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Decision Making
The document outlines the 8 step decision making process that managers follow: 1) Identify the problem, 2) Identify decision criteria, 3) Allocate weights to criteria, 4) Develop alternatives, 5) Analyze alternatives, 6) Select the best alternative, 7) Implement the selected alternative, and 8) Evaluate the effectiveness of the decision. It also discusses rational decision making and how managers can make effective decisions by following a process with characteristics like involving stakeholders and considering risks.
Decision Making
- 1. Chapter 5 Decision Making Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 1
- 2. LEARNING OUTLINE Follow this Learning Outline as you read and study this chapter. • The Decision-Making Process – Define decision and the decision-making process. – Describe the eight steps in the decision-making process. • The Manager as Decision Maker – Discuss the assumptions of rational decision making. – Describe the concepts of bounded rationality, satisficing, and escalation of commitment. – Explain what intuition is and how it affects decision making. Chapter 5, Stephen P. Robbins, Mary Coulter, and NancyContrast Management, Eighthnonprogrammed decisions. – Langton, programmed and Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 2
- 3. LEARNING OUTLINE (cont’d) Follow this Learning Outline as you read and study this chapter. • The Manager as Decision Maker (cont’d) – Contrast the three decision-making conditions. – Explain maximax, maximin, and minimax decision/ choice approaches. – Describe the four decision-making styles. – Discuss the decision-making biases and errors managers may exhibit. – Explain the managerial decision-making model. Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 3
- 4. LEARNING OUTLINE (cont’d) Follow this Learning Outline as you read and study this chapter. • Decision Making for Today’s World – Explain how managers can make effective decisions in today’s world. – List the six characteristics of an effective decision- making process. – Describe the five habits of highly reliable organizations. Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 4
- 5. Decision-Making • Decision – Making a choice from two or more alternatives • The Decision-Making Process – Identifying a problem and decision criteria and allocating weights to the criteria – Developing, analyzing, and selecting an alternative that can resolve the problem – Implementing the selected alternative Chapter 5, Stephen P. Robbins, Mary Coulter, and – Evaluating the decision’s effectiveness Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 5
- 6. Identify “I need to decide the best a franchise to purchase.” Exhibit 5.1 Problem • Financial qualifications Identify • Franchisor history The Decision • Start-up costs Criteria • Open geographical locations • Franchisor support Decision- Allocate Weights Start-up costs .......................................................10 Franchisor support ................................................7 Financial qualifications .........................................8 Making to Criteria Open geographical locations ...............................6 Franchisor history ..................................................7 Curves for Women Process Merle Norman Develop Second Cup Petland Alternatives Jani-King Chem-Dry Carpet Cleaning Liberty Tax Service McDonald’s Curves for Women Merle Norman Analyze Second Cup Petland Alternatives Jani-King Chem-Dry Carpet Cleaning Liberty Tax Service McDonald’s Select Curves for Women Merle Norman an Second Cup Petland Alternative Jani-King Chem-Dry Carpet Cleaning Liberty Tax Service McDonald’s Implement the “Chem-Dry Carpet Cleaning!” Alternative Chapter 5, Stephen P. Robbins, Mary Coulter, and Evaluate Nancy Langton, Management, Decision Effectiveness Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 6
- 7. Step 1: Identificationof a Problem • Problem – A discrepancy between an existing and desired state of affairs • Characteristics of Problems – A problem becomes a problem when a manager becomes aware of it – There is pressure to solve the problem – The manager must have the authority, information, or resources needed to solve the problem Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 7
- 8. Step 2: Identificationof Decision Criteria • Decision criteria are factors that are important (relevant) to resolving the problem: – Costs that will be incurred (investments required) – Risks likely to be encountered (chance of failure) – Outcomes that are desired (growth of the firm) Step 3: Allocation of Weights to Criteria • Decision criteria are not of equal importance: – Assigning a weight to each item places the items in the correct priority order of their importance in the decision- Chapter 5, Stephen P. Robbins, Mary Coulter, and making process Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 8
- 9. Exhibit 5.2 Criteriaand Weights for Franchise Decision Criterion Weight Start-up costs 10 Franchisor support 8 Financial qualifications 6 Open geographical locations 4 Franchisor history 3 Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 9
- 10. Step 4: Developmentof Alternatives • Identifying viable alternatives – Alternatives are listed (without evaluation) that can resolve the problem Step 5: Analysis of Alternatives • Appraising each alternative’s strengths and weaknesses – An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3. Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 10
- 11. Exhibit 5.3 EvaluationUsing Decision Criteria Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 11
- 12. Exhibit 5.4 EvaluationAgainst Weighted Criteria Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 12
- 13. Step 6: Selectionof an Alternative • Choosing the best alternative – The alternative with the highest total weight is chosen Step 7: Implementation of the Alternative • Putting the chosen alternative into action – Conveying the decision to and gaining commitment from Chapter 5, Stephen P. carry out the Coulter, and those who will Robbins, Mary decision Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 13
- 14. Step 8: Evaluationof Decision Effectiveness • The soundness of the decision is judged by its outcomes: – How effectively was the problem resolved by outcomes resulting from the chosen alternatives? – If the problem was not resolved, what went wrong? Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 14
- 15. Exhibit 5.5 Decisionsin Management Functions Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 15
- 16. Making Decisions • Rationality – Managers make consistent, value-maximizing choices with specified constraints – Assumptions are that decision makers: • Are perfectly rational, fully objective, and logical • Have carefully defined the problem and identified all viable alternatives • Have a clear and specific goal • Will select the alternative that maximizes outcomes in Chapter 5, Stephen P. Robbins,interests rather than in their personal the organization’s Mary Coulter, and interests Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 16
- 17. Exhibit 5.6 Assumptionsof Rationality Lead to • The problem is clear and unambiguous. • A single, well-defined goal is to be achieved. • All alternatives and consequences are known. Rational • Preferences are clear. Decision • Preferences are constant and stable. Making • No time or cost constraints exist. • Final choice will have maximize payoff. Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 17
- 18. Making Decisions (cont’d) •Bounded Rationality – Managers make decisions rationally, but are limited (bounded) by their ability to process information – Assumes decision makers: • Will not seek out or have knowledge of all alternatives • Will satisfice • Can be influenced by escalation of commitment Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 18
- 19. Making Decisions (cont’d) •Role of Intuition – Intuitive decision making • Making decisions on the basis of experience, feelings, and accumulated judgment • One-third of managers and other employees said they emphasized “gut feeling” over cognitive problem solving Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 19
- 20. Exhibit 5.7 WhatIs Intuition? Managers make decisions based on their past experiences Managers make Managers make decisions based on decisions based on ethical values or culture feelings or emotions Experience-based decisions Values- or ethics- Affect-initiated based decisions decisions Intuition Subconscious Cognitive-based mental processing decisions Managers use data from Managers make subconscious mind to decisions based on skills, help them make decisions knowledge, and training Chapter 5, Stephen P. Robbins, Mary Coulter, and Source: Based on L.A. Burke and M.K. Miller. “Taking the Mystery Out of Intuitive Decision Making.” Academy of Management Executive. October 1999. pp. 91–99. Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 20
- 21. Types of Problemsand Decisions • Structured Problems – Have clear goals – Are familiar – Are easily and completely defined • Programmed Decision – A repetitive decision that can be handled by a routine approach Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 21
- 22. Types of ProgrammedDecisions • A Procedure – A series of interrelated steps to respond to a structured problem • A Rule – An explicit statement that limits what a manager or employee can or cannot do • A Policy – A general guideline for making a decision Chapter 5, Stephen P. Robbins, Mary Coulter, and about a structured problem Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 22
- 23. Problems and Decisions(cont’d) • Unstructured Problems – Problems are new or unusual; information is ambiguous or incomplete • Nonprogrammed Decisions – Decisions are unique and nonrecurring; they require custom-made solutions Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 23
- 24. Decision-Making Conditions • Certainty – Accurate decisions possible because the outcome of every alternative is known • Risk – Decision maker estimates the likelihood of outcomes that result from the choice of particular alternatives Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 24
- 25. Decision-Making Conditions (cont’d) •Uncertainty – Limited information prevents estimation of outcome probabilities; may force managers to rely on intuition, hunches, and “gut feelings” • Maximax: the optimistic manager’s choice to maximize the maximum payoff • Maximin: the pessimistic manager’s choice to maximize the minimum payoff • Minimax: the manager’s choice to minimize his Chapter 5, Stephen P. Robbins, Mary Coulter, and maximum regret Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 25
- 26. Exhibit 5.8 ExpectedValue for Adding One Ski Lift Expected Expected × Probability = Value of Each Event Revenues Alternative Heavy snowfall $850,000 0.3 = $255,000 Normal snowfall 725,000 0.5 = 362,500 Light snowfall 350,000 0.2 = 70,000 $687,500 Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 26
- 27. Exhibit 5.9 PayoffMatrix Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 27
- 28. Exhibit 5.10 RegretMatrix Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 28
- 29. Decision-Making Styles • Dimensionsof Decision-Making Styles – Ways of thinking • Rational, orderly, and consistent versus • Intuitive, creative, and unique – Tolerance for ambiguity • Low tolerance: require consistency and order versus • High tolerance: multiple thoughts simultaneously Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 29
- 30. Decision-Making Styles (cont’d) •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 long-term decisions – Behavioural • Avoid conflict by working well with others and being Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian receptive to suggestions Edition. Copyright © 2005 Pearson Education Canada Inc. 30
- 31. Exhibit 5.11 Decision-MakingStyles High Analytic Conceptual For Ambiguity Tolerance Directive Behavioural Low Way of Thinking Chapter 5, Stephen P. Robbins, Mary Coulter, and Intuitive Rational Nancy Langton, Management, Eighth Canadian Source: S.P. Robbins and D.A. DeCenzo, Supervision Today. Edition. 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998), p. 166. Copyright © 2005 Pearson Education Canada Inc. 31
- 32. Exhibit 5.12 CommonDecision-Making Errors and Biases Overconfidence Hindsight Immediate Gratification Self-serving Anchoring Effect Sunk Costs Selective Perception Decision-Making Errors and Biases Randomness Confirmation Representation Framing Availability Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 32
- 33. Decision-Making Biases andErrors • 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 avoid immediate costs Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 33
- 34. Decision-Making Biases andErrors (cont’d) • Anchoring Effect – Fixating on initial information and ignoring later information • Selective Perception – 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 Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 34
- 35. Decision-Making Biases andErrors (cont’d) • 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 • Representation Bias – Drawing analogies and seeing identical situations when none exist • RandomnessP. Robbins, Mary Coulter, and Chapter 5, Stephen Bias – Creating unfounded meaning out of Nancy Langton, Management, Eighth Canadian random events Edition. Copyright © 2005 Pearson Education Canada Inc. 35
- 36. Decision-Making Biases andErrors (cont’d) • 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- Chapter 5, Stephen P. Robbins, Mary Coulter, and fact) Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 36
- 37. Exhibit 5.13 Overviewof Managerial Decision Making Decision-Making Approach • Rationality • Bounded rationality Decision-Making • Intuition Errors and Biases Types of Problems and Decisions • Well structured—programmed • Unstructured—nonprogrammed Decision • Choosing best alternative Decision-Making - maximizing Process - satisficing • Implementing Decision-Making Conditions • Evaluating • Certainty • Risk • Uncertainty Decision Maker’s Style • Directive • Analytic Chapter 5, Stephen P. Robbins, Mary Coulter, and • Conceptual • Behavioural Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 37
- 38. Decision Making forToday’s World • Guidelines for making effective decisions: – Know when it’s time to call it quits – Practice the five whys – Be an effective decision maker • Habits of highly reliable organizations (HROs): – Are not tricked by their success – Defer to the experts on the front line – Let unexpected circumstances provide the solution – Embrace complexity Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Management, anticipate their limits – Anticipate, but also Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 38
- 39. Characteristics of anEffective Decision-Making Process • Focuses on what is important • Is logical and consistent • Acknowledges both subjective and objective thinking and blends analytical with intuitive thinking • Requires only as much information and analysis as is necessary • Encourages and guides the gathering of relevant information and informed opinion Chapter 5, Stephen P. Robbins, Mary Coulter, to use, and flexible • Is straightforward, reliable, easy and Nancy Langton, Management, Eighth Canadian Edition. Copyright © 2005 Pearson Education Canada Inc. 39
Editor's Notes
- #6 A decision is a choice made from two or more alternatives. The decision-making process is a comprehensive process, involving eight steps, that begins with identifying a problem and decision criteria and allocating weights to those criteria; moves to developing, analyzing, and selecting an alternative that can resolve the problem; implements the alternative; and concludes with evaluating the decision’s effectiveness (see Exhibit 5.1 for a depiction of the decision-making process).
- #7 (See Exhibit 5.1 for a depiction of the decision-making process.)
- #8 A. Step 1 is identify a problem. A problem is defined as a discrepancy between an existing and a desired state of affairs. Some cautions about problem identification include the following: 1. Make sure it’s a problem and not just a symptom of a problem. 2. Problem identification is subjective. 3. Before a problem can be determined, a manager must be aware of any discrepancies. 4. Discrepancies can be found by comparing current results with some standard. 5. Pressure must be exerted on the manager to correct the discrepancy. 6. Managers aren’t likely to characterize a discrepancy as a problem if they perceive that they don’t have the authority, information, or other resources needed to act on it.
- #9 B. Step 2 is identify the decision criteria . Decision criteria are criteria that define what is relevant in making a decision. C. Step 3 is allocate weights to the criteria . The criteria identified in Step 2 of the decision-making process aren’t all equally important, so the decision maker must weight the items in order to give them correct priority in the decision. Exhibit 5.2 lists the criteria and weights for Joan’s franchise purchase decision.
- #11 D. Step 4 involves development of alternatives . The decision maker now needs to identify viable alternatives for resolving the problem. E. Step 5 is analyze alternatives . Each of the alternatives must now be critically analyzed. Each alternative is evaluated by appraising it against the criteria. Exhibit 5.3 shows the assessed values that Joan gave each of her eight alternatives regarding the franchise opportunities. Exhibit 5.4 reflects the weighting for each alternative (those found on Exhibits 5.2 and 5.3 ).
- #14 Step 6 is select an alternative . The act of selecting the best alternative from among those identified and assessed is critical. If criteria weights have been used, the decision maker simply selects the alternative with the highest score from Step 5. Step 7 is implement the alternative . The chosen alternative must be implemented. Implementation is conveying a decision to those affected by it and getting their commitment to it.
- #15 H. Step 8 involves evaluation of the decision effectiveness . This last step in the decision-making process assesses the result of the decision to see whether or not the problem has been resolved.
- #16 As Exhibit 5.5 shows, decision making is part of all four managerial functions. That’s why managers—when they plan, organize, lead, and control—are frequently called decision makers.
- #17 Managerial decision-making is assumed to be rational ; that is, choices are consistent and value-maximizing within specified constraints. The assumptions of rationality are summarized in Exhibit 5.6 . a. These assumptions are problem clarity (the problem is clear and unambiguous); goal orientation (a single, well-defined goal is to be achieved); known options (all alternatives and consequences are known); clear preferences; constant preferences (preferences are constant and stable); no time or cost constraints; and maximum payoff. b. The assumption of rationality is that decisions are made in the best economic interests of the organization, not in the manager’s interests. c. The assumptions of rationality can be met if: the manager is faced with a simple problem in which goals are clear and alternatives limited, in which time pressures are minimal and the cost of finding and evaluating alternatives is low, for which the organizational culture supports innovation and risk taking, and in which outcomes are concrete and measurable.
- #19 In spite of these limits to perfect rationality, managers are expected to “appear” rational as they make decisions. But because the perfectly rational model of decision making isn’t realistic, managers tend to operate under assumptions of bounded rationality, which is behaviour that is rational within the parameters of a simplified decision-making process that is limited (or bounded) by an individual’s ability to process information. a. Under bounded rationality, managers make satisficing decisions —in which managers accept solutions that are “good enough,” rather than maximizing payoffs. b. Managers’ decision-making may also be strongly influenced by the organization’s culture, internal politics, power considerations, and by a phenomenon called escalation of commitment —an increased commitment to a previous decision despite evidence that it may have been wrong.
- #20 Managers also regularly use their intuition. Intuitive decision-making is a subconscious process of making decisions on the basis of experience and accumulated judgment. Exhibit 5.7 describes the five different aspects of intuition. a. Making decisions on the basis of gut feeling doesn’t happen independently of rational analysis. The two complement each other. b. Although intuitive decision making will not replace the rational decision-making process, it does play an important role in managerial decision making.
- #21 Exhibit 5.7 describes the five different aspects of intuition.
- #22 Managers will be faced with different types of problems and will use different types of decisions. 1. Structured problems are straightforward, familiar, and easily defined. In handling this situation, a manager can use a programmed decision, which is a repetitive decision that can be handled by a routine approach.
- #23 There are three possible programmed decisions. a. A procedure is a series of interrelated sequential steps that can be used to respond to a structured problem. b. A rule is an explicit statement that tells managers what they ought or ought not do. c. A policy is a guide that establishes parameters for making decisions rather than specifically stating what should or should not be done. Examples: Procedure : Follow all steps for completing merchandise return documentation. Rule : Managers must approve all refunds over $50.00. No credit purchases are refunded for cash. Policy : Accept all customer-returned merchandise.
- #24 2. Unstructured problems are new or unusual problems in which information is ambiguous or incomplete. These problems are best handled by a nonprogrammed decision — that is, a unique decision that requires a custom-made solution.
- #25 1. Certainty is a situation in which a manager can make accurate decisions because the outcome of every alternative is known. This isn’t characteristic of most managerial decisions. 2. More common is the situation of risk, in which the decision maker is able to estimate the likelihood of certain outcomes. Exhibit 5.8 shows an example of how a manager might make decisions using “expected value” when considering the conditions of risk.
- #26 3. Uncertainty is a situation in which the decision maker has neither certainty nor reasonable probability estimates available. a. The choice of alternative is influenced by the limited amount of information available to the decision maker. b. It’s also influenced by the psychological orientation of the decision maker. 1) An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff). See Exhibit 5.9. 2) A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff). See Exhibit 5.9 . 3) The manager who desires to minimize the maximum regret will opt for a minimax choice. See Exhibit 5.10 .
- #27 Exhibit 5.8 shows an example of how a manager might make decisions using “expected value” when considering the conditions of risk.
- #28 1. An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff). See Exhibit 5.9 2. A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff). See Exhibit 5.9 .
- #29 The manager who desires to minimize the maximum regret will opt for a minimax choice. See Exhibit 5.10 .
- #30 Managers have different styles when it comes to making decisions and solving problems. One perspective proposes that people differ along two dimensions in the way they approach decision making. One dimension is an individual’s way of thinking —rational or intuitive. The other is the individual’s tolerance for ambiguity —low or high.
- #31 1. These two dimensions lead to a two by two matrix with four different decision-making styles (see Exhibit 5.11 ). a. The directive style is one that’s characterized by low tolerance for ambiguity and a rational way of thinking. b. The analytic style is one characterized by a high tolerance for ambiguity and a rational way of thinking. c. The conceptual style is characterized by an intuitive way of thinking and a high tolerance for ambiguity. d. The behavioural style is one characterized by a low tolerance for ambiguity and an intuitive way of thinking. 2. Most managers realistically probably have a dominant style and alternate styles, with some relying almost exclusively on their dominant style and others being more flexible depending on the situation.
- #32 The two dimensions of “way of thinking” and “tolerance for ambiguity” lead to a two-by-two matrix with four different decision-making styles (see Exhibit 5.11 ).
- #33 Managers use different styles and “rules of thumb” ( heuristics ) to simplify their decision making. These processes sometimes lead to decision biases and errors (see Exhibit 5.12 ).
- #34 1. Overconfidence bias occurs when decision makers tend to think that they know more than they do or hold unrealistically positive views of themselves and their performance. 2. Immediate gratification bias describes decision makers who tend to want immediate rewards and avoid immediate costs.
- #35 3. Anchoring effect describes when decision makers fixate on initial information as a starting point and then fail to adequately adjust for subsequent information. 4. Selective perception bias occurs when decision makers selectively organize and interpret events based on their biased perceptions. 5. Confirmation bias occurs when decision makers seek out information that reaffirms their past choices and discount information that is contradictory.
- #36 6. Framing bias occurs when decision makers select and highlight certain aspects of a situation while excluding others. 7. Availability bias occurs when decision makers remember events that are the most recent. 8. Representation bias occurs when decision makers assess the likelihood of an event based on how closely it resembles other events. 9. Randomness bias describes when decision makers try to create meaning out of random events.
- #37 10. Sunk costs error is when decision makers forget that current choices can’t correct the past. 11. Self-serving bias is where decision makers are quick to take credit for their successes and blame failure on outside factors. 12. Hindsight bias is the tendency for decision makers to falsely believe that they would have accurately predicted the outcome once the outcome is known.
- #38 1. Exhibit 5.13 provides an overview of managerial decision making. Managers want to make good decisions. 2. Regardless of the decision, it has been shaped by a number of factors.
- #39 Today’s business world revolves around making decisions, often risky ones with incomplete or inadequate information and under intense time pressure. What do managers need to do to make effective decisions under today’s conditions? Know when it’s time to call it quits. Practice the five whys. Be an effective decision maker. Build highly reliable organizations (HROs). Are not tricked by their own success. Defer to the experts on the front lines. Let unexpected circumstances provide the solution. Embrace complexity. Anticipate, but also anticipate their limits.