Chapter4_Foundations of Decision Making

Intuitive decision making can complement both bounded rationality and rational decision making.

Chapter4 Foundations of Decision Making

• How do managers make decisions?
  • Decision-Making Process A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution
    • Identification of a problem Problem:a discrepancy between an existing and a desired state of affaires.
    • Identification of decision criteria Decision criteria: Factors that are relevant in a decision
    • Allocation of weights to criteria give their relative priority in the decision
    • Development of alternatives list of alternative that can resolve the problem.
    • Analysis of alternatives Strengths and weaknesses of each alternative against the criteria.
    • Selection of an alternative decision rule
    • Implementation of the alternative convey the decision to those affected and getting their commitment to it.
    • Evaluation of decision effectiveness appraise the result of the decision to see whether it has corrected the problem.
  • Common Errors in the Decision-Making Process
    • Heuristics “rules of thumb ” to simplify decision making May lead to errors and biases
    • Overconfidence Unrealistically positive views of one’s self
    • Immediate gratification immediate gratification bias describes decision makers who tend to want immediate rewards and to avoid immediate costs.
    • Anchoring effect Anchoring effect /focalism describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.
    • Selective perception decision makers selectively organize and interpret events based on their biased perceptions
    • Confirmation refers to the tendency to selectively search for and consider information that confirms one's beliefs.
    • framing people react to a particular choice in different ways depending on whether it is presented as a loss or as a gain. People tend to avoid risk when a negative frame is presented but seek risks when a positive frame is presented.
    • Availability The availability bias happens when decisions makers tend to remember events that are the most recent and vivid in their memory
    • Representation When decision makers assess the likelihood of an event based on how closely it resembles other events or sets of events, that’s the representation bias / selection bias
    • Randomness try to create meaning out of random events or see patterns in random data
    • Sunk costs Sunk costs are costs (money, time, effort) that are not recoverable. Sunk cost represents money you already spent and have no chance of getting back, regardless of what may happen in the future.
    • Self-serving taking quick credit for successes and blaming outside factors for failures.
    • Hindsight Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact).
  • Three perspectives on decision making
    • Rational Model assumes that managers’ decision making will be rational logical and consistent choices to maximize value
      • The problem faced would be clear and unambiguous
      • The decision maker would have a clear and specific goal
      • Know all possible alternatives and consequences
      • Rationality is not a very realistic approach
    • Bounded Rationality Managers make rational decision,but are limited (bounded) in their ability to process information
      • Because managers can’t analyze information on all alternatives, they satisfice rather than maximize. They accept solutions that are “good enough.”
    • Intuitive Decision Making making decisions on the basis of experience, feelings and accumulated judgment
      • Described as “unconscious reasoning.” Intuitive decision making can complement both bounded rationality and rational decision making.
• What types of decisions and decision-making conditions do managers face?
  • How do problem differ?
    • Structured Problem A straightforward, familiar, and easily defined problem
    • Unstructured Problem A problem that is new or unusual for which information is ambiguous or incomplete.
    • Programmed decision A repetitive decision that can be handled using a routine approach Nonprogrammed Decisions A unique and nonrecurring decision that requires a custom-made solution.
  • How does a manager make programmed decisions?
    • Policy A general guide that establishes parameters for making decisions about recurring problems.
    • Procedure A series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation).
    • Rule An explicit statement that tells managers what they ought or ought not to do (limits on procedural actions).
  • What Decision Making Conditions Do Managers Face?
    • Certainty A situation in which a decision maker can make accurate decisions because the outcome of every alternative is known
    • Risk A situation in which a decision maker is able to estimate the likelihood of certain outcomes. Historical data or secondary information or past experiences let them assign probabilities to different alternatives.
    • Uncertainty A situation in which a decision maker has neither certainty nor reasonable probability estimates available. Limited amount of information.
• How Do Group Make Decisions?
  • Group decision making
    • Advantages ● Group decisions provide more complete information ● Diversity of experiences and perspectives are higher ●Groups generate more alternatives ●Group decisions increase acceptance of a solution
    • Disadvantages ● Group decisions are time consuming ●May be subject to minority domination ●Subject to pressure to conform ●Responsibility is ambiguous ●Subject to Groupthink which undermines critical thinking
  • When Are Groups Most Effective?
    • Whether Groups are more effective for decisions depends on the criteria: ●Accuracy ●Speed ●Creativity ●Acceptance ●Ideal Group Size
  • How Can You Improve Group Decision Making?
    • Brainstorming An idea-generating process that encourages alternatives while withholding criticism
    • Nominal Group Technique A decision-making technique in which group members are physically present but operate independently
    • Electronic Meeting Participants are linked by computer