DECISION MAKING

THE NATURE OF MANAGERIAL DECISION MAKING

Every time managers plan, organize, direct, or control organizational
activities, they make a stream of decisions.

Decision making is a basic part of every task managers perform.

Forces in the external environment give rise to many opportunities and

threats for managers and their organizations. In addition, inside an
organization, managers must address many opportunities and threats
that may arise as organ- izational resources are used.

To deal with these opportunities and threats, managers must make

decisions—that is, they must select one solution from a set of
alternatives
PROGRAMMED AND
NONPROGRAMMED DECISION MAKING

programmed decision making Routine, virtually

automatic decision making that follows established
rules or guidelines.

Programmed decisions are decisions that have been

made so many times in the past that managers have
developed rules or guidelines to be applied when
certain situations inevitably occur.
PROGRAMMED AND
NONPROGRAMMED DECISION MAKING

nonprogrammed decision making Nonroutine decision

making that occurs in response to unusual, unpredictable
opportunities and threats.

Nonprogrammed decision making occurs when there are

no ready-made decision rules that managers can apply to
a situation.

Rules do not exist because the situation is unexpected or

uncertain and managers lack the information they would
need to develop rules to cover it.
HOW DO MANAGERS MAKE DECISIONS IN THE ABSENCE
OF DECISION RULES?

intuition Feelings, beliefs, and hunches that come

readily to mind, require little effort and information
gathering, and result in on-the-spot decisions.

reasoned judgment A decision that requires time

and effort and results from careful information
gathering, generation of alternatives, and evaluation
of alternatives.
 THE CLASSICAL MODEL

One of the earliest models of decision

making, the classical model, is
prescriptive, which means it specifies how
decisions should be made
The premise of the classical model is that
once managers recognize the need to
make a decision, they should be able to
generate a complete list of all alternatives
and consequences and make the best
choice. In other words, the classical model
assumes managers have access to all the
information they need to make the
optimum decision
THE DOWNSIDE OF CLASSICAL MODEL

James March and Herbert Simon disagreed with the

underlying assumptions of the classical model of decision
making.
In contrast, they proposed that managers in the real
world do not have access to all the information they
need to make a decision.
Moreover, they pointed out that even if all information
were readily available, many managers would lack the
mental or psychological ability to absorb and evaluate it
correctly.
As a result, March and Simon developed the
administrative mode
THE ADMINISTRATIVE MODEL IS BASED ON THREE
IMPORTANT CONCEPTS

BOUNDED RATIONALITY March and Simon pointed out that human decision-
making capabilities are bounded by people’s cognitive limitations—that is,
limitations in their ability to interpret, process, and act on information
INCOMPLETE INFORMATION Even if managers had unlimited ability to
evaluate information, they still would not be able to arrive at the optimum
decision because they would have incomplete information.
SATISFICING March and Simon argued that managers do not attempt to
discover every alternative when faced with bounded rationality, an uncertain
future, unquantifiable risks, considerable ambiguity, time constraints, and
high information costs. Rather, they use a strategy known as satisficing,
which is exploring a limited sample of all potential alternatives.
THE CAUSES OF INCOMPLETE INFORMATION

RISK AND UNCERTAINTY. Risk is present when managers know the possible
outcomes of a particular course of action and can assign probabilities to them.
When uncertainty exists, the probabilities of alternative outcomes cannot be
determined and future outcomes are unknown.
AMBIGUOUS INFORMATION A second reason information is incomplete is that
much of the information managers have at their disposal is ambiguous
information. Its meaning is not clear—it can be interpreted in multiple and often
conflicting ways
TIME CONSTRAINTS AND INFORMATION COSTS The third reason information is
incomplete is that managers have neither the time nor the money to search for
all pos- sible alternative solutions and evaluate all the potential consequences of
those alternatives
SIX STEPS IN DECISION MAKING
ASSESSING THE ALTERNATIVES

Legality: Managers must ensure that a possible course of action will not
violate any domes- tic or international laws or government regulations.
Ethicalness: Managers must ensure that a possible course of action is
ethical and will not unnecessarily harm any stakeholder group
Economic feasibility: Managers must decide whether the alternatives are
economically feasible—that is, whether they can be accomplished, given
the organization’s performance goals.
Practicality: Managers must decide whether they have the capabilities
and resources required to implement the alternative, and they must be
sure the alternative will not threaten the attainment of other
organizational goals.
Heuristics & systematic errors
1. In the 1970s psychologists Daniel Kahneman and the late Amos
Tversky suggested that because all decision makers are subject to
bounded rationality, they tend to use heuristics, which are rules
of thumb that simplify the process of making decisions.
2. Kahneman and Tversky argued that rules of thumb are often
useful because they help decision makers make sense of
complex, uncertain, and ambiguous information. Sometimes,
however, the use of heuristics can lead to systematic errors in
the way decision makers process information about alternatives
and make decisions
3. systematic errors Errors that people make over and over and that
result in poor decision making.
Cognitive Biases
1. confirmation bias A cognitive bias resulting from the tendency to
base decisions on one’s existing beliefs even if evidence shows
that those beliefs are wrong.
2. representativeness bias A cognitive bias resulting from the
tendency to generalize inappropriately from a small sample or
from a single vivid event or episode.
3. illusion of control A source of cognitive bias resulting from the
tendency to overestimate one’s own ability to control activities
and events.
4. escalating commitment A source of cognitive bias result- ing
from the tendency to commit additional resources to a project
even if evidence shows that the project is failing.
Group decision making
1. Many (or perhaps most) important organizational decisions are made by groups or teams of managers
rather than by individuals.
2. Group decision making is superior to individual decision making in several respects. When managers work
as a team to make decisions and solve problems, their choices of alternatives are less likely to fall victim to
the biases and errors discussed previously. They are able to draw on the combined skills, competencies,
and accumulated knowledge of group members and thereby improve their ability to generate feasible
alternatives and make good decisions.
3. Group decision making also allows managers to process more information and to correct one another’s
errors. And in the implementation phase, all managers affected by the decisions agree to cooperate.
4. When a group of managers makes a decision (as opposed to one top manager making a decision and
imposing it on subordinate managers), the probability that the decision will be implemented successfully
increases.
BIASED Group decision making
Groupthink is a pattern of faulty and biased decision making that occurs in groups whose members strive for
agreement among themselves at the expense of accurately assessing information relevant to a decision

Two techniques known to counteract groupthink and cognitive biases are devil’s advocacy and dialectical
inquiry :
1. devil’s advocacy Critical analysis of a preferred alterna- tive, made in response to challenges raised by a
group member who, playing the role of devil’s advocate, defends unpopular or opposing alternatives for
the sake of argument.
2. dialectical inquiry Critical analysis of two preferred alternatives in order to find an even better alternative
for the organization to adopt.
END OF PRESENTATION