DECISION MAKING

The essence of the manager’s job

 Decision Making Process
• Decision making is a process of identifying a
problem and resolve it after identifying the most
apposite solution of it.

Decision: It is a choice from two or more

alternatives.

Problem: A discrepancy between existing state

and desired state of affairs.
 Process of Decision Making
Identification of a problem
Identification of decision criteria
Allocation of weight to criteria
Development of alternatives
Analysis of alternatives
Selection of an alternative
Implementation of alternative
Evaluation of decision effectiveness
I need to decide the best Car to purchase
Stylish; Comfortable;
Economical; Low fuel consumption
Low fuel consumption = 10; Economical = 8;
Comfortable = 7; Stylish = 4
Honda, Toyota, Prado
Honda = 9, 7, 5, 3
Toyota = 8, 6, 4.5, 3
Prado = 5, 4, 7, 4
Honda = 90 +56 + 35 + 12 = 193
Toyota = 80 + 48 + 31.5 + 12 = 171.5
Prado = 50 + 32 + 49 + 16 = 147
Purchase decision of Honda
Checking the performance of Honda whether it
works according to the ratings
 Types of Decisions
• Rational decision making
Consistent choices with value maximization within
given constraints.
• Intuitional decision making
Decision making based on feelings, past experiences
and judgment.
• Bounded rational decision making
A behavior that makes manager bounded due to
limited ability to process information.
 Rational Decision Making
Rational decision is made when

– Problem is clear and unambiguous

– A clear objective is to be achieved
– All alternatives and their consequences are known
– Preferences are clear and consistent
– No constraints exist (cost, time)
– Decision will maximize payoff
 Intuitional Decision Making
It depends upon any of the given factor
– Affect initiated decision (feelings or emotions)
– Value based (ethical values or culture)
– Mental processing (subconscious)
– Experience based (past experiences)
– Cognitive decision (skills, knowledge or training)
 Bounded Rationality Decision Making

• Rationality = Maximizing
• Bounded Rationality = Satisficing

Satisficing is when decision maker, due to

limited information and bounded skills, has to
select an alternative as “Good Enough”.
 Types of Problems
• Structured problems
These are the problems that are easy to
understand and define, familiar and
straightforward.

• Unstructured problems
These are the problems that are ambiguous,
unfamiliar, unusual, and for which information
is incomplete.
 Types of Decisions
• Programmed Decision
A type of decision that is recurring in nature, and
is handled by a routine approach; and manager
has a ‘cut-and-dried’ solution.

• Nonprogrammed Decision
It is a unique decision that occurs when there is
nonrecurring problem; which requires a custom-
made solution.
 Styles of Decision Making

• Decision making styles have 2 dimensions

– The way of thinking

• Rational: orderly, and consistent
• Intuitive: creative, and unique
– Tolerance for ambiguity
• Low tolerance: require consistency and order
• High tolerance: multiple thoughts simultaneously
 Individual vs. Group Decisions
• Advantages of group decision making
– Process gain
– More likely to identify and reject incorrect solutions
– More accurate memory of facts and events
– Greater informational resources
– Increased commitment for implementation
• Disadvantages of group decision making
– Time
– Groupthink
• Other Effects
– Group polarization
 Groupthink
• Groupthink- syndrome of bad decision-making

12.17
 Group Polarization

Group Polarization- tendency to shift toward more

extreme positions after group discussion

Risky Neutral Cautious

 7 Methods of Group Decision Making

• Decision by authority with group discussion

• Decision by authority without group discussion
• Decision by expert
• Averaging individual’s opinions
• Decision by minority
• Decision by majority
• Consensus
 Factors Hindering Group Decision Making
• Lack of group maturity
• Social loafing (exerting less efforts in groups)
• Free riding (consuming more than one’s share)
• Defensive avoidance (denial of danger)
• Groupthink
• Poor conflict management
• Egocentrism
• Lack of heterogeneity
• Premature closure
• Lack of individual incentives
 How can we avoid these problems
• Selecting group members appropriately
• 1. Make sure there is heterogeneity in expertise
• Having time to go through developmental stages (and do it!)
• Building trust and cohesion can help alleviate many
problems on this list
• Creating norms and processes for making group decisions
• 1. Small decisions will be made by individual group
members
• 2. For big decisions, entire group will go through steps for
thoughtful and considered decision making
Styles of Decision Making
• Types of Decision Makers
– Directive
• Use minimal information and consider few alternatives.
– Analytic
• Make careful decisions in unique situations.
– Conceptual
• Maintain a broad outlook and consider many
alternatives in making decisions.
– Behavioral
• Avoid conflict by working well with others and being
receptive to suggestions.
 Decision Making Techniques
1. Decision Trees – Manager identifies options,
branching out of an initial bipolar choice to
make, by projecting likely outcomes. The
limitation of this technique lies mainly in that
it forces you to address the problem from only
two possible avenues of solution right from
the start.
2. The Pareto Analysis – It is based on the
Pareto Principle whereby you must identify
which actions will let you get 80% of the
possible positive results by doing only 20% of
the work. It is known as the 80/20 rule.
3. Pros & Cons – one lists the advantages and
disadvantages of each possible decision and
attempts to identify the best possible
outcome whereby the advantages outnumber
the disadvantages.
4. PMI – is a variation of the Pros & Cons
technique adding a third possibility called
“interesting” (plus/minus/interesting).
5. Six Thinking Hats
White Hat:
With this thinking hat you focus on the data
available.  
Red Hat:
'Wearing' the red hat, you look at problems
using intuition, gut reaction, and emotion.
Black Hat:
Using black hat thinking, look at all the bad
points of the decision.
Yellow Hat:
The yellow hat helps you to think positively. It
is the optimistic viewpoint that helps you to
see all the benefits of the decision and the
value in it.
Green Hat:
The Green Hat stands for creativity. This is
where you can develop creative solutions to a
problem.
Blue Hat:
The Blue Hat stands for process control.
Decision-Making Biases and Errors
• Heuristics
– Using “rules of thumb” to simplify decision
making.
• Overconfidence Bias
– Holding unrealistically positive views of one’s self
and one’s performance.
• Immediate Gratification Bias
– Choosing alternatives that offer immediate
rewards and that to avoid immediate costs.
• Anchoring Effect
– Fixating on initial information and ignoring
subsequent information.
• 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
and discounting contradictory information.
• Framing Bias
– Selecting and highlighting certain aspects of a
situation while ignoring other aspects.
• Availability Bias
– Losing decision-making objectivity by focusing on
the most recent events.
• 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).