CHAPTER 02 – MAKING DECISIONS

LECTURE 04, 05, 06

Maliha Rabeta
Lecturer
Department of Business Administration in
Finance and Banking
BUP

16 January 2023
WHAT IS A DECISION?

 Decision can be referred as a choice among two or more alternatives.

 Managers at all levels and in all areas of organizations make decisions. That is, they
make choices. Although decision-making is typically described as choosing among
alternatives, this view is too simplistic. Why? Because decision-making is (and should
be) a process, not just a simple act of choosing among alternatives.
 A key to success in management and in your career is knowing how to be an
effective decision-maker.
 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.
 Evaluating the decision’s effectiveness.
DECISION-MAKING PROCESS
 DECISION-MAKING PROCESS
STEP 1: IDENTIFY A PROBLEM

 Problem: an obstacle that makes it difficult to achieve a desired goal or purpose.

 Every decision starts with a problem, a discrepancy between an existing and a desired
condition.
 For example, Amanda is a sales manager whose reps need new laptops because their old
ones are outdated and inadequate for doing their job. To make it simple, assume it’s not
economical to add memory to the old computers and it’s the company’s policy to
purchase, not lease. Now we have a problem—a disparity between the sales reps’
current computers (existing condition) and their need to have more efficient ones
(desired condition).Amanda has a decision to make.
 STEP 1: IDENTIFYING THE PROBLEM

 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.
DECISION-MAKING PROCESS
STEP 2: IDENTIFY THE DECISION CRITERIA

 Decision criteria are factors that are important to resolving the problem.
 Once a manager has identified a problem, he or she must identify the decision
criteria important or relevant to resolving the problem. Every decision-maker has
criteria guiding his or her decisions even if they’re not explicitly stated.
 In this example, Amanda decides after careful consideration that memory and storage
capabilities, display quality, battery life, warranty, and carrying weight are the relevant
criteria in her decision.
 STEP 2: IDENTIFYING DECISION CRITERIA

 Decision criteria are factors that are important (relevant) to resolving the problem. E.g.:
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)
DECISION-MAKING PROCESS
STEP 3: ALLOCATE WEIGHTS TO THE CRITERIA

 If the relevant criteria aren’t equally important, the decision maker must weight the
items in order to give them the correct priority in the decision.

• A simple way is to give the most important criterion a weight of 10 and then assign
weights to the rest using that standard. Of course, you could use any number as the
highest weight.
IMPORTANT DECISION CRITERIA
Criterion Weight

Memory and storage 10

Battery life 8

Carrying weight 6

Warranty 4

Display quality 3
DECISION-MAKING PROCESS
STEP 4: DEVELOP ALTERNATIVES

 List viable alternatives that could solve the problem.

 In this step, a decision maker needs to be creative, and the alternatives are only
listed and not evaluated yet.
 Example: Amanda identifies eight laptops as possible choices

• Here the decision maker needs to be creative, and the alternatives are only
listed—not evaluated
POSSIBLE ALTERNATIVES
Laptop Memory and Battery Carrying Warranty Display
Storage Life Weight Quality
HP ProBook 10 3 10 8 5

Lenovo IdeaPad 8 5 7 10 10

Apple MacBook 8 7 7 8 7

Toshiba Satellite 7 8 7 8 7

Apple MacBook Air 8 3 6 10 8

Dell Inspirion 10 7 8 6 7

HP Pavilion 4 10 4 8 10
STEP 5: EVALUATION OF ALTERNATIVES

Laptop Memory Battery Carrying Warranty Display Total

and Life Weight Quality
Storage
HP ProBook 100 24 60 32 15 231

Lenovo IdeaPad 80 40 42 40 30 232

Apple MacBook 80 56 42 32 21 231

Toshiba Satellite 70 64 42 32 21 229

Apple MacBook Air 80 24 36 40 24 204

Dell Inspirion 100 56 48 24 21 249

HP Pavilion 40 80 24 32 30 206
DECISION-MAKING PROCESS
STEP 6: SELECT AN ALTERNATIVE

 Choose the alternative that generates the highest total in Step 5.

 In this example Amanda would choose the Dell Inspiron because it scored higher
than all other alternatives (249 total).
DECISION-MAKING PROCESS
STEP 7: IMPLEMENT THE ALTERNATIVE

 Put the chosen alternative into action.

• By Conveying the decision to those affected and get their commitment to it.

• We know that if the people who must implement a decision participate in the
process, they’re more likely to support it.

• Another thing managers may need to do during implementation is reassess the

environment for any changes, especially if it’s a long-term decision. Are the criteria,
alternatives, and choice still the best ones, or has the environment changed in such a
way that we need to reevaluate?
DECISION-MAKING PROCESS
STEP 8: EVALUATE DECISION EFFECTIVENESS

 Evaluate the result or outcome of the decision to see if the problem was resolved.

• If it wasn’t resolved, what went wrong?

• Was the problem incorrectly defined? Were errors made when evaluating
alternatives? Was the right alternative selected but poorly implemented?

• The answers might lead you to redo an earlier step or might even require starting the
whole process over.
DECISIONS MANAGERS MAY MAKE: PLANNING AND ORGANIZING
DECISIONS MANAGERS MAY MAKE: LEADING AND CONTROLLING
 RATIONALITY

 Rational Decision-Making: choices that are logical and consistent and maximize value
 Assumptions of rationality:
 Rational decision maker is logical and objective
 Problem faced is clear and unambiguous
 Decision maker would have clear, specific goal and be aware of all alternatives and consequences
 The alternative that maximizes achieving this goal will be selected
 Decisions are made in the best interest of the organization

 These assumptions apply to any decision—personal or managerial. However, for

managerial decision making, we need to add one additional assumption—decisions are
made in the best interests of the organization.
ASSUMPTIONS OF RATIONALITY
 MAKING DECISIONS (CONT’D)

 Bounded Rationality

 Managers make decisions rationally, but are limited (bounded) by their ability to
process information.

 Assumptions are that decision makers:

 Will not seek out or have knowledge of all alternatives

 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.
INFLUENCES ON DECISION MAKING

 Escalation of Commitment

 Increasing or continuing a commitment to previous decision despite mounting

evidence that the decision may have been wrong. E.g., positive experience in
dealing with some suppliers, currently suffers bad financial performance. strongly
influenced by the organization’s culture, internal politics, power considerations.

 The Role of Intuition

 Intuitive decision making

INTUITION

 Intuitive decision-
making: making decisions
on the basis of experience,
feelings, and accumulated
judgment

five different aspects of intuition identified by researchers studying managers’ use

of intuitive decision-making.
 EVIDENCE-BASED MANAGEMENT
• Evidence-based management (EBMgt): the systematic use of the best available evidence to improve
management practice.
• Any decision-making process is likely to be enhanced through the use of relevant and reliable evidence
 The premise behind evidence-based management (EBMgt) is “systematic use of the best available
evidence to improve management practice.
 EBMgt is quite relevant to managerial decision-making.
 The four essential elements of EBMgt are :
 the decision maker’s expertise and judgment;
 external evidence that’s been evaluated by the decision maker;
 opinions, preferences, and values of those who have a stake in the decision; and
 relevant organizational (internal) factors such as context, circumstances, and organizational members.
 PROBLEMS AND DECISIONS

 Structured Problems
 Involve goals that clear.
 Are familiar (have occurred before).
 Are easily and completely defined—information about the problem is available and
complete.
 Programmed Decision
 A repetitive decision that can be handled by a routine approach.
 E.g., registration process.
TYPES OF PROGRAMMED DECISIONS

 A Policy

 A general guideline for making a decision about a structured problem. (system)

 E.g., Accept all customer-returned merchandise.

 Students have the right to review his final mark.

 The recruitment must start from job vacancy announcement.

TYPES OF PROGRAMMED DECISIONS

 A Procedure
 A series of interrelated steps that a manager can use to respond (applying a policy) to
a structured problem.

 E.g., Follow all steps for completing merchandise return documentation.

 Purchasing procedures.

 Follow the steps for reviewing marks.

 Recruitment procedures.

 Registration procedures.
TYPES OF PROGRAMMED DECISIONS

 A Rule
 An explicit statement that limits what a manager or employee can or cannot do in
carrying out the steps involved in a procedure. Examples:

 Managers must approve all refunds over $50.00.

 No credit purchases are refunded for cash.

 Reviewing marks can be within the first week of publishing final results.
PROBLEMS AND DECISIONS (CONT’D)

 Unstructured Problems

 Problems that are new or unusual and for which information is ambiguous or incomplete.

 Problems that will require custom-made solutions.

 Non-programmed Decisions

 Decisions that are unique and nonrecurring/ infrequent.

 Decisions that generate unique responses.

 E.g., making a decision regarding opening a second branch in a new geographical area.

 few decisions in the real world are either fully programmed or non-programmed
TYPES OF PROBLEMS, TYPES OF DECISIONS, AND LEVEL IN THE
ORGANIZATION
PROGRAMMED VS NONPROGRAMMED DECISIONS

Characteristic 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

 Certainty: a situation in which a manager can make accurate decisions because all outcomes are
known. E.g., putting a deposit in a bank, the annual return on it is known. The outcomes of each
alternative is certain. As you might expect, most managerial decisions aren’t like this.

• Risk: A situation in which the decision maker is able to estimate the likelihood of certain outcomes.
The decision maker is able to estimate the likelihood of certain outcomes. Under risk, managers have
historical data from past personal experiences or secondary information that lets them assign
probabilities to different alternatives.

• Uncertainty: a situation in which a decision maker has neither certainty nor reasonable probability
estimates available. Managers face decision-making situations of uncertainty. 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.
MANAGING RISK

 Under risk, managers have historical data from past personal experiences or
secondary information that lets them assign probabilities to different alternatives.
 This is used to calculate expected value—the expected return from each possible
outcome—by multiplying expected revenue by the probability of each alternative
EXPECTED VALUE

Expected Expected Value of

Event Probability
Revenues Each Alternative
Heavy snowfall $850,000 0.3 $255,000
Normal snowfall $725,000 0.5 $362,000
Light snowfall $350,000 0.2 $70,000
Blank Blank Total expected revenue: $687,500
DECISION-MAKING CONDITIONS

 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.
 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).
 2) A pessimistic one will pursue a maximin choice (maximizing the minimum possible
payoff).
 3) The manager who desires to minimize the maximum regret will opt for a minimax
choice/regret.

© Prentice Hall, 2002

 DECISION-MAKING CONDITIONS

 Uncertainty

 Limited of information prevents estimation of outcome probabilities for alternatives

associated with the problem and may force managers to rely on intuition, hunches,
and “gut feelings”.

 Maximax: the optimistic manager’s choice to maximize the maximum payoff. E.g.,
S4=

 Maximin: the pessimistic manager’s choice to maximize the minimum payoff. E.g.,
S3=

 Minimax: the manager’s choice to minimize his maximum regret. E.g., S4=
 PAYOFF MATRIX

Visa Marketing Strategy (in MasterCard MasterCard MasterCard

millions of dollars CA 1 CA 2 CA 3
Strategy 1 13 14 11
Strategy 2 9 15 18
Strategy 3 24 21 15
Strategy 4 18 14 28

A marketing manager at Visa has determined four possible strategies (Strategy 1, Strategy 2, Strategy 3, and
Strategy 4) for promoting the Visa card throughout the West Coast region of the United States. The
marketing manager also knows that major competitor MasterCard has three competitive actions (CA 1, CA
2, and CA 3) it’s using to promote its card in the same region. For this example, we’ll assume that the Visa
manager had no previous knowledge that would allow her to determine probabilities of success of any of the
four strategies. She formulates the matrix shown above to show the various Visa strategies and the resulting
profit, depending on the competitive action used by MasterCard.
 REGRET MATRIX

Visa Marketing Strategy (in MasterCard MasterCard MasterCard

millions of dollars CA 1 CA 2 CA 3
Strategy 1 11 7 17
Strategy 2 15 6 10
Strategy 3 0 0 13
Strategy 4 6 7 0

Managers calculate regret by subtracting all possible payoffs in each category from the maximum possible payoff
for each given event, in this case for each competitive action. For our Visa manager, the highest payoff—given that
MasterCard engages in CA1, CA2, or CA3—is $24 million, $21 million, or $28 million, respectively (the highest
number in each column). Subtracting the payoffs in previous slide from those figures produces the results shown in
this slide.
HEURISTICS

 Heuristics or “rules of thumb” can help make sense of complex,

uncertain, or ambiguous information.
 However, they can also lead to errors and biases in processing and
evaluating information.
COMMON DECISION-MAKING BIASES
 DECISION-MAKING BIASES AND ERRORS

 Heuristics/ trial and error method

 Using “rules of thumb” to simplify decision making. Based on past experience

(trial and error method).
 Overconfidence Bias

 Holding unrealistically positive views of one’s self and one’s performance.

 Immediate Gratification Bias/ short term thinking

 Choosing alternatives that offer immediate rewards and that to avoid immediate
costs.
 DECISION-MAKING BIASES AND ERRORS (CONT’D)

 Anchor/ strongly linked

 Fixating on initial information and ignoring subsequent information.
 Selective Perception
 Selecting organizing and interpreting events based on the decision maker’s biased
perceptions. E.g., first impression about price, impression about new investment.
 Confirmation Bias
 Seeking out information that reaffirms past choices and discounting
contradictory information.
DECISION-MAKING BIASES AND ERRORS (CONT’D)

 Framing Bias
 Selecting and highlighting certain aspects of a situation while ignoring other
aspects. E.g., focus on revenue and ignore maintenance skills.
 Availability Bias
 Losing decision-making objectivity by focusing on the most recent events.
DECISION-MAKING BIASES AND ERRORS (CONT’D)

 Representation Bias
 Drawing analogies/likeness and seeing identical situations when none exist.
E.g., considers last summer revenue the same for this year.
 Randomness Bias
 Creating unfounded meaning out of random events. E.g., event happened by
chance. E.g., making high profit because of having high stock of paints and
Israel prevented paints from entry.
DECISION-MAKING BIASES AND ERRORS (CONT’D)
 Sunk Costs Errors
 Forgetting that current actions cannot correct past events and relate only to future
consequences.
 Self-Serving Bias
 Taking quick credit for successes and blaming outside factors for failures.
 Hindsight/observation Bias
 Mistakenly believing that an event could have been predicted once the
actual outcome is known (after-the-fact). E.g., let us start producing and will
see the customer reaction.
 OVERVIEW OF MANAGERIAL DECISION MAKING

Because it’s in their best interests,

managers want to make good
decisions—that is, choose the “best”
alternative, implement it, and
determine whether it takes care of
the problem, which is the reason the
decision was needed in the first
place.
Their decision-making process is
affected by four factors:
• the decision-making approach,
• the type of problem,
• decision-making conditions, and
• certain decision-making errors and
biases.
GUIDELINES FOR MAKING EFFECTIVE DECISIONS

 Understand cultural differences

 Create standards for good decision making
 Know when it’s time to call it quits
 Use an effective decision-making process
 Develop your ability to think clearly
CHARACTERISTICS OF AN EFFECTIVE DECISION-MAKING PROCESS

 Focuses on what’s important

 Is logical and consistent
 Acknowledges subjective and analytical thinking, blends analytical with intuitive
thinking
 Requires only as much information as is needed to resolve particular dilemma
 Encourages the gathering of relevant information
 Is straightforward, reliable, easy-to-use, flexible
DESIGN THINKING AND DECISION MAKING
▪ Design thinking: approaching management problems as designers approach design
problems
▪ It begins with the first step of identifying problems.
▪ Design thinking says that managers should look at problem identification collaboratively and
integratedly, with the goal of gaining a deep understanding of the situation. They should look
not only at the rational aspects, but also at the emotional elements.
▪ Then invariably, of course, design thinking would influence how managers identify and
evaluate alternatives. “A traditional manager would take the options that have been
presented and analyze them based on deductive reasoning and then select the one with the
highest net present value. However, using design thinking, a manager would say, ‘What is
something completely new that would be lovely if it existed but doesn’t now?’ ”
▪ Design thinking means opening up your perspective and gaining insights by using observation
and inquiry skills and not relying simply on rational analysis.
BIG DATA AND DECISION-MAKING

 Big data: the vast amount of quantifiable data that can be analyzed by highly sophisticated data
processing
 One IT expert described big data with “3V’s: high volume, high velocity, and/or high variety information
assets.”
 With this type of data at hand, decision makers have very powerful tools to help them make decisions.
Experts caution that collecting and analyzing data for data’s sake is wasted effort. Goals are needed
when collecting and using this type of information.
 Big data, no matter how comprehensive or well analyzed, needs to be tempered by good judgment.
 For instance, a recent government report states: “Companies should remember that while big data is
very good at detecting correlations, it does not explain which correlations are meaningful.”
 LINEAR-NONLINEAR THINKING STYLE

 Thinking style reflects two things:

 1- source of information used: external data or internal, such as intuition.
 2- how he process that information:
 (linear- rational, logic and analytic; or nonlinear- intuitive and creative.
 - linear thinking style: prefer use external data and process it through rational and
logic.
 - nonlinear style: prefer use internal source of information and process it by intuition.
DECISION-MAKING STYLES

 Dimensions of Decision-Making Styles

 Ways of thinking

 Rational, orderly, and consistent

 Intuitive, creative, and unique

 Tolerance for ambiguity

 Low tolerance: require consistency and order

 High tolerance: multiple thoughts simultaneously

DECISION-MAKING STYLES
DECISION-MAKING STYLES (CONT’D)

 Types of Decision Makers

 Directive: Use minimal information and consider few alternatives. E.g., buying a Chinese I-
bad.
 Analytic: Make careful decisions in unique situations, few alternatives. E.g., Developing a
program for purchasing and warehousing.
 Conceptual: Maintain a broad outlook and consider many alternatives in making long-
term decisions. E.g., Deciding of opening a small business.
 Behavioral: Avoid conflict by working well with others and being receptive/open to
suggestions.
 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.