Chapter (6)

Making Decisions in
Organizations
Lecture (8)

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 Chapter (6)
Making Decisions in Organizations
Introduction
Decision making is the essence of management. It’s what managers do (or
try to avoid). And all managers would like to make good decisions
because they’re judged on the outcomes of those decisions.

After studying this chapter, you should be able to do the following:

6.1 Define what is the meaning of decision?

6.2 Describe the eight steps in the decision-making process.

6.3 The four Approaches to decision making.

6.4 Types of decisions.

6.5 Common biases that affect decision making.

In this chapter, we will examine the concept of decision making and how
managers make decisions.

6.1 Define what is the meaning of decision?

Managers at all levels and in all areas of organizations make decisions.

Decision can be easily defined as a choice among two or more
alternatives.

6.2 Describe the eight steps in the decision-making process.

Although decision making is typically described as choosing among

alternatives, it should be defined as a process rather than a single step.
The decision making process consists of (8) steps as follows

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Step 1: Identify a Problem

Every decision starts with a problem, a discrepancy between an existing

and a desired condition.

Although problem identification is not easy job, but it is essential. This is

because problem is an obstacle that makes it difficult to achieve a desired
goal or purpose.

Examples of organizational problems are decrease in sales, increase in

rivalry, need for new equipment.

Step 2: Identify Decision Criteria

Once a manager has identified a problem, he or she must identify the
decision criteria; which is the factor important or relevant to resolving
the problem. Every decision maker has criteria guiding his or her
decisions even if they’re not explicitly stated.

Step 3: Allocate Weights to the Criteria

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

How? A simple way is to give the most important criterion a weight of 10

and then assign weights to the rest using the same standard.

Step 4: Develop Alternatives

The fourth step in the decision-making process requires the decision

maker to list viable alternatives that could resolve the problem. In this
step, a decision maker needs to be creative, and the alternatives are only
listed—not evaluated just yet.

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Step 5: Analyze Alternatives
Once alternatives have been identified, a decision maker must evaluate
each one. How? By using the criteria established in Step 2. This can be
achieved through assigning the relative weights (importance) to each
alternative.

Step 6: Select an Alternative

The sixth step in the decision-making process is choosing the best
alternative or the one that generated the highest total in Step 5, i.e.
choosing the alternative with the highest total score.

Step 7: Implement the Alternative

In Step 7 in the decision-making process, you put the decision into action
by conveying it to those affected and getting 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 than if you just tell them what
to.

Step 8: Evaluate Decision Effectiveness

The last step in the decision-making process involves evaluating the

outcome or result of the decision to see whether the problem was
resolved. If the evaluation shows that the problem still exists, then the
manager needs to assess what went wrong.

6.3 The Four Approaches to Decision Making.

There are four main approaches to decision making: Rational decision
making, Bounded rationality, Intuitive decision making, and Evidence-
Based Management.

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A) Rationality Decision Making:
We assume that managers will use rational decision making; that is,
they’ll make logical and consistent choices to maximize value.

What does it mean to be a “rational” decision maker?

This means to make decisions based on the assumptions of rationality.
These assumptions are as follows:

1) Rational decision maker would be fully objective and logical.

2) The problem faced would be clear and unambiguous.
3) The decision maker would have a clear and specific goal and know all
possible alternatives and consequences.

4) Finally, making decisions rationally would consistently lead to

selecting the alternative that maximizes the likelihood of achieving that
goal.

5) Decisions are made in the best interests of the organization.

These assumptions of rationality aren’t very realistic and managers don’t

always act rationally, but the next concept can help explain how most
decisions get made in organizations.

B) Bounded Rationality
A more realistic approach to describing how managers make decisions is
the concept of bounded rationality, which says that managers make
decisions rationally, but are limited (bounded) by their ability to process
information.

Because they can’t possibly analyze all information on all alternatives, so

that they satisfice, rather than maximize. This means that they accept
solutions that are “good enough.”

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However, keep in mind that managers' decision making is also 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. Because they don’t want to admit that their initial decision is
inadequate.

C) Intuition

Intuitive decision making is making decisions on the basis of

experience, feelings, and accumulated judgment. Intuitive decision
making can complement both rational and bounded rational decision
making.

In addition, a recent study found that individuals who experienced intense

feelings and emotions when making decisions actually achieved higher
decision-making performance, especially when they understood their
feelings as they were making decisions. The old belief that managers
should ignore emotions when making decisions may not be the best
advice.

D) Evidence-Based Management

Evidence-based management (EBMgt) is defined as the “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 as follows:

1) The decision maker’s expertise and judgment.

2) External evidence that’s been evaluated by the decision maker.

3) Opinions, preferences, and values of those who have a stake in the

decision.

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4) Relevant organizational (internal) factors such as context,
circumstances, and organizational members. The strength or influence of
each of these elements on a decision will vary with each decision.

6.4 Types of decisions.

Managers in all kinds of organizations face different types of problems

and decisions as they do their jobs. Depending on the nature of the
problem, a manager can use one of two different types of decisions.
A) Structured Problems and Programmed Decisions

Structured problems are situations characterized by being

straightforward, familiar, and easily defined. For instance, a server
spills a drink on a customer’s coat. The customer is upset and the manager
needs to do something. In other words, they are usual situations.

These usual situations require repetitive decisions. These decisions are

called programmed decisions; they are repetitive decisions that can be
handled by a routine approach that has been proved successful in the
past.

Manager relies on one of three types of programmed decisions:

Procedure, rule, or policy.

Procedure: Is a series of sequential steps a manager uses to respond to a

structured problem.
Rule: Is an explicit statement that tells a manager what can or cannot be
done. Rules are frequently used because they’re simple to follow and
ensure consistency.

Policy: Is a guideline for making a decision. In contrast to a rule, a policy

establishes general parameters for the decision maker rather than
specifically stating what should or should not be done.

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 Policies typically contain an ambiguous term that leaves interpretation up
to the decision maker.

B) Unstructured Problems and Non-programmed Decisions

Unstructured problems are situations characterized by being new or

unusual problems for which information is ambiguous or incomplete.

When problems are unstructured, managers must rely on non-

programmed decision making in order to develop unique solutions. Non-
programmed decisions are unique and non-repetitive and involve
custom-made solutions.

Programmed Versus Non-programmed Decisions

Characteristic Programmed Non-programmed

Type of problem Structured Unstructured

Managerial level Lower levels Upper levels

Frequency Repetitive and routine New and unusual

Information Available Ambiguous and incomplete

Goals Clear and specific Vague

Time frame for solution Short Relatively long

Solution relies on Procedures, rules, policies Judgement and creativity

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6.5 Common biases that affect decision making.
Managers always follow one of the previously discussed approaches in
making their decisions but sometimes they make common errors and
biases. The most commonly found errors and biases are (12) pitfalls that
affect the decision making process.

A) Overconfidence Bias
When decision makers tend to think they are overqualified i.e., they know
more than they do or hold unrealistically positive views of themselves and
their performance.

B) Immediate Gratification Bias

It describes decision makers who tend to want immediate rewards and
to avoid immediate costs. For these individuals, decision choices that
provide quick payoffs are more appealing than those with postponed
payoffs in the future.

C) Anchoring Effect
It describes how decision makers fixate on initial information as a
starting point and then, fail to adequately adjust for subsequent
information.

D) Selective Perception
First impressions, ideas, prices, and estimates carry unwarranted weight
relative to information received later. When decision makers selectively
organize and interpret events based on their biased perceptions.

E) Confirmation Bias
Decision makers who seek out information that reaffirms their past
choices and discounts information that contradicts past judgments.

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F) Framing Bias
It occurs when decision makers select and highlight certain aspects of
a situation while excluding others.

G) Availability Bias
It happens when decision makers tend to remember events that are the
most recent and vivid in their memory. Thus, it distorts their ability to
recall events in an objective manner and results in distorted judgments
and probability estimates.

H) Representation Bias
When decision makers assess the likelihood of an event based on how
closely it resembles other events or sets of events.

I) Randomness Bias
It 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 there’s nothing that can be done to predict them.

J) Sunk Costs Error

It occurs when decision makers forget that current choices can’t correct
the past. They incorrectly fixate on past expenditures of time, money, or
effort in assessing choices rather than on future consequences.

K) Self-serving Bias
It describes decision makers who are quick to take credit for their
successes and to blame failure on outside factors.

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L) Hindsight Bias
It is 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.

Finally, managers might want to ask trusted individuals to help them

identify weaknesses in their decision-making style and try to improve on
those weaknesses.

End of Chapter (6)

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