DECISION MAKING
Chapter 6
DECISION-MAKING
Decision
Making a choice from two or more
alternatives
The Decision-Making Process
Identifying a problem and decision
criteria and allocating weights to the
criteria
Developing, analyzing, and selecting an
alternative that can resolve the problem
Implementing the selected alternative
Evaluating the decisions effectiveness
STEP 1: IDENTIFICATION OF A
PROBLEM
Problem
A discrepancy between an existing and desired state of
affairs
Characteristics of Problems
A problem becomes a problem when a manager becomes
aware of it
There is pressure to solve the problem
The manager must have the authority, information, or
resources needed to solve the problem
STEP 2: IDENTIFICATION OF DECISION CRITERIA
Decision criteria are factors that are important
(relevant) to resolving the problem:
Costs
that will be incurred (investments required)
Risks likely to be encountered (chance of failure)
Outcomes that are desired (growth of the firm)
Step 3: Allocation of Weights to Criteria
Decisioncriteriaarenotofequalimportance:
Assigningaweighttoeachitemplacestheitemsinthe
correctpriorityorderoftheirimportanceinthedecision
makingprocess
5
STEP 4: DEVELOPMENT OF ALTERNATIVES
Identifying viable alternatives
Alternatives
are listed (without evaluation) that can
resolve the problem
Step 5: Analysis of Alternatives
Appraising each alternatives strengths and
weaknesses
Analternativesappraisalisbasedonitsabilitytoresolve
theissuesidentifiedinsteps2and3.
STEP 6: SELECTION OF AN ALTERNATIVE
Choosing the best alternative
The alternative with the highest total weight is chosen
Step 7: Implementation of the Alternative
Puttingthechosenalternativeintoaction
Conveyingthedecisiontoandgainingcommitmentfrom
thosewhowillcarryoutthedecision
STEP 8: EVALUATION OF
DECISION EFFECTIVENESS
The soundness of the decision is judged by its
outcomes:
How
effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
If
the problem was not resolved, what went wrong?
EXHIBIT 6-5 DECISIONS
MANAGERS MAKE
MAKING DECISIONS
Rationality
Managers
make consistent, value-maximizing choices
with specified constraints.
Assumptions
610
are that decision makers:
Are perfectly rational, fully objective, and logical.
Have carefully defined the problem and identified all viable
alternatives i.e. no ambiguity
Have a clear and specific goal
Will select the alternative that maximizes outcomes in the
organizations interests rather than in their personal
interests.
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
MAKING DECISIONS (CONTD)
Bounded Rationality
Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
Assumptions are that decision makers:
611
Does not have knowledge about all alternatives so will
not analyze all alternatives
Will
satisfice*choose
the
first
alternative
encountered that satisfactorily solves the problem
rather than maximize the outcome of their decision by
considering all alternatives and choosing the best.
Escalation of Commitment
Increasing or continuing a
commitment to previous decision
despite mounting evidence that the decision may
have been wrong.
INFLUENCES ON DECISION MAKING
Role of Intuition
Intuitive
612
decision making
Making decisions on the basis of experience, feelings, and
accumulated judgment
One-third of managers and other employees said they
emphasized gut feeling over cognitive problem solving
TYPES OF PROBLEMS AND DECISIONS
Structured Problems
Involve
Are
goals that clear.
familiar (have occurred before).
Are
easily and completely definedinformation
about the problem is available and complete.
Programmed Decision
A
repetitive decision that can be handled by a
routine approach.
613
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Inc. All rights reserved.
TYPES OF PROGRAMMED DECISIONS
A Procedure
A series of interrelated steps that a manager can use to
respond (applying a policy) to a structured problem.
A Rule
An explicit statement that limits what a manager or
employee can or cannot do in carrying out the steps
involved in a procedure.
A Policy
A general guideline for making a decision about a
structured problem.
614
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Inc. All rights reserved.
AN EXAMPLE OF POLICY, PROCEDURE, AND RULE
Policy
Accept
all customer-returned merchandise.
Procedure
Follow
all steps for completing merchandise
return documentation.
Rules
Managers
No
615
must approve all refunds over $50.00.
credit purchases are refunded for cash.
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
PROBLEMS AND DECISIONS
(CONTD)
Unstructured Problems
Problems
that are new or unusual and for which
information is ambiguous or incomplete.
Problems
that will require custom-made
solutions.
616
Nonprogrammed Decisions
Decisions
that are unique and nonrecurring.
Decisions
that generate unique responses.
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
EXHIBIT 6-7 PROGRAMMED VERSUS
NONPROGRAMMED DECISIONS
DECISION-MAKING CONDITIONS
Certainty
A
ideal situation in which a manager can make an
accurate decision because the outcome of every
alternative choice is known.
Risk
A
situation in which the manager is able to
estimate the likelihood (probability) of outcomes
that result from the choice of particular
alternatives.
618
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Inc. All rights reserved.
DECISION-MAKING CONDITIONS
Uncertainty
Limited
information prevents estimation of
outcome probabilities for alternatives associated
with the problem and may force managers to
rely on intuition, hunches, and gut feelings.
619
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Inc. All rights reserved.
EXHIBIT 6-11 COMMON DECISION-MAKING
ERRORS AND BIASES
620
DECISION-MAKING BIASES AND
ERRORS
Heuristics
Using
rules of thumb to simplify decision
making.
Overconfidence Bias
Holding
unrealistically positive views of ones
self and ones performance.
Immediate Gratification Bias
Choosing
alternatives that offer immediate
rewards and that to avoid immediate costs.
621
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Inc. All rights reserved.
DECISION-MAKING BIASES AND ERRORS
(CONTD)
Anchoring Effect
Focusing
and accepting initial information and ignoring
subsequent information.
Selective Perception
Selectively
organizing and interpreting events based on
the decision makers biased perceptions.
Confirmation Bias
Seeking
out information that reaffirms past choices and
discounting contradictory information.
622
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
DECISION-MAKING BIASES AND ERRORS
(CONTD)
Framing Bias
Availability Bias
Drawing analogies and seeing identical situations when none
exist.
Randomness Bias
623
Losing decision-making objectivity by focusing on the most
recent events.
Representation Bias
Selecting and highlighting certain aspects of a situation while
ignoring other aspects.
Creating unfounded meaning out of random events.
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
DECISION-MAKING BIASES AND ERRORS
(CONTD)
Sunk Costs Errors
Forgetting that current actions cannot influence past events
rather relate only to future consequences.
Self-Serving Bias
Taking quick credit for successes and blaming outside factors
for failures.
Hindsight Bias
624
Mistakenly believing that an event could have been predicted
once the actual outcome is known (after-the-fact).
Copyright 2005 Prentice Hall,
Inc. All rights reserved.
