveraged their brand to offer online streaming and Kisoks, they could have avoided failure. While that seems obvious now in hindsight, tempting us to think we would have predicted it, many experts failed to predict industry trends in advance. Though the criticisms of decision makers may have merit, as Malcolm Gladwell, author of Blink and The Tipping Point, writes, “what is clear in hindsight is rarely clear before the fact.”

II. Influences on decision making: Individual differences and organizational constraints

Decision making in practice is influenced by bounded rationality, common biases and errors and the use of intuition. Individual differences such as personality also create deviations from the rational model. Personality dimensions such as conscientiousness and self-esteem plays role in decision making. Conscientiousness affects escalation of commitment as these people are driven by the fear of failure. Also they tend to make lot of hindsight bias as they have compulsive need to justify their actions too. People with high self-esteem tend to make lot of attribution errors such as self-serving bias.

When the situation is stressful, it is found that men takes egocentric and risky decisions while women become more empathetic and they make better decisions. Women spend more time than men analyzing the past, present and future. They are more likely to overanalyze problems before deciding and to rehash a decision once made.

People with higher mental ability may be fast in making decisions but they are susceptible to make errors due to overconfidence bias and anchoring. Even cultural differences have an impact in decision making. Cultures differ in time orientation, the value they place on rationality, their belief in the ability of people to solve problems, and their preferences for collective decision making. Example, mangers in Egypt make decisions slower and more deliberate process they follow than their U.S. counterparts.

When it comes to organizational constraints that affect decision making, performance evaluation systems, reward systems, formal regulations, system-imposed time constraints and historical precedents plays a huge role. Organizations can constrain decision makers, creating deviations from the rational model. Ramesh, a shift manager at a Domino’s restaurant in Ahmedabad, describes constraints he faces on the job. “I’ve got rules and regulations covering almost every decision I make-from how to make a pizza to how often the oven needs to be cleaned. My job doesn’t come with much freedom of choice.” Historical or past decisions and the impact it created can influence present decisions.

III. Ethics in decision making

Ethical considerations should be important to all organizational decision making. There are three ethical criteria which are significant in decision making. They are; utilitarianism, protection of human rights and deonance.

Utilitarianism: this proposes making decisions solely based on their outcomes, ideally to provide the greatest good for all. This view dominates business decision making and is consistent with goals such as efficiency, productivity and high profits.

Another ethical criterion is to make decisions consistent with fundamental liberties and privileges, as set forth in documents like the Constitution of India. It basically focuses on right to privacy, free speech and due process. This criterion protects whistle-blowers when they reveal organizations unethical practices to the press or government agencies using their right to free speech. This criterion protects whistle blowers when they reveal an organization’s unethical practices to the press or government agencies, using their right to free speech.

A third criterion is to impose and enforce rules fairly and impartially to ensure justice or an equitable distribution of benefits and costs. This criterion is often approached from a deonance standpoint.

Deonance is a perspective in which ethical decisions are made because you “ought to” in order to be consistent with moral norms, principles, standards, rules and laws. Some employees might feel as if they should not steal from their workplace because it is ethically wrong by moral norms.

Decision makers, particularly in for-profit organizations, feel comfortable with utilitarianism. The best interests of the organization and its stockholders can justify a lot of questionable actions, such as large layoffs. This is where corporate social responsibility (CSR) comes into picture to bring positive change.

Researchers are turning increasingly to behavioral ethics- an area of study that analyzes how people behave when confronted with ethical dilemma.

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