MAKING DECISIONS

LEARNING OBJECTIVES
2.1 Describe the eight steps in the decision-making
process.
2.2 Explain the four approaches managers can use
when making decisions.
2.3 Classify decisions and decision-making styles.
2.4 Describe how biases affect decision making.
2.5 Identify cutting-edge approaches for improving
decision making.
DECISION MAKING???
The Wolf, Goat, and Cabbage
This problem can be found in eighth-century writings.
A man has to take a wolf, a goat, and some cabbage across a river.
His rowboat has enough room for the man plus either the wolf or the
goat or the cabbage. If he takes the cabbage with him, the wolf will
eat the goat. If he takes the wolf, the goat will eat the cabbage. Only
when the man is present are the goat and the cabbage safe from their
enemies. All the same, the man carries wolf, goat, and cabbage
across the river. How?
Puzzle provided by Kordemsky: The Moscow Puzzles (Dover)
WHAT IS A DECISION?
Decision—a choice among two or more alternatives
DECISION MAKING PROCESS
Step 7:
Step 1: Step 6:
Implement
Identify a Select an
the
Problem Alternative
Alternative
Step 8:
Step 2:
Step 5: Evaluate
Identify the
Analyze Decision
Decision
Alternatives Effectivenes
Criteria
s
Step 3:
Step 4:
Allocate
Develop
Weights to
Alternatives
the Criteria
 DECISION-MAKING PROCESS STEP 1:
IDENTIFY A PROBLEM

Problem: an obstacle that makes it difficult to achieve a desired goal

or purpose.
Every decision starts with a problem, a discrepancy between an
existing and a desired condition.
Example: ?????
 DECISION-MAKING PROCESS STEP 2:
IDENTIFY THE DECISION CRITERIA

Decision criteria are factors that are important to resolving the

problem.
DECISION-MAKING PROCESS STEP 3:
ALLOCATE WEIGHTS TO THE CRITERIA
If the relevant criteria aren’t equally important, the decision maker
must weight the items in order to give them the correct priority in
the decision.

Criteria Weight
 DECISION-MAKING PROCESS STEP 4:
DEVELOP ALTERNATIVES
List viable alternatives that could solve the
problem.

Alternativ C#1 C#2 C#3 C#4 C#5 C#6 C#7

es
DECISION-MAKING PROCESS STEP 5: ANALYZE ALTERNATIVES STEP 6: SELECT AN
ALTERNATIVE

STEP 5: Once you identify the alternatives you need

to analyze them using the criteria established in
Step 2.
STEP 6: Choose the alternative that generates the
highest total in Step 5.
DECISION-MAKING PROCESS STEP
7: IMPLEMENT THE ALTERNATIVE
Put the chosen alternative into action.
Convey the decision to those affected and get their commitment
to it.
 DECISION-MAKING PROCESS STEP 8:
EVALUATE DECISION EFFECTIVENESS

Evaluate the result or outcome of the decision to see if the problem

was resolved.
If it wasn’t resolved, what went wrong?
APPROACHES TO DECISION MAKING
 RATIONALITY

Rational Decision Making: choices that are logical and consistent

and maximize value

Assumptions of rationality:
 Rational decision maker is logical and objective
 Problem faced is clear and unambiguous
 Decision maker would have clear, specific goal and be aware of all
alternatives and consequences
 The alternative that maximizes achieving this goal will be selected
 Decisions are made in the best interest of the organization
 BOUNDED RATIONALITY

Bounded rationality: decision making that’s rational, but limited by

an individual’s ability to process information
Satisfice: accepting solutions that are “good enough”
Escalation to commitment
 INTUITION

Intuitive Decision Making: making decisions on the basis of

experience, feelings, and accumulated judgment
EXHIBIT 2.6 WHAT IS INTUITION?

Exhibit 2.6 shows the five different aspects of intuition identified by researchers
studying managers’ use of intuitive decision making.

Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved
 EVIDENCE-BASED MANAGEMENT
• Evidence-based management (E B Mgt): the systematic use of the
best available evidence to improve management practice.

• The four essential elements of EBMgt.

i. the decision maker’s expertise and judgment;

ii. external evidence that’s been evaluated by the decision maker;
iii. opinions, preferences, and values of those who have a stake in the
decision; and
iv. relevant organizational (internal) factors such as context,
circumstances, and organizational members.
TYPES OF DECISIONS: STRUCTURED
PROBLEMS AND PROGRAMMED
DECISIONS
Structured problems: straightforward, familiar,
and easily defined problems
Programmed decisions: repetitive decisions that
can be handled by a routine approach
TYPES OF PROGRAMMED DECISIONS
Procedure: a series of sequential steps used to
respond to a well-structured problem
Rule: an explicit statement that tells managers
what can or cannot be done
Policy: a guideline for making decisions
TYPES OF DECISIONS: UNSTRUCTURED
PROBLEMS AND NONPROGRAMMED
DECISIONS
Unstructured problems: problems that are new
or unusual and for which information is ambiguous
or incomplete
Nonprogrammed decisions: unique and
nonrecurring and involve custom-made solutions
EXHIBIT 2.7 PROGRAMMED VS.
NONPROGRAMMED DECISIONS

Characteristic Programmed Nonprogrammed

Decisions Decisions
Type of problem Structured Unstructured
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or
incomplete
Goals Clear, specific Vague
Time frame for Short Relatively long
solution
Solution relies on… Procedures, rules, Judgment and creativity
policies

Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved
DECISION-MAKING STYLES
Research has identified four different individual
decision-making styles based on two dimensions:
1. An individual’s way of thinking
2. An individual’s tolerance for ambiguity
The four styles are directive, analytic, conceptual
and behavioral.
FOUR DECISION-MAKING STYLES
Directive style: low tolerance for ambiguity and
seek rationality
Analytic style: seek rationality but have a higher
tolerance for ambiguity
Conceptual style: intuitive decision makers with a
high tolerance for ambiguity
Behavioral style: intuitive decision makers with a
low tolerance for ambiguity
EXHIBIT 2.8 DECISION-STYLE MODEL

Exhibit 2.8 shows the decision-style model from A. J. Rowe and J. D. Boulgarides,
Managerial Decision Making (Upper Saddler River, N J: Prentice Hall, 1992), p. 29.
HEURISTICS
Heuristics or “rules of thumb” can help make sense
of complex, uncertain, or ambiguous information.
However, they can also lead to errors and biases in
processing and evaluating information.
EXHIBIT 2.9 COMMON DECISION-
MAKING BIASES

Exhibit 2.9 identifies 12 common decision errors of managers and biases they
may have.

Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved
DECISION-MAKING BIASES AND ERRORS
OF 4)
(1

Overconfidence Bias: holding unrealistically

positive views of oneself and one’s performance
Immediate Gratification Bias: choosing
alternatives that offer immediate rewards and avoid
immediate costs
Anchoring Effect: fixating on initial information
and ignoring subsequent information
DECISION-MAKING BIASES AND ERRORS
OF 4)
(2

Selective Perception Bias: selecting, organizing

and interpreting events based on the decision
maker’s biased perceptions
Confirmation Bias: seeking out information that
reaffirms past choices while discounting
contradictory information
Framing Bias: selecting and highlighting certain
aspects of a situation while ignoring other aspects
DECISION-MAKING BIASES AND ERRORS
OF 4)
(3

Availability Bias: losing decision-making

objectivity by focusing on the most recent events
Representation Bias: drawing analogies and
seeing identical situations when none exist
Randomness Bias: creating unfounded meaning
out of random events
DECISION-MAKING BIASES AND ERRORS
OF 4)
(4

Sunk Costs Errors: forgetting that current actions

cannot influence past events and relate only to
future consequences
Self-serving Bias: taking quick credit for
successes and blaming outside factors for failures
Hindsight Bias: mistakenly believing that an event
could have been predicted once the actual outcome
is known (after-the-fact)
CUTTING-EDGE DECISION MAKING
Technology has changed the ability of managers to
access information. Two technology driven cutting-
edge aides to decision making are:
 Design thinking: approaching management
problems as designers approach design problems
 Big data and Artificial Intelligence: big data
refers to huge and complex data sets now
available. Big data has opened the door to
widespread use of artificial intelligence (A I)
BIG DATA AND ARTIFICIAL INTELLIGENCE

Big data: the vast amount of quantifiable data that

can be analyzed by highly sophisticated data
processing
Can be a powerful tool in decision making, but
collecting and analyzing data for data’s sake is
wasted effort
ARTIFICIAL INTELLIGENCE AND
MACHINE LEARNING TOOLS
Artificial Intelligence (A I) – uses computing power to
solve complex problems
 A I systems have the ability to learn and have
facilitated the use of new tools such as:
 Machine learning
 Deep learning
 Analytics
MACHINE LEARNING, DEEP LEARNING,
AND ANALYTICS
Machine Learning: A method of data analysis that
automates analytical model building.
Deep Learning: A subset of machine learning that
use algorithms to create a hierarchical level of
artificial neural networks that simulate the function
of the human brain.
Analytics: The use of mathematics, statistics,
predictive modeling, and machine learning to find
meaningful patterns in a data set.