Management

Fourteenth Edition

Chapter 2
Making Decisions

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Be A Better Decision-Maker
A key to success in management and in your
career is knowing how to be an effective
decision-maker.

Decision—a choice among two or more

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Exhibit 2-1
Decision-Making Process

Exhibit 2-1 shows the eight steps in the decision-making process. This process is as
relevant to personal decisions as it is to corporate decisions.
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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.
• Example: Amanda is a sales manager whose reps
need new laptops.

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Decision-Making Process
Step 2: Identify the Decision Criteria
• Decision criteria are factors that are important to
resolving the problem.
• Example: Amanda decides that memory and
storage capabilities, display quality, battery life,
warranty, and carrying weight are the relevant
criteria in her decision

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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.
• Example: The weighted criteria for Amanda’s
computer purchase are shown in Exhibit 2-2.

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Exhibit 2-2
Important Decision Criteria

Criterion Weight
Memory and storage 10
Battery life 8
Carrying weight 6
Warranty 4
Display quality 3

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Decision-Making Process
Step 4: Develop Alternatives
• List viable alternatives that could solve the
problem.
• Example: Amanda identifies eight laptops as
possible choices (shown in Exhibit 2-3).

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 Exhibit 2-3
Possible Alternatives
Laptop Memory and Battery Life Carrying Warranty Display
Storage 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

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Decision-Making Process
Step 6: Select an Alternative
• Choose the alternative that generates the highest
total in Step 5.

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 Exhibit 2-4
Evaluation of Alternatives
Laptop Memory Battery Carrying Warranty Display Total
and Storage Life Weight Quality

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

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Decision-Making Process
Step 7: Implement the Alternative
• Put the chosen alternative into action.
• Convey the decision to those affected and get
their commitment to it.

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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?

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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

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Bounded Rationality
• Bounded rationality: decision making that’s
rational, but limited by an individual’s ability to
process information
• Satisfice: accepting solutions that are “good
enough”
• Escalation of commitment: an increased
commitment to a previous decision despite
evidence it may have been wrong

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Exhibit 2-6
What is Intuition?

Exhibit 2-6 shows the five different aspects of intuition identified by researchers studying
managers’ use of intuitive decision-making.
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Evidence-Based Management
• Evidence-based management (EBMgt): the
systematic use of the best available evidence to
improve management practice.

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Types of Decisions
• Structured problems: straightforward, familiar,
and easily defined problems
• Programmed decisions: repetitive decisions that
can be handled by a routine approach
• Unstructured problems: problems that are new
or unusual and for which information is ambiguous
or incomplete
• Nonprogrammed decisions: unique and
nonrecurring and involve custom made solutions
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Types of Programmed Decisions
• 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: a guideline for making decisions

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Decision-Making Conditions
• Certainty: a situation in which a manager can
make accurate decisions because all outcomes
are known
• Risk: a situation in which the decision maker is
able to estimate the likelihood of certain outcomes
• Uncertainty: a situation in which a decision maker
has neither certainty nor reasonable probability
estimates available

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Managing Risk
• Managers can use historical data or secondary
information to 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

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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.

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Decision-Making Biases and Errors (1 of 4)
• Overconfidence Bias: holding unrealistically
positive views of oneself and one’s performance
• Immediate Gratification Bias: choosing
alternatives that offer immediate rewards and
avoid immediate costs
• Anchoring Effect: fixating on initial information
and ignoring subsequent information

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Decision-Making Biases and Errors (2 of 4)
• Selective Perception Bias: selecting, organizing
and interpreting events based on the decision
maker’s biased perceptions
• Confirmation Bias: seeking out information that
reaffirms past choices while discounting
contradictory information
• Framing Bias: selecting and highlighting certain
aspects of a situation while ignoring other aspects

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Decision-Making Biases and Errors (4 of 4)
• 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-fact)

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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

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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
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Copyright

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