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CH 2

The document describes the eight step decision making process as: 1) identifying the problem, 2) identifying decision criteria, 3) allocating weights to criteria, 4) developing alternatives, 5) analyzing alternatives, 6) selecting an alternative, 7) implementing the alternative, and 8) evaluating the decision. It also discusses the four ways managers make decisions as rational, bounded rational, intuitive, and evidence-based. Finally, it covers types of decisions, decision making situations and conditions, biases, and tips for effective decision making.

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26 views40 pages

CH 2

The document describes the eight step decision making process as: 1) identifying the problem, 2) identifying decision criteria, 3) allocating weights to criteria, 4) developing alternatives, 5) analyzing alternatives, 6) selecting an alternative, 7) implementing the alternative, and 8) evaluating the decision. It also discusses the four ways managers make decisions as rational, bounded rational, intuitive, and evidence-based. Finally, it covers types of decisions, decision making situations and conditions, biases, and tips for effective decision making.

Uploaded by

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2

Making Decisions
Learning Outcomes

ü Describe eight steps in decision-making


process
ü Explain the four ways managers make
decisions
ü Classify decisions and decision-making
conditions
ü Identify effective decision-making techniques
Decision Making

Ø Decision - making a choice from two or more

alternatives.
Ø Problem - an obstacle that makes it difficult to

achieve a desired goal or purpose.


2.1. The Decision Making Process

Source: Robbins & Coulter (2018)


Step 1: Identifying a Problem

v Characteristics of Problems

Ø A problem becomes a problem when a manager


becomes aware of it.
Ø There is pressure to solve the problem.

Ø The manager must have the authority, information, or


resources needed to solve the problem.
Step 2: Identifying Decision Criteria

v Decision criteria are factors that are important (relevant) to

resolving the problem, such as:

Ø Costs that will be incurred (investments required)

Ø Risks likely to be encountered (chance of failure)

Ø Outcomes that are desired (growth of the firm)


Step 3: Allocating Weights to the Criteria

v Decision criteria are not of equal importance:

Ø Assigning a weight to each item places the items in the

correct priority order of their importance in the


decision-making process.
Exhibit 2-2: Important Decision Criteria
Step 4: Developing Alternatives

v Identifying viable alternatives

Ø Alternatives are listed (without evaluation) that can

resolve the problem.


Exhibit 2-3: Possible Alternatives
Step 5: Analyzing Alternatives

v Appraising each alternative’s strengths and weaknesses

Ø An alternative’s appraisal is based on its ability to

resolve the issues related to the criteria and criteria


weight.
Exhibit 2-4: Evaluation of Alternatives
Step 6: Selecting an Alternative

v Choosing the best alternative


Ø The alternative with the highest total weight is chosen.
Step 7: Implementing the Alternative

v Putting the chosen alternative into action

Ø Conveying the decision to and gaining commitment

from those who will carry out the alternative


Step 8: Evaluating Decision Effectiveness

v The soundness of the decision is judged by its outcomes.

Ø How effectively was the problem resolved by

outcomes resulting from the chosen alternatives?

Ø If the problem was not resolved, what went wrong?


Exhibit 2-5: Decisions Managers May Make
2.2. Four ways of Making Decisions
2.2.1. Rationality decision making
v Managers make consistent, value-maximizing choices
with specified constraints.
v Assumptions are that decision makers:
ü Are perfectly rational, fully objective, and logical.
ü Have carefully defined the problem and identified all
viable alternatives.
ü Have a clear and specific goal
ü Will select the alternative that maximizes outcomes in
the organization’s interests rather than in their
personal interests.
2.2. Four ways of Making Decisions
v 2.2.2. Bounded Rationality

v Managers make decisions rationally, but are limited (bounded) by


their ability to process information.
v Assumptions are that decision makers:
ü Will not seek out or have knowledge of all alternatives
ü Will satisfice - choose the first alternative encountered that
satisfactorily solves the problem - rather than maximize the
outcome of their decision by considering all alternatives and
choosing the best.
v Influence on decision making
ü Escalation of commitment: an increased commitment to a
previous decision despite evidence that it may have been wrong.
2.2. Four ways of Making Decisions
2.2.3. Intuitive decision- making
v Making decisions on the basis of experience, feelings,
and accumulated judgment.
Exhibit 2-6: What Is Intuition?
2.2. Four ways of Making Decisions
2.2.4. Evidence-based decision- making
v Making decisions on the basis of the best available
research evidence and informed by experiential evidence
from the field and relevant contextual evidence.
2.3. Types of Decisions
Ø Programmed Decision - a repetitive decision that can be

handled by a routine approach.


Ø Non-programmed Decisions - unique and nonrecurring
decisions that require a custom-made solution.
Types of Programmed Decisions

v Procedure - a series of interrelated steps that a manager


can use to apply a policy in response to a structured
problem.

v Rule - an explicit statement that limits what a manager or

employee can or cannot do.

v Policy - a general guideline for making a decision about a

structured problem.
Policy, Procedure, and Rule (Examples)

v Policy

ü Accept all customer-returned merchandise.

v Procedure

ü Follow all steps for completing merchandise return


documentation.
v Rules

ü Managers must approve all refunds over $50.00.

ü No credit purchases are refunded for cash.


Exhibit 2-7: Programmed Versus
Non-programmed Decisions
2.4. Decision-Making Situations

v Certainty
ü a situation in which a manager can make an accurate

decision because the outcome of every alternative


choice is known.
v Risk
ü a situation in which the manager is able to estimate

the likelihood (probability) of outcomes that result


from the choice of particular alternatives.
Exhibit 2-8: Expected Value
Decisions Under Uncertainty

v Limited information prevents estimation of outcome


probabilities for alternatives .
v Limited information forces managers to rely on intuition,
hunches, and “gut feelings.”
ü Maximax: the optimistic manager’s choice to maximize
the maximum payoff.
ü Maximin: the pessimistic manager’s choice to maximize
the minimum payoff.
ü Minimax: the manager’s choice to minimize maximum
regret.
Exhibit 2-9: Payoff Matrix
Exhibit 2-10: Regret Matrix
Decision-Making Styles

Ø Linear Thinking Style - a person’s tendency to use external

data/facts; the habit of processing information through


rational, logical thinking.

Ø Nonlinear Thinking Style - a person’s preference for

internal sources of information; a method of processing


this information with internal insights, feelings, and
hunches.
Decision-Making Biases and Errors

Ø Heuristics - using “rules of thumb” to simplify decision

making.

Ø Overconfidence Bias - holding unrealistically positive views

of oneself and one’s performance.

Ø Immediate Gratification Bias - choosing alternatives that

offer immediate rewards and avoid immediate costs.


Exhibit 2-11: Common Decision-Making Biases
Decision-Making Biases and Errors (cont.)

Ø Anchoring Effect - fixating on initial information and

ignoring subsequent information.

Ø Selective Perception Bias - selecting, organizing and

interpreting events based on the decision maker’s biased


perceptions.

Ø Confirmation Bias - seeking out information that reaffirms


past choices while discounting contradictory information.
Decision-Making Biases and Errors (cont.)

Ø Framing Bias - selecting and highlighting certain aspects of


a situation while ignoring other aspects.
Ø Availability Bias - losing decision-making objectivity by

focusing on the most recent events.


Ø Representation Bias - drawing analogies and seeing
identical situations when none exist.
Ø Randomness Bias - creating unfounded meaning out of

random events.
Decision-Making Biases and Errors (cont.)

Ø Sunk Costs Errors - forgetting that current actions cannot

influence past events and relate only to future


consequences.
Ø Self-Serving Bias - taking quick credit for successes and

blaming outside factors for failures.


Ø Hindsight Bias - mistakenly believing that an event could

have been predicted once the actual outcome is known


(after-the-fact).
Exhibit 2-12: Overview of Managerial Decision Making
Decision Making for Today’s World

v Guidelines for making effective decisions:


ü Understand cultural differences
ü Know when it’s time to call it quits
ü Use an effective decision making process
v Habits of highly reliable organizations (HROs)
ü Are not tricked by their success
ü Defer to the experts on the front line
ü Let unexpected circumstances provide the solution
ü Embrace complexity
ü Anticipate, but also anticipate their limits

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