Decision-making

Objectives
What is decision-making? Decision-making processes. Classification of
decision-making processes. Well-structured decision-making problems. Ill-
structured decision-making. Decision-making models.

Important topics

Decision-making – managerial function focused on solution of decision-

making problems.

Structure of decision-making process – steps of decision-making process

Well and ill-structured decision-making processes – classification of

decision-making processes in accordance with their complexity.

Economic rationality model and social (administrative) model – two basic

models of decision-making.

1. What is decision-making

It is a managerial function focused on decision-making processes. Decision-

making process is the process of choice between at least two alternatives.

Decision-making processes solve so called decision-making problems.

Decision-making problem is the difference between what we want
(objective) and reality. Mistakes, accidents and opportunities are typical
decision-making problems. Plan (objective) and experience represent what
we want.

2. Structure of decision-making process

Each phase of decision-making process is represented by specific activities.

Simon’s structure has four steps:

1. analysis of environment – covers identification of problem and its causes.

2. solution proposal – decision-maker search for different scenarios of
solution and analyses them.
3. solution choice – decision-maker evaluates scenarios and decide on which
will be implemented.
4. result control – decision-maker compares results achieved with objectives
and evaluates it.

3. Classification of decision-making processes

By frequency
 unique – do not repeat or randomly,
 routine – repeat often, we know how to solve them.

By character

 strategic – very important, solved by top managers,

 tactical – solved by middle managers,
 operational – solved by first line managers and employees.

By style

 exact – solved by exact usually mathematical methods.

 intuitive (empirical) – solved by intuition and experience.

By decision-maker

 individual decision-maker – faster but missing feedback of other people,

 group – more difficult on management, possible synergic effect

Depending on risk

 in certainty – decision-maker has all information,

 in risk – decision-maker knows probabilities of the likely outcomes for
possible action
 in uncertainty – decision-maker does not know probabilities of the
likely outcomes for possible action
 in indefiniteness – decision-maker does not know outcomes of possible
actions or alternatives.

Well-structured and ill-structured decision-making problems

 well-structured decision-making problems are simple problems that

happen repeatedly and we know how to solve them.
 ill-structure decision-making problems are problems with many
variables and require creativity.

4. Decision-maker relationship to risk

 problem seekers – have positive relationship to risks, tend to choose

risky alternatives,
 neutral problem solvers – decide on situation if to take the risk or no,
 problem avoiders – prefer less risky alternatives.

5. Two models of deciding

Economic – rationality model – rational decision-maker who:

 knows all alternatives that solve the problem,
 knows effects of all alternatives,
 can quantitatively evaluate all alternatives
 can choose the best alternative.

Economic – rationality model is based on systemic application of principle

of optimization.

Social (administrative) model – normal decision-maker who:

 lacks information about the problem,

 has limited ability to solve decision-making problems,
 has simplified understanding of world,
 does not identify all alternatives solving the problem,
 decides for the first acceptable alternative, does not search for the best
one.

Social (administrative) model works with principle of satisfaction.

6. Typical mistakes in decision-making

 late identification of decision-making problem,

 lack of sensitivity to decision-making problems,
 fast decision without analysis and diagnosis of the problem,
 favour decision (own, manager’s),
 lack of innovativeness,
 waiting for initiative of other people,
 unwillingness to take risks,
 expecting that the problem will disappear.

Very good videos on deciding, I recommend:

https://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice?language=cs
https://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions?lan
guage=cs
https://www.ted.com/talks/ruth_chang_how_to_make_hard_choices?language=cs