Topic 3 mp_decision_making

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3Chapter

Foundations of Decision Making

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Learning Objectives

• Describe the decision making process.• Explain the three approaches managers can

use to make decisions.• Describe the types of decisions and decision-

making conditions managers face.• Discuss group decision making.• Discuss contemporary issues in managerial

decision making.

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How Do Managers Make Decisions?

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Decision making process

8 steps1. Identify problems2. Identify decision criteria (critical success factors)

3. Weight the criteria (set priority)4. Develop alternatives5. Analyze alternatives6. Select alternative7. Implement alternative8. Evaluate decision effectiveness

What Defines a Decision Problem?

Problem – A discrepancy between an existing and a desired state of affairs.

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Factors in the Decision-Making Process

Relevant decision criteria:• Price• Model (two-or four-door)• Size • Manufacturer • Optional equipment• Fuel economy, or• Repair records.

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Weighing Criteria and Analyzing AlternativesTo weigh criteria:

1. Give the most important criterion a weight of 10.

2. Compare remaining criteria against that standard to indicate their relative degrees of importance.

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Weighing Criteria and Analyzing Alternatives (cont.)

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Weighing Criteria and Analyzing Alternatives (cont.)

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Determining the Best Choice

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Implementing Decisions

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• Putting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it.

The Last Step in the Decision Process

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The last step in the decision-making process, managers appraise the result of the decision to see whether the problem was resolved.

Common Errors in the Decision Making Process

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• Overconfidence: when they think they know more than they do/hold unrealistic positive views of themselves.

• Immediate Gratification: decision makers tend to want immediate reward and to avoid immediate costs.

• Anchoring: decision makers fixate on initial information as a starting point, and then, once set, fail to adequately adjust for subsequent information.

• Selective perception: decision makers selectively organize and interpret events based on their biased perceptions.

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Common Errors

Common Errors

• Confirmation: decision makers seek out information that reaffirms their past choices and discount information that contradicts past judgment.

• Framing: decision makers select and highlight certain aspects of a situation while excluding others.

• Availability: Decision makers tend to remember events that are the most recent and vivid in their memory.

• Representation: decision makers assess the likelihood of an event based on how closely it resembles other events.

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Common Errors

• Randomness: decision makers try to create meaning out of random events.

• Sunk costs: decision makers forget that current choices can’t correct the past.

• Self-serving: decision makers who are quick to take credit for their successes and blame failure on outside factors.

• Hindsight: decision makers tend to falsely believe that they would have accurately predicted the outcome of an event once that outcome is actually known.

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(1) The Rational Model

• Rational decision making – Choices that are consistent and maximize value within specified constraints

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IT can enhance an org’s decision-making capabilities.

• Rational Model assumes – that managers’ decision making will be rational

logical and consistent choices to maximize value– The problem faced would be clear and

unambiguous – the decision maker would have a clear and

specific goal – know all possible alternatives

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(2) Bounded Rationality

• Bounded rationality – Decisions that are rational within the limits of a manager’s ability to process information

• Satisfice – Accepting solutions that are “good enough”

• Escalation of commitment – An increased commitment to a previous decision despite evidence that it may have been a poor one

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(3) Intuition in Decision Making

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• Intuitive Decision Making– making decisions on the basis of experience,

feelings and accumulated judgment– described as “unconscious reasoning.”

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Types of Problems

• Structured problem – A straightforward, familiar, and easily defined problem

• Unstructured problem – A problem that is new or unusual for which information is ambiguous or incomplete

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Types of Decisions: Programmed

Programmed decisions – Repetitive decisions that can be handled using a routine approach

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Types of Decisions: Nonprogrammed

Nonprogrammed decisions – Unique and nonrecurring decisions; require a custom-made solution

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Problems, Decision Types, and Organizational Levels

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Decision-Making Conditions

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• Risk – A situation where a decision maker estimates the likelihood of certain outcomes

• Certainty – A situation where a manager can make accurate decisions because the outcome of every alternative is known

• Uncertainty – A situation where a decision maker has neither certainty nor reasonable probability estimates available

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How Do Groups Make Decisions?

Important decisions are often made by groups who will be most affected by those decisions:• Committees• Task forces• Review panels• Work teams

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Group Decision Making: Benefits

• Provides more information

• Generates more alternatives

• Increases acceptance of a solution

• Increases legitimacy of the decision

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Group Decision Making: Drawbacks

• Time-consuming• Infrequent and often inefficient interaction• Minority domination• Groupthink• Ambiguous responsibility

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When Are Groups Most Effective?

Individual• Faster decision making• More efficient use of

work hours

Group• More accurate decisions• More heterogeneous

representation• More time-consuming• More creative• More effective in

accepting final solution

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Improving Group Decision Making

Three ways of making group decisions more creative:• Brainstorming• Nominal group technique• Electronic meetings

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How Can You Improve Group Decision Making?• Brainstorming

– An idea-generating process that encourages alternatives while withholding criticism

– Ideas construction -> decision• Nominal Group Technique

– group members are physically present but operate independently

– Secretly write list of general prob. & solutions• Electronic Meeting

- nominal group tech. - participants are linked by computer

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Contemporary Issues

• National culture – Influences the way in which decisions are made and the degree of risk a decision maker will take

• Creativity – The ability to produce novel and useful ideas

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Creativity in Decision Making

Creativity allows the decision maker to:• Appraise and understand a problem more fully• “See” problems others can’t see • Identify all viable alternatives

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