CHAPTER 7 Decision making: The essence of a

managers job
Identify the eight steps in the decisionmaking process
Discuss the three ways managers make decisions
Explain the two types of problems and decisions
Contrast the three decisionmaking conditions
Describe two different decisionmaking styles
Identify some common decisionmaking errors and
biases
Describe some effective decisionmaking techniques for
todays world
Decision Making
Decision making a choice from two or more
alternatives.
Problem an obstacle that makes it difficult to
achieve a desired goal or purpose. It is a
discrepancy between an existing and a desired
state of affairs.
The Decision Making Process
1. Identifying a problem and decision criteria
and allocating weights to the criteria
2. Developing, analyzing, and selecting an
alternative that can resolve the problem
3. Implementing the selected alternative
4. Evaluating the decisions effectiveness
Figure 7.1 DecisionMaking Process
Step 1: Identifying a Problem
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: Identifying Decision Criteria
Decision criteria are factors that are important
(relevant) to resolving the problem, such as:
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: Allocating Weights to the
Criteria
Decision criteria are not of equal importance:
Assigning a weight to each item places the items
in the correct priority order of their importance in
the decisionmaking process.
Table 7.1 Criteria and Weights
Step 4: Developing Alternatives
Identifying viable alternatives
Alternatives are listed (without evaluation) that
can resolve the problem.
Table 7.2 Possible Alternatives
Step 5: Analyzing Alternatives
Appraising each alternatives strengths and
weaknesses
An alternatives appraisal is based on its
ability to resolve the issues related to the
criteria and criteria weight.
Table 7.3 Evaluation of Alternatives
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Step 6: Selecting an Alternative
Choosing the best alternative
The alternative with the highest total weight is
chosen.
Step 7: Implementing the Alternative
Putting the chosen alternative into action
Conveying the decision to and gaining commitment
from those who will carry out the alternative
Step 8: Evaluating 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?
Table 7.4 Decisions in the management functions
Rational DecisionMaking
Rational DecisionMaking describes choices
that are logical, consistent and value
maximising within specified constraints.
Bounded Rationality decision making thats
rational, but limited (bounded) by an
individuals ability to process information.
Satisfice accepting solutions that are good
enough.Not Maximise.
May not be the best solution but good enough to
solve problem
2007 Prentice Hall, Inc. All
rights reserved.
619
Figure 7.2 Assumptions of Rationality
Rational Decisionmaking (contd)
Example
You look for a job after graduation, preferably as a project engineer,
with a minimum salary $5,000 & within 100 miles of your hometown.
You accept a job offer as a field coordinator, not a project engineer but
still in your preferred field 50 miles from home at a salary of $4,000.
If you search comprehensively, you would have discovered a job as
project engineer at an engineering firm only 25 miles from your
hometown with a starting salary of $4,500.
You werent a perfectly rational decision maker because you didnt
maximize your decision by searching all possible alternatives & choose
the best.
Because the 1
st
job is satisfactory (or good enough), you behave in a
bounded rationality manner by accepting it.
Intuitive DecisionMaking
Intuitive decision making
A subconscious process of making decisions
on the basis of experience, feelings, and
accumulated judgment.
Intuitions can actually help to improve
decisionmaking
Figure 7.3 What Is Intuition?
Types of Problems
Structured Problems straightforward,
familiar, and easily defined problems.
Unstructured Problems problems that are
new or unusual and for which information is
ambiguous or incomplete.
Programmed vs. Non
Programmed Decisions
Programmed Decision a repetitive decision
that can be handled by a routine approach.
For structured problems that are straightforward,
familiar and easily defined
Nonprogrammed Decisions unique and
nonrecurring decisions that require a custom
made solution.
For unstructured problems that are new, unusual,
and information is ambiguous or incomplete
Types of Programmed Decisions
Procedure a series of interrelated sequential
steps that a manager can use to respond to a
structured problem.
Rule an explicit statement that limits what a
manager or employee can or cannot do.
Policy a general guideline for making a
decision about a structured problem.
Table 7.5 Programmed Versus
Nonprogrammed Decisions
DecisionMaking conditions
Certainty
a situation in which a manager can make accurate
decisions because the outcome of every
alternative 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.
Table 7.6 Expected Value
Decision to make adding another lift to current facility at a ski resort
Data available for the past 10 years 3 years of heavy snowfall, 5 years of
normal snowfall and 2 years of light snowfall
Decisions Under Uncertainty
Limited information prevents estimation of
outcome probabilities for alternatives .
Limited information forces managers to rely
on intuition, hunches, and gut feelings.
Maximax: the optimistic managers choice to maximize
the maximum payoff.
Maximin: the pessimistic managers choice to maximize
the minimum payoff.
Minimax: the managers choice to minimize maximum
regret.
Table 7.7 Payoff Matrix
Decision to make choose the best among four strategies
Data available competitor has three competitive actions
Max Min
14
18
24
28
11
9
15
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Maximax Maximin
Table 7.8 Regret Matrix
Decision to make choose the best among four strategies
Data available competitor has three competitive actions
Max
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15
13
7
Minimax
DecisionMaking Styles
Linear Thinking Style a persons preference
for using external data and facts; a method of
processing information through rational,
logical thinking.
Nonlinear Thinking Style a persons
preference for internal sources of information;
a habit of processing information with internal
insights, feelings, and hunches.
DecisionMaking Biases and Errors
Heuristics using rules of thumb to simplify
decision making.
Overconfidence Bias holding unrealistically
positive views of oneself and ones
performance.
Immediate Gratification Bias choosing
alternatives that offer immediate rewards and
avoid immediate costs.
DecisionMaking Biases and Errors (cont.)
Anchoring Effect fixating on initial
information and ignoring subsequent
information.
Selective Perception Bias selecting,
organizing and interpreting events based on
the decision makers biased perceptions.
Confirmation Bias seeking out information
that reaffirms past choices while discounting
contradictory information.
DecisionMaking Biases and Errors (cont.)
Framing Bias selecting and highlighting
certain aspects of a situation while ignoring
other aspects.
Availability Bias losing decisionmaking
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.
DecisionMaking Biases and Errors (cont.)
Sunk Costs Errors forgetting that current
actions cannot influence past events and
relate only to future consequences.
SelfServing 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 (afterthefact).
Figure 7.4 Common DecisionMaking
errors and biases
Decision Making for Todays World
Guidelines for making effective decisions:
Understand cultural differences
Know when its time to call it quits
Use an effective decision making process
Six characteristics of effective decision making process
1. Focus on what is important
2. Logical and consistent
3. Blend analytical with intuitive thinking
4. Requires good enough information and analysis
5. Encourage and guide the gathering of relevant information and
informed opinion
6. straightforward, reliable, easy to use and flexible
Decision Making for Todays World
Best way for managers to respond to unpredictability
and uncertainty is by building an organisation that
expertly spots the unexpected when it crops up and
then quickly adapts to the changed environment.
Habits of highly reliable organizations (HROs)
Are not tricked by their success
Defer to the experts on the front line
Let unexpected circumstances provide the solution
Embrace complexity
Anticipate, but also anticipate their limits
Figure 7.5 Overview of Managerial Decision
Making
Terms to Know
Decisionmaking process
Decision criteria
Rational decision making
Bounded rationality
Satisfice
Intuitive decision making
Structured problems
Unstructured problems
Programmed decision
Nonprogrammed decisions
Procedure
Policy
Rule
Certainty
Risk
Maximax Maximin
Minimax
Linear thinking style
Nonlinear thinking style
Heuristics
Bias