Basics of Decision Making

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 Part I

Introduction
Is This An Effective Management Strategy In the Face of the KNOWN Risks!

YES!

NO!!

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 Organizations
 Organizations are systems
 Involve people, structure and a
common purpose
 Have limited resources
 Need to perform a series of functions to
meet its objectives
 Managers
 Managers are responsible for effective
and efficient execution of these
organizational functions.
 A typical manager performs a number
of functions that are categorized as:
• Interpersonal
• Informational
• Decisional
 Managers
One of the key traits that distinguish
managers from operatives is the ability to
make independent decisions.
 Part II

Decision-making
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 Example
A farmer with his wolf, goat, and cabbage
come to the edge of a river they wish to
cross. There is a boat at the river’s edge,
but of course, only the farmer can row.
The boat can only handle one animal/item
in addition to the farmer. If the wolf is ever
left alone with the goat, the wolf will eat
the goat. If the goat is left alone with the
cabbage, the goat will eat the cabbage.
What should the farmer do to get across
the river with all his possessions?
 Decision Making

• What is decision making?

 It is the process of selecting among
alternatives.
 Chester Bernard in “The Functions of the
Executive” gave a comprehensive analytical
treatment of decision making and noted:
“The process of decision … are largely
techniques for narrowing choice.”

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 Definitions
• Choice about a “course of action”
-- Simon

• Choice leading to “a certain desired

objective”
-- Churchman

• Knowledge indicating the nature of a

commitment to action
-- Holsapple and Whinston
 What is decision-making?
The word decision is defined as:
“A choice between two or more
alternatives”.
Thus decision-making can be defined as:
“the selection of a course of action from
among alternatives ”.
Example of error in decision-making process
• Shane Frederick had used simple puzzles to study
cognitive self monitoring, as in the following
example: “A bat and a ball cost 1.10 dollars in total.
The bat costs 1 dollar more than the ball. How much
does the ball cost?” Almost everyone reports an
initial tendency to answer “10 cents” because the
sum 1.10 dollars separate naturally into 1 dollar and
10 cents and because 10 cents is about the right
magnitude. Frederick found that many intelligent
people yield to this immediate impulse” 50% (47/93)
of Princeton students and 56% (164/293) of students
at the University of Michigan gave the wrong answer.
Clearly, these respondents offered a response
without checking it.
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Decision Making

Intelligence
Activity

Feedbac
Design Activity
k

Choice
Activity

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 Decision-making process
• Herbert A. Simon, the well known Nobel Prize
winning organization and decision theorist
conceptualized three major phases in decision-
making process:
1. Intelligence activity – Consists of searching
the environment for conditions calling for
decision making
2. Design activity – During this phase,
inventing, developing, and analyzing
possible courses of action take place
3. Choice activity – This is the actual choice -
selecting a particular course of action from
among those variables
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Mintzberg’s Model

Phase 1 Phase 2 Phase 3

SELECTION
IDENTIFICATION DEVELOPMENT 1. Judgement
1. Recognition 1. Search 2. Analysis
2. Diagnosis 2. Design 3. Bargaining

Authorization

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Behavioural Decision Making

Decision Rationality

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 Behavioral Decision Making Models
Economic Rationality Model
• This model comes from classic model, in which the
decision maker is perfectly and completely rational in
every way. Regarding decision-making activities, the
following conditions are assumed.
1. The decision will be completely rational in the means-
end sense.
2. There is a complete and consistent system of
preferences which allows a choice among alternatives.
3. There is complete awareness of all the possible
alternatives.
4. There is no limits to the complexity of computations that
can be performed to determine the best alternatives.
5. Probability calculations are neither frightening nor
mysterious.
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Simon’s Bounded Rationality Model
• To present a more realistic alternative to the
economic rationality model, Herbert A Simon
proposed an alternative model. He felt that
management decision-making behavior could best
be described as follows”

1. In choosing between alternatives, managers

attempt to satisfice, or look for the one which is
satisfactory or “good enough”. Examples of
satisficing criteria would be adequate profit or share
of the market and fair price.
2. They recognize that the world they perceive is a
drastically simplified model of the real world. They
are content with this simplification because they
believe the real world is empty anyway.
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 Simon’s Bounded Rationality Model (contd…)

3. Because they satisfice rather than maximize, they

can make their choices without first determining
all possible behavior alternatives and without
ascertaining that these are in fact all the
alternatives.
4. Because they treat the world rather empty, they
are able to make decision with relatively simple
rules of thumb or tricks of the trade or force of
habits. These techniques do not make impossible
demands upon their capacity for thought.

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 New Rational Techniques: ABC and EVA

Traditionally, accounting identified costs according to the

category of expenses (for example, salaries, supplies and fixed
costs). Activity-based Costing (ABC), on the other hand,
determines costs according to what is paid for the different
tasks employees perform. Under ABC, costs associated with
activities such as processing sales orders, expediting supplies
and/or customer orders, resolving supplier quality and/or
problem, and retooling of machines are calculated. Both the
traditional and ABC methods reach the same bottom line costs,
but ABC provides decision makers a much more accurate
breakdown of the cost data. For instance, at Hewlett-Packard
when ABC showed that testing new designs and parts was
extremely expensive, engineer changed their plans on the spot
to favour components that required less testing, thus greatly
lowering costs.
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 New Rational Techniques: ABC and EVA …

Another example of rethinking the traditional economic rationality

used by management decision makers is the finance technique of
Economic Value Added (EVA).EVA A long standing tenet of the
economic model has been that a rational decision is one which
resulted in the earning higher than the cost of capital.
Traditionally, the cost of capital has simply been equated with the
interest paid on borrowed capital. Under EVA, however, the true
cost of all capital is determined. For example, the true cost of
equity capital is the opportunity cost (what shareholders could
earn in price appreciation and dividends if they invested in similar
company). Also, what a firm spends on research and development
or employee training has been traditionally treated as expenses,
but under EVA, it is treated as capital investment and is added
into the cost of capital. The EVA is determined by subtracting this
total cost of capital from the after-tax operating profit.
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The Social Model
At the opposite extreme from the economic rationality model is the
Social Model. Sigmund Freud presented humans as bundles of
feelings, emotions, and instincts with their behaviour guided by
their unconscious desires.

Although most contemporary psychologists would take issue with

the Freudian description of humans, almost all would agree that
social influences have significant impact on decision-making
behaviour. Furthermore, social pressures and influences may cause
managers to make irrational decisions.

There seems to be a tendency on the part of many decision makers

to stick with a bad decision alternative, even when it is unlikely
that things can be turned around. Staw and Ross have identified
four major reasons why this phenomenon of escalation of
commitment might happen.

1)Project Characteristics
2)Psychological Determinants
3)Social Forces
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4)Organizational Determinants
Judgmental Heuristics and Biases Model (Kahneman
&Tversky)

1. Are there more words in the English language that (a) begin
with the letter r or (b) have r as the third letter?
2. One one day in a large metropolitan hospital, eight birth were
recorded by gender in the order of their arrival. Which of the
following orders of birth (B= boy, G=girl) was most likely to
be reported?
a. BBBBBBBB b. BBBBGGGG c. BGBBGGGB
3. A newly hired engineer for a computer firm in the Boston
metropolitan area has four years of experience and good all-
around qualifications. When asked to estimate the starting
salary for this employee, Prof. Luthens secretary (knowing
very little about the profession or the industry) guesses an
annual salary of $50,000. What is your estimate?

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Judgmental Heuristics and Biases Model (Kahneman &Tversky)

The availability heuristic

This cognitive input into judgment refers to decision makers’
tendencies to assess the frequency, probability, or likelihood of an
event occurring by how readily they can remember it. “An event
that evokes emotions and is vivid, easily imagined, and specific will
be more ‘available’ from memory than will an event that is
unemotional in nature, bland, difficult to imagine, or vague.”

The representativeness heuristic

This second major heuristic uses decision rules of thumb based on
the likelihood of an event’s occurrence as judged by the similarity
of that occurrence to stereotypes of similar occurrences.
“the problem here is that we believe that a sequence of
independent events (such as eight births) generated from a
random process should resemble the essential characteristics of
random process, even when the sequence is too short for that
process to express itself statistically. Decision makers expect a few
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examples of a random event to behave in the same way as large
The anchoring and adjustment heuristic

In this heuristic, the decision maker makes a judgment by starting

from an initial value or anchor and then adjusts to make the final
decision.

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The Nature of Decision Making
Making effective decisions, as well as
recognizing when a bad decision has been
made and quickly responding to mistakes, is a
key ingredient in organizational effectiveness.
Some experts believe that decision making is
the most basic and fundamental of all
managerial activities.
Decision making is most closely linked with the
Planning function.
However, it is also part of Organizing, Leading
and Controlling.
 What is Decision Making?

• Decision making is the

act of choosing one
alternative from among a
set of alternatives.

• We have to first decide

that a decision has to be
made and then secondly
identify a set of feasible
alternatives before we
select one.
 Decision-Making Process

• Decision-Making Process includes:

recognizing and defining the nature of a decision

situation
identifying alternatives
choosing the ‘best’ [most effective] alternative and
putting it into practice.
Decision-Making Process. . .
(continued)

Sometimes effective decisions must be

made to:

• Optimize some set of factors such as profits, sales,

employee welfare and market share or
• Minimize loss, expenses or employee turnover or
• Select best method for going out of business,
laying off employees, or terminating a strategic
alliance.
Decision-Making Process. . .
(continued)

Managers make decisions about both

problems (undesirable situations) and
opportunities (desirable situations).
Cutting costs by 10%
Learning that the company has earned higher-
than-projected profits
It may take a long time before a manager
can know for sure if the right decision was
made.
 Types of Decisions

• Programmed decision is
one that is fairly
structured or recurs with
some frequency (or both).
• Nonprogrammed decision
is one that is unstructured
and occurs much less
often than a programmed
decision.
 Programmed Decisions. . .
Many decisions regarding basic operating
systems and procedures and standard
organizational transactions fall into this
category.
McDonald’s employees are trained to make the Big
Mac according to specific procedures.
Starbucks, and many other organizations, use
programmed decisions to purchase new supplies
[coffee beans, cups and napkins].
Nonprogrammed Decisions. . .
Most of the decisions made by top managers
involving strategy and organization design are
nonprogrammed.
Decisions about mergers, acquisitions and takeovers, new
facilities, new products, labor contracts and legal issues are
nonprogrammed decisions.
Managers faced with nonprogrammed decisions
must treat each one as unique, investing great
amounts of time, energy and resources into
exploring the situation from all views.
Intuition and experience are major factors in
these decisions.
 Decision-Making Conditions

• Decision Making Under

Certainty

• Decision Making Under

Risk

• Decision Making Under

Uncertainty
 Decision Making Under Certainty

A state of certainty exists when a decision maker

knows, with reasonable certainty, what the
alternatives are and what conditions are
associated with each alternative.
Very few organizational decisions, however, are
made under these conditions.
The complex and turbulent environment in which
businesses exist rarely allows for such
decisions.
 Decision Making Under Risk

A state of risk exists when a decision maker makes

decisions under a condition in which the availability of
each alternative and its potential payoffs and costs are
all associated with probability estimate.
Decisions such as these are based on past experiences,
relevant information, the advice of others and one’s own
judgment.
Decision is ‘calculated’ on the basis of which alternative
has the highest probability of working effectively. [union
negotiations, Porsche’s SUV focus vs high-performance sports cars]
 Decision Making Under Uncertainty
A state of uncertainty exists when a decision maker does
not know all of the alternatives, the risks associated with
each, or the consequences each alternative is likely to
have.
Most of the major decision making in today’s
organizations is done under these conditions.
To make effective decisions under these conditions,
managers must secure as much relevant information as
possible and approach the situation from a logical and
rational view.
Intuition, judgment and experience always play major
roles in the decision-making process under these
conditions.
See Figure 9.1, page 279.
 A View of Decision-Making
Conditions
The decision
maker faces
conditions of:

Certainty Risk Uncertainty

Level of ambiguity and chances of making a bad decision

Lower Moderat Higher

e
Rational Perspectives on Decision Making

Keys to Decision Making

Classical
Decision
Model

Rational
Decision
Making
 Classical Decision Model
• An approach to decision making that tells
managers how they should make decisions.
• Approach assumes that managers are logical
and rational.
• Approach assumes that managers’ decisions will
be in the best interests of the organization.
• Conditions suggested in this approach rarely, if
ever, exist.
See Figure 9.2, page 281.
The Classical Model of Decision
Making …and end up
with a
decision that
best
serves the
interests
of the
organization.
Obtain complete and
perfect information.
Eliminate
uncertainty. Evaluate
everything rationally
When faced
and logically…
with a
decision
situation,
managers
should…
 Rational Decision Making
Consists of six (6) steps that keep the
decision maker focused on facts and logic
and help guard against inappropriate
assumptions and pitfalls.

Designed to help the manager approach a

decision rationally and logically.
 Rational Decision Making. . . (continued)

1) Recognizing and defining the decision

situation
a) Need to ‘define’ precisely what the problem is.
b) Manager must develop a complete
understanding of the problem.
c) Manager must carefully analyze and consider the
situation.
 Rational Decision Making. . . (continued)

2) Identifying alternatives
a) Managers must realize that their alternatives may
be limited by legal, moral and ethical norms,
authority constraints, available technology,
economic considerations and unofficial social
norms.
 Rational Decision Making. . . (continued)

3) Evaluating alternatives
a) Each alternative must pass successfully through three
stages before it may be worthy of consideration as a
solution.
1. Feasibility – Is it financially possible? Is it legally
possible? Are there limited human, material and/or
informational resources available?
2. Satisfactory – Does the alternative satisfy the conditions
of the decision situation? [50% increase in sales]
3. Affordability – How will this alternative affect other parts
of the organization? What financial and non-financial
costs are associated?
b) The manager must put ‘price tags’ on the consequences of
each alternative.
c) Even an alternative that is both feasible and satisfactory
must be rejected if the consequences are too expensive for
the total system.
 Rational Decision Making. . . (continued)

4) Selecting an alternative
a) Choosing the best alternative is the real test of
decision making.
b) Optimization is the goal because a decision is
likely to affect several individuals or departments.
c) Finding multiple acceptable alternatives may be
possible; selecting one and rejecting the others
may not be necessary.
 Rational Decision Making. . . (continued)

5) Implementing the chosen alternative

a) Managers must consider people’s resistance to
change when implementing decisions.
b) For some decisions, implementation is easy; for
others, very difficult or time consuming.
c) Operational plans are very useful in
implementing alternatives.
d) Managers must also recognize that even when
all of the alternatives and their consequences
have been evaluated as precisely as possible,
unanticipated consequences are still likely.
 Rational Decision Making. . . (continued)

6) Following up and evaluating the results

a) Managers must evaluate the effectiveness of their
decisions – did the chosen alternative serve its original
purpose?
b) If the implemented alternative appears not to be
working, the manager has several choices:
1. Another previously identified alternative might be
adopted or
2. Recognize that the situation was not correctly
defined and start the process all over again or
3. Decide that the alternative has not been given
enough time to work or should be implemented in a
different way.
[See Figure 9.3 and Table 9.1 ]
Figure 9.3: Evaluating Alternatives
in the Decision-Making Process
Behavioral Aspects of Decision Making

• Sometimes decision making must reflect

subjective considerations (tastes, etc.)

• Other behavioral aspects include: political

forces, intuition, escalation of commitment,
risk propensity and ethics.
 Behavioral Aspects. . . (continued)

The Administrative Model of Decision Making

 Herbert A Simon, a Nobel Prize winner in Economics,
developed the model to describe how decisions are
often made rather than to prescribe how they should be
made.
 Argues that decision makers have incomplete and
imperfect information, are constrained by ‘bounded
rationality’ and tend to ‘satisfice’ when making
decisions.
 Bounded rationality suggests that decision makers are
limited by their values and unconscious reflexes, skills
and habits. [American vs foreign automakers]
 Behavioral Aspects. . . (continued)

Satisficing is the tendency to search for

alternatives only until one is found that meets
some minimum standard of sufficiency.

Rather than conducting an exhaustive search

for the best possible alternative, decision
makers tend to search only until they identify
an alternative that meets some minimum
standard of sufficiency.
 The Administrative Model of
Decision Making
...and end up with a
decision that may
or may not serve
the interests of the
organization.

Use incomplete and

imperfect Information.

Are constrained by
bounded rationality.
When faced with Tend to satisfice…
a
decision
situation
managers
actually…
 Behavioral Aspects. . . (continued)

 The Classical and Administrative Models paint quite a

different picture of decision making. However, each
may be used to better understand how managers
make decisions.
 The Classical Model attempts to explain how
managers can at least attempt to be more rational
and logical in their approach to decisions.
 The Administrative Model can be used by managers
to develop a better understanding of their inherent
biases and limitations.
 Behavioral Forces Influencing Decisions

Political Forces in Decision Making

Coalition - an informal alliance of individuals or

groups formed to achieve a common goal [stockholders,
directors, parliament blocs, etc]

Impact of a coalition may be positive or

negative.
Managers must recognize when to use
coalitions, how to assess if they are acting in the
best interest of the organization and how to
control their negative effects.
 Behavioral Forces Influencing Decisions

Intuition – is an innate belief about something,

without conscious consideration.

Deciding to do something because it ‘feels right’

or one has a ‘hunch’.
Feeling is based on years of experience and
practice in making decisions in similar situations;
may help managers make occasional decisions
without going through an a-to-z process.
 Behavioral Forces Influencing Decisions

Escalation of Commitment – occurs when a

decision maker stays with a decision even
when it appears to be wrong. [Pan Am holdings]
Decision makers must guard against
sticking too long with an incorrect decision.
However, managers should not ‘bail out’ of
a seemingly incorrect decision too soon.
Behavioral Forces Influencing Decisions

Risk Propensity – the

extent to which a
decision maker is
willing to gamble
when making a
decision.

Organizational culture is
a prime ingredient in
encouraging different
levels of risk.
Behavioral Forces Influencing Decisions

Ethics
Managerial ethics involves a
wide variety of decisions:
Relationships of the firm
to its employees [closing a dept
to save money]

Relationships of the
employees to the firm
Relationships of the firm
to other economic agents
65
 Decision-Making
Processes

Organization Theory and

Design
Eleventh Edition
Richard L. Daft

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Types of Decisions
• Organizational decision making –
process of identifying and solving
problems
1. Problem Identification
2. Problem Solution
• Programmed Decisions – repetitive and
well defined
• Nonprogrammed Decisions – novel
and poorly defined
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 Decision Making in Today’s
Environment

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 Individual Decision Making
• Rational approach – ideal method for
how managers should make decisions

• Bounded rationality perspective – how

decisions are made under severe time and
resource constraints

69
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Steps in the Rational Approach

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 Bounded Rationality Perspective
• There is a limit to how rational managers
can be—time and resource constraints
– Nonprogrammed decisions

• Constraints and Tradeoffs

– Constraints impinge the decision maker

• The Role of Intuition

– Experience and judgment rather than logic
71
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 Constraints and Tradeoffs
During Nonprogrammed Decision Making

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Organizational Decision Making

Management Science Approach

Carnegie Model

Incremental Decision Model

73
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 Management Science Approach
• Use of statistics to identify relevant variables
• Remove human element
• Very successful for military problems
• Good tool for decisions where variables can
be indentified and measured
• A drawback of management science is that
quantitative data are not rich and lack tacit
knowledge
74
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 Carnegie Model

75
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 Incremental Decision Model
• Focus on structured sequence of activities
from discovery to solution
• Large decisions are a collection of small
choices
• Decision interrupts are barriers
– Identification Phase
– Development Phase
– Selection Phase
– Dynamic Factors
76
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The Incremental Decision Model

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 Problem Identification and
Problem Solution
When problem and problem solution are uncertain

78
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 Garbage Can Model

• Pattern or flow of multiple decisions

• Think of the whole organization
• Explain decision making in high
uncertainty - organized anarchy:
– Problematic preferences
– Unclear, poorly understood technology
– Turnover
• Streams of events instead of defined
problems and solutions
79
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 Consequences of the
Garbage Can Model
1. Solutions may be proposed even when
problems do not exist
2. Choices are made without solving
problems
3. Problems may persist without being
solved
4. A few problems are solved
80
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 Illustration of Independent Streams of
Events in the Garbage Can Model of
Decision-Making

81
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Contingency Framework for
Using Decision Models

82
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Special Decision Circumstances
• Today’s environment presents high-
stakes, quick decisions
• Managers must deal with:
– High-velocity environments
– Learning from decision mistakes
– Understanding cognitive and personal biases
• Escalating commitment
• Prospect theory
• Groupthink
• Evidence-based management
• Encourages dissent and
83
diversity
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 Design Essentials
• Most decisions are not made in a logical manner
• Individuals make decisions, but organizational decisions
are not made by a single individual
• Conflict exists when problems are not agreed on
• The garbage can model has become a description of
decision-making
• Organizations operate in high-velocity environments
• Allowing biases to cloud decision making can have
negative consequences

84
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01/29/25 85
 Identifying Decision Criteria
The word criteria, is defined as “a
standard by which something can be
judged”.
A decision criteria therefore, is the basis
of a decision, which outlines the relevant
and important factors for a decision. And
implicitly, it also defines what is not
important.
 Decision Criteria: Example
In the above-cited scenario, the decision
criteria may include the following factors:
 Relevant qualifications
 Leadership skills
 Communication skills
 Planning and analytical skills
 Professional experience
 Allocating Weights to
Criteria
 The next step in the decision making
process is prioritization.
 Prioritization is achieved by assigning
quantitative weights to each criteria
element.
 The weightage defines the relative
significance of each element.
Allocating Weights: Example

Criterion Weight
Relevant qualifications 3
Leadership skills 5
Communication skills 3
Analytical skills 4
Professional experience 1
 Developing Alternatives
 Involves defining the possible
alternatives (or choices) that would
resolve the problem.
 In our case, the alternatives would be a
list of candidates or job applicants.
 Analyzing Alternatives
 Alternatives are rated and analyzed
on the basis of the criteria
 The rating can be based on a specified
scale, say 1 – 5 etc.
 Rating may be subjective in nature
and thus,may depend on the judgment
of the individual(s)
 Criteria Rating: Example

CANDI DATES RATI NG AND ASSESSMENT

Candidate Qualif- Leader- Commun- Analysis Exper-
ication ship ication ience
Kamran Ashraf 3 3 3 1 1
Rahila Mushtaq 2 1 4 2 2
Tasaduq Hussain 4 2 3 2 3
Zubair Ahmed 2 5 2 4 1
Maliha J aved 4 5 4 3 2
 Analyzing & Assessment:
Example

EVALUATI ON OF CANDI DATES

Candidate Qualif- Leader- Commun- Analysis Exper- Total
ication ship ication ience
Kamran Ashraf 9 15 9 4 1 38
Rahila Mushtaq 6 5 12 8 2 33
Tasaduq Hussain 12 10 9 8 3 42
Zubair Ahmed 6 25 6 16 1 54
Maliha J aved 12 25 12 12 2 63
 Selecting an alternative
 Involves choosing the best alternative,
based on the above rating and analysis
 Generally implies selecting the
alternative with the highest score.
 Implementing the Alternative
 Putting the decision into action
 Involves clear communication of the
decision to all concerned and obtaining
their commitment
 Evaluation
 Evaluation forms an integral part of any
process
 Involves evaluation of the outcome based
on the desired goal and criteria
 Involves assessing the effectiveness and
efficiency of the outcome (or the entire
process)
 In case of any undesired results, each step
of the process is carefully reviewed to
trace the root causes
01/29/25 97
Effective Decision Making
The Eight Elements of Effective
Decisions
• Problem
• Objectives
• Alternatives
• Consequences
• Tradeoffs
– Uncertainty
– Risk Tolerance
– Linked Decisions
 Effective Decision Making
• Problem
– Be creative about your problem definition.
– Turn problems into opportunities.
– Reexamine your problem definition as you go.
– Maintain your perspective.
 Effective Decision Making
• Objectives
– Let your objectives be your guide.
• Objectives determine what information you seek.
• Objectives can help you explain your choices to
others.
– Master the art of identifying objectives.
 Effective Decision Making
• Alternatives
– Don’t box yourself in with limited alternatives
– Use your objectives and ask “how?”
– Set high aspirations
– Never stop looking for alternatives
• Think outside the box
• Brainstorm (See Rules for Brainstorming)
– Give your subconscious time to operate
• Incubate
 Effective Decision Making
• Consequences
– Compare alternatives using a payoff matrix.
• See Game Theory presentation at
http://www.charleswarner.us/indexpresentations.ht
ml/
– Use experts to help define consequences.
 Payoff Matrix
KBBB
Go No Go

Go 4, 2* 3, 4 * KAAA, KBBB
KAAA

No go 1, 3 2, 1

Assigning weights is the most difficult decision.

 Effective Decision Making
• Tradeoffs
– Use swaps.
– Determining the relative value of different
consequences is the hard part.
 Effective Decision Making
• Uncertainty
– Use risk profiles to simplify decisions involving
uncertainty.
• What are the key uncertainties?
• What are the possible outcomes of these
uncertainties?
• What are the chances of occurrence of each
possible outcome?
• What are the consequences of each outcome?
– Use experts to help define possible outcomes.
 Effective Decision Making
• Uncertainty
– Use a Decision Tree.
• Alternatives - Uncertainty - Consequences
 Decision Tree

KBBB Go

KAAA Go KBBB No Go

KAAA

KAAA No Go KBBB Go

KBBB No Go
 Effective Decision Making
• Risk Tolerance
– Understand and calibrate your group’s
tolerance to take risks.
– Incorporate your risk tolerance into all of your
decisions.
 Effective Decision Making*
• Linked Decisions
– Linked decisions are complex.
– Ask: “How will this decision affect other
people, other departments, other brands,
other company divisions, partners, the
industry?”

* Based on the book Smart Choices: A Practical Guide to Making Better

Decisions, John S. Hammond, Ralph L. Keeney, Howard Raiffa, Harvard
Business School Press, 1999.
 Effective Decision Making
Summary
• Problem
• Objectives
• Alternatives
• Consequences
• Tradeoffs
– Uncertainty
– Risk Tolerance
– Linked Decisions
01/29/25 112
Understanding Decision
Making
 Understanding Decision Making
• Puzzles, Problems, and Wicked Problems
– A discrepancy between a desirable and an actual
situation.
– Well structured, ill-structured, and complex problems.
• Decision
– A choice made between available alternatives.
• Decision Making
– The process of developing and analyzing alternatives
and choosing from among them.
• Judgment
– The cognitive, or “thinking,” aspects of the decision-
making process.
G.Dessler, 2003
April 4, 2006 LIS580- Spring 2006 114
 Wicked Problems
• Proposed by H.J. Rittel and M. Webber of UC Berkeley in 1973.
• Wicked problems do not have an exhaustive set of potential solutions.
• Every wicked problem can be considered to be a symptom of another problem.
• Discrepancies in representing a wicked problem can be explained in numerous
ways--the choice of explanation in turn determines the nature of the problem's
resolution.
• Every wicked problem is essentially unique--lessons-learned are hard to transfer
across to other problems.
• Wicked problems are often "solved" through group efforts.
• Wicked problems require inventive/creative solutions.
• Every implemented solution to a wicked problem has consequences, and may cause
additional problems.
• Wicked problems have no stopping rule(s).
• Solutions to wicked problems are not true-or-false, but instead better, worse, or good
enough.
• There is no immediate and no ultimate test of a solution to a wicked problem.
• The planner or designer (solving the problem) has no inherent right to solve the
problem, and no permission to make mistakes.

http://en.wikipedia.org/wiki/Wicked_problems
April 4, 2006 LIS580- Spring 2006 115