Introduction to Decision

Making and Negotiation

Decision Making & Negotiation

MM5009
 Why decision making?
Management is concerned with
deciding to do or not to do something,
with planning, with considering alternatives,
with monitoring performance, with
collaborating with other people or achieving
ends through others; it is the process of
taking decisions in social system in the face
of problems which may not be self-
generated (Checkland, 1993).
 Why decision making?
Decision making is what the
leaders and managers do every
time.

According to Peter Drucker, leaders do the

right thing, and managers do thing right. It
means that leader is one who set what to do,
and manager is one who set how to do.

Decision making is the process of setting what

to do and how to do.
 What to do vs How to do
What to do How to do

Current Ideal
condition condition
Current Ideal
condition condition Controlling
Issues:
Issues: 1. Collect and analyze information to set
Framing decision (Context) What alternatives available?
1. What we want to achieve? How to choose the best
2. What criteria of the ideal alternative?
condition? 2. How to implement the best alternative?
3. Are there problems that inhibit the
objective?
 Why

In the actual decision making, people

have heuristics, bias, bounded rationality
and make mistakes

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 Because
System 1 System 2
(intuitive, automatic) (Reflective, effortful)
Cannot be turn off Cannot be main actor

Process Characteristics
Automatic Controlled
Effortless Effortful
Associative Deductive
Rapid, parallel Slow, serial
Process opaque Self-aware
Skilled action Rule application

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 What is intuition?
The process is dominated by
your subconscious mind.
The information is processed in
parallel rather than sequentially.
You are more connected with
your emotions.
How does intuition work?
Your subconscious mind
somehow finds links between your
new situation and various patterns
of your past experiences.
That message comes as your
inner voice and will most likely be
expressed in the language of your
feelings.
You may not recall most of the
details of those experiences. And
even if you did, it may be very
hard to express the lessons you
learnt in a form acceptable for
analytical reasoning. Yet, your
subconscious mind still
remembers the patterns learnt.
It can rapidly project your new
circumstances onto those patterns
and send you a message of
wisdom.
When do we need intuitive DM?
Expedient decision making and rapid response are
required. The circumstances leave you no time to go
through complete rational analysis.
Fast paced change. The factors on which you base your
analysis change rapidly.
The problem is poorly structured.
The factors and rules that you need to take into account
are hard to articulate in an unambiguous way.
You have to deal with ambiguous, incomplete, or
conflicting information.
There is no precedent.
What is heuristic?
A 'heuristic is a method to help solve a
problem, commonly informal.
It is particularly used for a method that
often rapidly leads to a solution that is
usually reasonably close to the best
possible answer.
Heuristics are "rules of thumb", educated
guesses, intuitive judgments or simply
common sense.
 Heuristic
Heuristics can sometimes provide good
estimation but also can lead to the systematically
biased judgment.

Tversky and Kahneman identified three main

heuristics :
1. Availability Heuristics

2. Representativeness Heuristics

3. Anchoring and Adjustment Heuristics

 Availability Heuristics (1)
Available heuristics :
Judge the probability of
the occurrence of
events by how easily
these events are
brought to mind

Example
Statistically, travel by air
plane is still saver than
motorcycle
 Availability Heuristics (2)
Manager assess the frequency, probability, or likely
causes of an event by the degree to which instances
or occurrences of that event are readily available
in memory
 Biases Associated with
Availability Heuristics (1)
1. Ease of recall is not associated with probability
i.e. People believe that motorcycle accidents cause more deaths
than stomach cancer in United Stated. This believes occur
because car accidents get more exposure from media than
stomach cancer

2. Ease of imagination is not related to probability

i.e. Civil engineer in charge of construction project may find it
easy to imagine all the circumstances that could lead to the
delay of project such as strikes, adverse weather condition,
interruption in the supply of material and equipment, geological
problem. The result could be a gross overestimate of the risk of
the project overrunning the deadline.
 Biases Associated with
Availability Heuristics (2)
3. Illusory correlation
i.e. celebrity experienced divorced, then people usually
correlate married celebrity with divorce.

All people with beard correlate with terrorist

Representativeness Heuristics
Manager assess the likelihood of an events
occurrence by the similarity of that occurrence
to their stereotypes of similar occurrences.
 Anchoring and Adjustment
Judgment is widely used to make estimates of
values. Often these estimates start with an initial
value which is then adjusted to obtain the final
estimate.
The initial value, or starting point, may be
suggested from historical precedent, from the
way in which a problem is presented, or from
random information
Unfortunately, the adjustment from these initial
values is often insufficient
Therefore, in the Decision Making what we will
learn is how to improve the not optimal solution

so our decision will be closer to gain an optimal

solution

How to be closer to gain an optimal solution?

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Decision Making

Descriptive
What people actually do, or have
done
Prescriptive
What people should and can do
Normative
What people should do (in theory)

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 Decision
Rational/Ideal/Normative Approaches
Decision Making Actual/Descriptive
Decision Making
GAP
Assumptions:
1. Perfectly define the Bounded
problem Rational
2. Identify all criteria
3. Accurately weigh all
Prescriptive
criteria according to their
preference
Intuition
4. Know all relevant
alternatives Systematic Model
5. Accurately asses each of Decision Process
alternative based on each
criterion Biases
6. Accurately calculate and
choose the alternative
with the highest Guidances to be
perceived value more rational

Not
Optimal Need to
Close to optimal
solution Improve
solution
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Rational Decision Making
Then, based
on the
The rational expected
decision outcomes and
making their weights,
process relies you rate your
mostly on options by
logic and their
quantitative perceived
analysis. utility.

You consciously Finally, you

analyze all the options. choose the
You formulate the main option that
criteria for judging the has the
expected outcomes of highest rating.
your options and you
assign certain weights
to those criteria to
reflect their relative
importance.
THANKS
Discussion

What is the best decision making in practice?

A. Rational?
B. Intuitive?
Why?