Chapter 7 Decision-Making

The Decision Making Process

Decision-a choice among two or more alternatives
-decision making is (and should be) a process, not just a simple act of choosing among
alternatives
Step 1: Identifying a problem
Problem-discrepancy between an existing and a desired condition
-an obstacle that makes it difficult to achieve a desired goal or purpose
Step 2: Identifying Decision Criteria
Decision criteria-criteria that define whats important or relevant to resolving a problem
Step 3: Allocating weights to the criteria
Step 4: Developing Alternatives
Step 5: Analyzing Alternatives
When you multiply each alternative by the assigned weight, you get the weighted
alternatives
Step 6: Selecting an Alternative
Step 7: Implementing the Alternative
Step 8: Evaluating Decision Effectiveness
Decisions Manager May Make
Planning
What are the organizations long-term objectives?
What strategies will best achieve those objectives?
What should the organizations short-term objectives be?
How difficult should individual goals be?
Organizing
How many employees should I have report directly to me?
How much centralization should there be in the organization?
How should jobs be designed?
When should the organization implement a different structure?
Leading
How do I handle employees who appear to be unmotivated/
What is the most effective leadership style in a given situation?
How will a specific change affect worker productivity?
When is the right time to stimulate conflict?
Controlling
What activities in the organization need to be controlled?
How should those activities be controlled?
When is a performance deviation significant?
What type of management information system should the organization have?

Managers Making Decisions

4 Perspectives on how managers make decisions:

1. Rationality
Rational decision making-describes choices that are logical and consistent and
maximize value
Assumptions of rationality:
1. A rational decision maker would be fully objective and logical
2. The problem faced would be clear and unambiguous and the
decision maker would have a clear and specific goal and know all possible
alternatives and consequences
3. Making decisions rationally would consistently lead to selecting
the alternatives that maximizes the likelihood of achieving that goal
2. Bounded Rationality
Bounded rationality-decision making thats rational, but limited (bounded) by an
individuals ability to process information
Satisfice-accept solutions that are good enough
Escalation of commitment-an increased commitment to a previous decision despite
evidence it may have been wrong
3. Role of Intuition
Intuitive decision making-making decisions on the basis of experience, feelings and
accumulated judgment
What is intuition:
1. Values or ethics-based decisions-managers make decisions
based on ethical values or culture
2. Experience-based decisions-managers make decisions based
on their past experiences
3. Affect-initiated decisions-managers make decisions based on
feelings or emotions
4. Cognitive-based decisions-managers make decisions based on
skills, knowledge, and training
5. Subconscious mental processing-managers use data from
subconscious mind to help them make decisions
4. The Role of Evidence-Based Management
Evidence-based management (EBMgt)-the systematic use of the best available
evidence to improve management practice
4 essential elements of EBMgt:
1. Decision makers expertise and judgment
2. External evidence thats been evaluated by the decision maker
3. Opinions, preferences, and values of those who have a stake in
the decision
4. Relevant organizational (internal) factors such as context,
circumstances and organizational members

Types of Decisions
1. Structure Problems and Programmed Decisions
Structured problems-straightforward, familiar and easily defined problems
Programmed decision-a repetitive decision that can be handled by a routine approach

Procedure-a series of sequential steps used to respond to a well-structured problem

Rule-an explicit statement that tells managers what can or cannot be done
Policy-guideline for making decisions
2. Unstructured Problems and Nonprogrammed Decisions
Unstructured problems-problems that are new or unusual and for which information is
ambiguous or incomplete
Nonprogrammed decisions-unique and nonrecurring decisions that require a custommade solution
Lower-level managers mostly rely on programmed decisions (procedures, rules, and
policies) because they confront familiar and repetitive problems.
As managers move up the organizational hierarchy, the problems they confront become
more unstructured. Because lower-level managers handle the routine decisions and let upperlevel managers deal with the unusual or difficult decisions.
Also, upper-level managers delegate routine decisions to their subordinates so they can
deal with more difficult issues
Characteristics

Programmed Decisions

Nonprogrammed Decisions

Type of problem

Structured

unstructured

Managerial Level

Lower levels

Upper levels

Frequency

Repetitive, routine

New, unusual

Information

Readily available

Ambiguous or incomplete

Goals

Clear, specific

vague

Time frame for solution

short

Relatively long

Solution relies on...

Procedures, rules, policies

Judgment and creativity

Decision-Making Conditions
1. Certainty-a situation in which a manager can make accurate decisions because
all outcomes are known
2. Risk-a situation in which the decision maker is able to estimate the likelihood of
certain outcomes
3. Uncertainty-a situation in which a decision maker has neither certainty nor
reasonable probability estimates available
* Under these conditions, the choice of alternative is influenced by the limited amount of
available information and by the psychological orientation of the decision maker
Regret-the amount of money that could have been made had a different strategy been
used
*uncertainty often forces them to rely more on intuition, creativity, hunches and gut feel

Decision Making Styles

1. Linear-Nonlinear Thinking Style Profile
Linear thinking style-decision style characterized by a persons preference for using
external data and facts and processing this information through rational, logical thinking
Nonlinear thinking style-decision style characterized by a persons preference for
internal sources of information and processing this information with internal insights, feelings
and hunches
2. Decision-Making Biases and Errors
Heuristics-rules of thumb that managers use to simplify decision making
*Even though managers may use rules of thumb, that doesnt mean those rules are reliable
Overconfidence bias-when decision makers tend to think they know more than they do or hold
unrealistically positive views of themselves and their performance
Immediate gratification bias-describes decision makers who tend to want immediate rewards
and to avoid immediate costs
Anchoring effect-how decision makers fixate on initial information as a starting point an dthen,
once set, fail to adequately adjust for subsequent information
Selective perception bias-when decision makers selectively organize and interpret events
based on their biased perceptions
-this influences the information they pay attention to, the problems, they identify, and the
alternatives they develop
Confirmation bias-decision makers who seek out information that reaffirms their past choices
and discount information that contradicts past judgments
-these people tend to accept at face value information that confirms their preconceived views
and are critical and skeptical of information that challenges these views
Framing bias-when decision makers select and highlight certain aspects of a situation while
excluding others
Availability bias-when decision makers tend to remember events that are the most recent and
vivid in their memory
Representation bias-when decision makers assess the likelihood of an event based on how
closely it resembles other events or sets of events
Randomness bias-describes the actions of decision makers who try to create meaning out of
random events. They do this because most decision makers have difficulty dealing with chance
even though random events happen to everyone and theres nothing that can be done to predict
them
Sunk cost error-when decision makers forget that current choices cant correct the past
Self-serving bias-decision makers who are quick to take credit for their successes and to
blame failure on outside factors
Hindsight bias-the tendency for decision makers to falsely believe that they would have
accurately predicted the outcome of an event once that outcome is actually known
3. Overview of Managerial Decision Making

4 factors that affect decision-making process

1. Type of problem
2. Decision-making conditions
3. Decision-making style

Effective Decision Making in Todays World

1. Understand cultural differences
2. Know when its time to call it quits
3. Use an effective decision-making process
6 characteristics of effective decision making process
1. Focuses on whats important
2. Logical and consistent
3. Acknowledges both subjective and objective
thinking and blends analytical with intuitive thinking
4. Requires only as much information and analysis as
is necessary to resolve a particular dilemma
5. Encourages and guides the gathering of relevant
information and informed opinion
6. Straightforward, reliable, easy to use and flexible
4. Build an organization that can spot the unexpected and quickly adapt to the
changed environment
5 habits of highly reliable organizations (HRO):
1. Theyre not tricked by their success
2. They defer to the experts on the front line
3. They let unexpected circumstances provide the
solution
4. They embrace complexity
5. They anticipate, but also recognize their limits