2. 6ā2
L E A R N I N G O U T L I N E
Follow this Learning Outline as you read and study this chapter.
The Decision-Making Process
ā¢ Define decision and decision-making process.
ā¢ Describe the eight steps in the decision-making process.
ā¢ Explain the challenges managers face in identifying
problems.
ā¢ Discuss why decision criteria are important in the
decision-making process.
ā¢ Describe how managers develop, analyze, and select
alternatives.
ā¢ Explain what happens during implementation and
evaluation.
3. 6ā3
L E A R N I N G O U T L I N E (contād)
Follow this Learning Outline as you read and study this chapter.
The Managers as Decision Maker
ā¢ Explain why decision making is synonymous with
managing.
ā¢ Discuss the assumptions of rational decision making.
ā¢ Describe the concepts of bounded rationality, satisficing,
and escalation of commitment.
ā¢ Explain what intuition is and how it affects decision
making.
ā¢ Contrast programmed and nonprogrammed decisions.
ā¢ Define the three forms of programmed decision making.
ā¢ Contrast the three decision-making conditions.
4. 6ā4
Decision Making
ā¢ Decision
ļMaking a choice from two or more alternatives.
ā¢ The Decision-Making Process
ļIdentifying a problem and decision criteria and
allocating weights to the criteria.
ļDeveloping, analyzing, and selecting an alternative
that can resolve the problem.
ļImplementing the selected alternative.
ļEvaluating the decisionās effectiveness.
5. 6ā5
Step 1: Identifying the Problem
ā¢ Problem
ļA discrepancy between an existing and desired state
of affairs.
ā¢ Characteristics of Problems
ļA problem becomes a problem when a manager
becomes aware of it.
ļThere is pressure to solve the problem.
ļThe manager must have the authority, information, or
resources needed to solve the problem.
6. 6ā6
Step 2: Identifying Decision Criteria
ā¢ Decision criteria are factors that are important
(relevant) to resolving the problem.
ļCosts that will be incurred (investments required)
ļRisks likely to be encountered (chance of failure)
ļOutcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the Criteria
ā¢ Decision criteria are not of equal importance:
ļAssigning a weight to each item places the items in
the correct priority order of their importance in the
decision making process.
7. 6ā7
Step 4: Developing Alternatives
ā¢ Identifying viable alternatives
ļAlternatives are listed (without evaluation) that can
resolve the problem.
Step 5: Analyzing Alternatives
ā¢ Appraising each alternativeās strengths and
weaknesses
ļAn alternativeās appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.
8. 6ā8
Step 6: Selecting an Alternative
ā¢ Choosing the best alternative
ļThe alternative with the highest total weight is
chosen.
Step 7: Implementing the Decision
ā¢ Putting the chosen alternative into action.
ļConveying the decision to and gaining commitment
from those who will carry out the decision.
9. 6ā9
Step 8: Evaluating the Decisionās
Effectiveness
ā¢ The soundness of the decision is judged by its
outcomes.
ļHow effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
ļIf the problem was not resolved, what went wrong?
10. 6ā10
Making Decisions
ā¢ Rationality
ļManagers make consistent, value-maximizing choices
with specified constraints.
ļAssumptions are that decision makers:
ļ¶ Are perfectly rational, fully objective, and logical.
ļ¶ Have carefully defined the problem and identified all
viable alternatives.
ļ¶ Have a clear and specific goal
ļ¶ Will select the alternative that maximizes outcomes in
the organizationās interests rather than in their personal
interests.
11. 6ā11
Making Decisions (contād)
ā¢ Bounded Rationality
ļManagers make decisions rationally, but are limited
(bounded) by their ability to process information.
ļAssumptions are that decision makers:
ļ¶ Will not seek out or have knowledge of all alternatives
ļ¶ Will satisficeāchoose the first alternative encountered
that satisfactorily solves the problemārather than
maximize the outcome of their decision by considering
all alternatives and choosing the best.
12. 6ā12
Influences on Decision Making
ā¢ Escalation of Commitment
ļIncreasing or continuing a commitment to previous
decision despite mounting evidence that the decision
may have been wrong.
ā¢ The Role of Intuition
ļIntuitive decision making
ļ¶ Making decisions on the basis of experience, feelings,
and accumulated judgment.
13. 6ā13
Problems and Decisions
ā¢ Structured Problems
ļInvolve goals that clear,
ļAre familiar (have occurred before),
ļAre easily and completely definedāinformation about
the problem is available and complete,
ā¢ Programmed Decision
ļA repetitive decision that can be handled by a routine
approach.
14. 6ā14
Types of Programmed Decisions
ā¢ A Policy
ļA general guideline for making a decision about a
structured problem.
ā¢ A Procedure
ļA series of interrelated steps that a manager can use
to respond (applying a policy) to a structured problem.
ā¢ A Rule
ļAn explicit statement that limits what a manager or
employee can or cannot do in carrying out the steps
involved in a procedure.
15. 6ā15
Policy, Procedure, and Rule Example
ā¢ Policy
ļAccept all customer-returned merchandise.
ā¢ Procedure
ļFollow all steps for completing merchandise return
documentation.
ā¢ Rules
ļManagers must approve all refunds over $50.00.
ļNo credit purchases are refunded for cash.
16. 6ā16
Problems and Decisions (contād)
ā¢ Unstructured Problems
ļProblems that are new or unusual and for which
information is ambiguous or incomplete.
ļProblems that will require custom-made solutions.
ā¢ Nonprogrammed Decisions
ļDecisions that are unique and nonrecurring.
ļDecisions that generate unique responses.
17. 6ā17
Decision-Making Conditions
ā¢ Certainty
ļA ideal situation in which a manager can make an
accurate decision because the outcome of every
alternative choice is known.
ā¢ Risk
ļA situation in which the manager is able to estimate
the likelihood (probability) of outcomes that result
from the choice of particular alternatives.
18. 6ā18
Decision-Making Conditions
ā¢ Uncertainty
ļLimited or information prevents estimation of outcome
probabilities for alternatives associated with the
problem and may force managers to rely on intuition,
hunches, and āgut feelingsā.
ļ¶ Maximax: the optimistic managerās choice to maximize
the maximum payoff
ļ¶ Maximin: the pessimistic managerās choice to maximize
the minimum payoff
ļ¶ Minimax: the managerās choice to minimize his
maximum regret.
19. 6ā19
Decision-Making Styles
ā¢ Dimensions of Decision-Making Styles
ļWays of thinking
ļ¶ Rational, orderly, and consistent
ļ¶ Intuitive, creative, and unique
ļTolerance for ambiguity
ļ¶ Low tolerance: require consistency and order
ļ¶ High tolerance: multiple thoughts simultaneously
20. 6ā20
Decision-Making Styles (contād)
ā¢ Types of Decision Makers
ļDirective
ļ¶ Use minimal information and consider few alternatives.
ļAnalytic
ļ¶ Make careful decisions in unique situations.
ļConceptual
ļ¶ Maintain a broad outlook and consider many
alternatives in making long-term decisions.
ļBehavioral
ļ¶ Avoid conflict by working well with others and being
receptive to suggestions.
21. 6ā21
Decision-Making Biases and Errors
ā¢ Heuristics
ļUsing ārules of thumbā to simplify decision making.
ā¢ Overconfidence Bias
ļHolding unrealistically positive views of oneās self and
oneās performance.
ā¢ Immediate Gratification Bias
ļChoosing alternatives that offer immediate rewards
and that to avoid immediate costs.
22. 6ā22
Decision-Making Biases and Errors
(contād)
ā¢ Anchoring Effect
ļFixating on initial information and ignoring
subsequent information.
ā¢ Selective Perception
ļSelecting organizing and interpreting events based on
the decision makerās biased perceptions.
ā¢ Confirmation Bias
ļSeeking out information that reaffirms past choices
and discounting contradictory information.
23. 6ā23
Decision-Making Biases and Errors
(contād)
ā¢ Framing Bias
ļ Selecting and highlighting certain aspects of a situation
while ignoring other aspects.
ā¢ Availability Bias
ļ Losing decision-making objectivity by focusing on the most
recent events.
ā¢ Representation Bias
ļ Drawing analogies and seeing identical situations when
none exist.
ā¢ Randomness Bias
ļ Creating unfounded meaning out of random events.
24. 6ā24
Decision-Making Biases and Errors
(contād)
ā¢ Sunk Costs Errors
ļ Forgetting that current actions cannot influence past events
and relate only to future consequences.
ā¢ Self-Serving Bias
ļ Taking quick credit for successes and blaming outside
factors for failures.
ā¢ Hindsight Bias
ļ Mistakenly believing that an event could have been
predicted once the actual outcome is known (after-the-fact).
25. 6ā25
Decision Making for Todayās World
ā¢ Guidelines for making effective decisions:
ļKnow when itās time to call it quits.
ļPractice the five āwhysā.
ļBe an effective decision maker.
ā¢ Habits of highly reliable organizations (HROs)
ļAre not tricked by their success.
ļDefer to the experts on the front line.
ļLet unexpected circumstances provide the solution.
ļEmbrace complexity
ļAnticipate, but also anticipate their limits
26. 6ā26
Characteristics of an Effective Decision-
Making Process
ā¢ It focuses on what is important.
ā¢ It is logical and consistent.
ā¢ It acknowledges both subjective and objective
thinking and blends analytical with intuitive thinking
ā¢ It requires only as much information and analysis as
is necessary to resolve a particular dilemma.
ā¢ It encourages and guides the gathering of relevant
information and informed opinion.
ā¢ It is straightforward, reliable, easy to use, and
flexible.