Decision Making

Varaidzo Kaguda
Business Studies Department
University of Zimbabwe
 Introduction
• Management is the practice of consciously and
continually shaping formal organizations, and the
art of decision making is central to doing that.
• Decision making refers to the systematic
identification and selection of a course of action to
deal with a specific problem or take advantage of an
opportunity.
• A good decision results in the selection of
appropriate goals and courses of action that
increase organizational performance; and bad
decisions result in lower performance.
• Its an important part of every manager’s job.
 Problem and opportunity
• Situation that occurs when an actual state of affairs differs
from a desired state of affairs.
• Problems are usually opportunities in disguise.
• A problem of customer complaints about slow delivery of
orders could, for example, also be seen as an opportunity to
redesign production processes and customer service.
• Opportunity – situation that occurs when circumstances offer
an organization the chance to exceed stated goals and
objectives.
 Programmed and Non-programmed
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 (decision rules).
• E.g. An office manager orders basic office supplies,
such as paper and pens, whenever the inventory of
supplies on hand drops below a certain level.
• Its programmed in the sense that the office managers
do not need to continually make judgments about what
should be done. They can rely on long-established
decision rules – e.g. when the storage shelves are
three-quarters empty, order copy paper.
 Programmed decision making cont’d
• If a problem recurs, and if its component elements can be
defined, predicted and analyzed, then it may be a candidate
for programmed decision making.
• Programmed decisions limits management’s freedom
because of less latitude (freedom) in deciding what to do.
• However, the rules, policies or procedures governing
programmed decision making are meant to save time and
free up management to devote attention to other more
important activities.
 Nonprogrammed decision making
• Non-routine decision making that occurs in
response to unusual, unpredictable opportunities
and threats.
• 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 and managers lack the information they
would need to develop rules to cover it.
• E.g. decisions to invest in a new kind of technology,
what to do about a failing product line, launch a
new promotional campaign, enter a new market or
expand internationally.
 Nonprogrammed decision making cont’d
• How do managers make decisions in the absence of
decision rules?
• First, they must search for information about
alternative courses of action, second, they must rely on
intuition and judgment to choose wisely among
alternatives.
• Intuition – ability to make sound decisions based on
one’s past experience and immediate feelings about
information at hand.
• Judgment – ability to develop a sound opinion based on
one’s evaluation of the information at hand.
• Both intuition and judgment usually result in flawed
decision making – thus the likelihood of error is much
greater in nonprogrammed decision making than in
programmed decision making.
 Decision making situations
• Decision making situations are frequently categorized
on a continuum ranging from certainty (predictable),
through risk, to uncertainty (highly unpredictable).
• Certainty – decision making condition in which
managers have accurate, measurable, and reliable
information about the outcome of various alternatives
under consideration.
• Risk – occurs whenever managers cannot predict an
alternative’s outcome with certainty, but have enough
information to predict the probability it will lead to the
desired state.
• Uncertainty – decision making condition in which
managers face unpredictable external conditions or
lack of information needed to establish the probability
of certain events.
 The classical/ Rational decision making
•
model
A prescriptive approach to decision making based on
the assumption that the decision maker can identify
and evaluate all possible alternatives and their
consequences and rationally choose the most
appropriate course of action.
• Also known as the rational decision making model.
• Prescriptive – specifies how decisions should be made.
• the model assumes that managers have access to all
the information they need to make the optimum
decision – the most appropriate decision possible in
light of what they believe to be the most desirable
future consequences of their organization.
 Classical decision making model cont’d
• The rational decision making process involves the
following four stages:
(1) Investigate the situation
• Define the problem
• Diagnose causes
• Identify decision objectives what would constitute an
effective solution. (improve rather than restore
organizational performance).
(2) Develop alternatives
• This stage may be reasonably simple for most
programmed decisions but not so simple for complex
nonprogrammed decisions, especially if there are time
constraints.
 Classical decision making model cont’d
(3) Evaluate alternatives and select the best one
available
Once managers have generated a set of alternatives,
they then evaluate the merits and demerits of each
one.
In general successful managers use four criteria to
evaluate the pros and cons of alternative courses of
action:
• Legality, ethicalness, economic feasibility and
practicality.
 Classical decision making model cont’d
(4) Implement and monitor decision.
• Once the best alternative has been selected,
managers have to make plans to cope with the
requirements and problems that may be
encountered in putting it into effect.
• Resources must be acquired and allocated as
necessary.
• Budgets, schedules and progress reports are all
essential to performing the management function
of control.
 Six - steps in decision making
• Recognize the need for a decision

• Generate alternatives

• Evaluate or assess alternatives

• Choose among alternatives

• Implement the chosen alternative

• Learn from feedback

 The Administrative Model
• James March and Herbert Simon disagreed with the
underlying assumptions of the classical model of
decision making.
• They proposed that managers in the real world do
not have access to all the information they need to
make a decision.
• They pointed out that even if all the information
were available, many managers would lack the
mental or psychological ability to absorb and
evaluate it correctly.
• The administrative model is based on three
important concepts: bounded rationality,
incomplete information, and satisficing.
 Bounded rationality
• March and Simon pointed out that human decision
making capabilities are bounded by people’s cognitive
limitations – that is limitations on their ability to
interpret, process, and act on information.
• They argued that the limitations of human intelligence
constrain the ability of decision makers to determine
the optimum decision.
• They coined the term bounded rationality to describe
the situation in which the number of alternatives a
manager must identify is so great and the amount of
information so vast that it is difficult for the manager to
even come close to evaluating it all before making a
decision.
 Incomplete information
• Even if managers may have unlimited ability to
evaluate information, they still would not be able to
arrive at the optimum decision because they would
have incomplete information.
• Information is incomplete because the full range of
decision making alternatives is unknowable in most
situations and the consequences associated with
known alternatives are uncertain.
• In other words, information is incomplete because
of risk and uncertainty, ambiguity, and time
constraints
 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.
• Satisficing – searching for and choosing an acceptable,
or satisfactory, response to problems and
opportunities, rather than trying to make the best
decision.
• They pointed out that managerial decision making is
more art than science.
• Managers should rely on their intuition and judgment
to make what seems to them to be the best decision in
the face of uncertainty and ambiguity.
Cognitive biases and decision making
• In the 1970s psychologists Daniel Kahneman and Amos
Tversky suggested that because all decision makers are
subject to bounded rationality, they tend to use heuristics,
rules of thumb that simplify the process of making decisions.
• They argued that rule 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.
• Systematic errors – errors that peopke make over and over
and that result in poor decision making.
• Because of cognitive biases , which are caused by systematic
errors, otherwise capable managers end up making bad
decisions.
 Cognitive biases and decision making
Cont’
• Four sources of bias that can adversely affect
the way managers make decisions are: prior
hypotheses, representativeness, the illusion of
control, and escalating commitment.
• Prior hypothesis bias- A cognitive bias
resulting from the tendency to base decisions
on strong prior beliefs even if evidence shows
that those beliefs are wrong.
 Cognitive biases and decision making Cont’

• Representativeness Bias – A cognitive bias

resulting from the tendency to generalize
inappropriately from a small sample or from a
single vivid event or episode.
• Illusion of control – A source of cognitive bias
resulting from the tendency to overestimate
one’s own ability to control activities and
events.
 Cognitive biases and decision making Cont’

• Escalating commitment – A source of cognitive

bias resulting from the tendency to commit
additional resources to a project even if
evidence shows that the project is failing.
 Political Decision Making Model
• In contrast to the rational model, players in the
political model (often referred to as
incrementalists) do not focus on a single issue but
on many intraorganizational problems that reflect
their personal goals.
• In contrast to the administrative model, the
political model does not assume that decisions
result from applying existing standard operating
procedures, programs, and routines.
 Political Decision Making Model cont’
• Decisions result from bargaining among
coalitions.
• Managerial power is decentralized.
• The political model views decision making as a
process of conflict resolution and consensus
building and decisions as products of
compromise.
• The old adage, “Scratch my back and I will scratch
yours” is the dominant decision making strategy.
 Political Decision Making Model cont’
• When a problem requires a change in policy, the
political model predicts that a manager will
consider a few alternatives, all of them similar to
existing policy.
• This perspective points out that decisions tend to
be incremental i.e that managers make small
changes in response to immediate pressures
instead of working out a clear set of plans and a
comprehensive program. This incrementalist
approach can be seen as the simplest or most
extreme form of satisficing
Political Decision Making Model cont’
• The incremental approach of the political
model allows managers to reduce the time
spent on the information search and problem
definition stages. Incremental decision making
is geared to address shortcomings in present
policy rather than consider a superior, but
novel, course of action.
 Political Decision Making Model cont’
• In the political model, the stakeholders have different
perception, priorities, and solutions. Because
stakeholders have the power to veto some proposals,
no policy that harms a powerful stakeholder is likely to
triumph even if it is objectively.
• For example, access to information can be very
sensitive issue, since in politics, “information is power.”
If managers discover that once a new information
system is implemented they will no longer have access
to certain data, it is quite possible they will resist the
implementation effort
 Decision Making styles
• Making decisions is one of the main activities
of a leader. Wren and Voich (Wren and Voich,
1994) believe that decision making is
mandatory for successful execution of any
managerial function. According to the Four
Quadrant Model of the Brain of Ned Herman,
Rowe (Rowe et al., 1989) defined four styles of
decision making.
 Decision Making Styles Cont’
• The activity of each quadrant of the brain is
the basis for a particular style of decision
making.
• Rowe (1992) determined styles of decision
making through combining cognitive
complexity and value orientation.
 Decision Making Styles Cont’
• Cognitive complexity stems from the use of
information to the conceptual ability of
parallel information processing and
generalisation, i.e. determining strategy. Value
orientation is based on the orientation of
technical values (tasks) to the orientation of
organisational values (people).
 Decision Making Styles cont’
• The styles of decision making that Alan Rowe
talks about are the following: Directive,
Analytical, Conceptual, Behavioural.
 Directive
• used by autocratic leaders who show
tendency to behave aggressively. They make
decisions on the basis of a relatively small
amount of information and lack tolerance for
vague information.
 Analytical
• managers with analytical style in cognitive
terms are complex. They make decisions by
researching extensive data and have increased
tolerance for vague information.
 Conceptual
• is notable in managers with need for
recognition and success. They make decisions
based on extensive elaboration of data and
tend to be creative and inventive.
 Behavioural
• characterises managers with exaggerated
need for acceptance (affiliation) and
democratic relations with subordinates. They
make decisions taking care to maintain good
relations with other employees.