Management: Managers As Decision Makers

Management tenth edition
Chapter Managers
6 as
Decision Makers
Learning Outcomes
Follow this Learning Outline as you read and
study this chapter.
6.1 The Decision-Making Process.

• Define decision.
• Describe the eight steps in the decision-making process.
6.2 Managers Making Decisions.
• Discuss the assumptions of rational decision making.
• Describe the concepts of bounded rationality, satisficing, and
escalation of commitment.
• Explain intuitive decision making.
Learning Outcomes
6.3 Types Of Decisions and Decision-Making

Conditions.
• Explain the two types of problems and decisions.
• Contrast the three decision making conditions.
• Explain maximax, maximin, and minimax decision choice
approaches.
6.4 Decision-Making Styles
• Describe two decision-making styles.
• Discuss the twelve decision-making biases.
• Explain the managerial decision-making model.
Learning Outcomes
6.5 Effective Decision Making In Today’s World.

• Explain how managers can make effective decisions
in today’s world.
• List the six characteristics of an effective decision
making process.
• List the five habits of highly reliable organizations.
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.
Exhibit 6–1
The Decision-Making
Process
Step 1: Identifying the Problem
• Problem
 A discrepancy between an existing and desired state
of affairs.
• 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.
Step 2: Identifying Decision Criteria
• Decision criteria are factors that are important
(relevant) to resolving the problem such as:
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the Criteria

• Decision criteria are not of equal importance:
 Assigning a weight to each item places the items in
the correct priority order of their importance in the
decision-making process.
Step 4: Developing Alternatives
• Identifying viable alternatives
 Alternatives are listed (without evaluation) that can
resolve the problem.
Step 5: Analyzing Alternatives

• Appraising each alternative’s strengths and
weaknesses
 An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.
Step 6: Selecting an Alternative
• Choosing the best alternative
 The alternative with the highest total weight is
chosen.
Step 7: Implementing the

Alternative
• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.
Step 8: Evaluating the Decision’s
Effectiveness
• The soundness of the decision is judged by its
outcomes.
 How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
 If the problem was not resolved, what went wrong?
Exhibit 6–5 Decisions in the Management
Functions
Making Decisions
• Rationality
 Managers make consistent, value-maximizing choices
with specified constraints.
 Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all viable
alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes outcomes in the
organization’s interests rather than in their personal interests.
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.
 Influence on decision making
 Escalation of commitment: an increased commitment to a
previous decision despite evidence that it may have been
wrong.
The Role of Intuition
• Intuitive decision making

 Making decisions on the basis of experience, feelings,
and accumulated judgment.
Exhibit 6–6 What Is Intuition?
Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive
Decision Making,” Academy of Management Executive, October 1999, pp. 91–99.
Types of Problems and Decisions
• Structured Problems
 Involve goals that are 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.
Types of Programmed Decisions
• Procedure
 A series of interrelated steps that a manager can use
to respond (applying a policy) to a structured problem.
• Rule
 An explicit statement that limits what a manager or
employee can or cannot do.
• Policy
 A general guideline for making a decision about a
structured problem.
Policy, Procedure, and Rule
Examples
• Policy
 Accept all customer-returned merchandise.
• Procedure
 Follow all steps for completing merchandise return
documentation.
• Rules
 Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.
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.
• Nonprogrammed Decisions
 Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.
Exhibit 6–7 Programmed Versus Nonprogrammed Decisions
Decision-Making Conditions
• Certainty
 A situation in which a manager can make an accurate
decision because the outcome of every alternative
choice is known.
• Risk
 A situation in which the manager is able to estimate
the likelihood (probability) of outcomes that result
from the choice of particular alternatives.
Decision Making Conditions
• Uncertainty
 Limited 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
 Maximin: the pessimistic manager’s choice to maximize the
minimum payoff
 Minimax: the manager’s choice to minimize maximum regret.
Decision-Making Styles
• Linear thinking style

 A person’s preference for using external data and
facts and processing this information through rational,
logical thinking
• Nonlinear thinking style

 A person’s preference for internal sources of
information and processing this information with
internal insights, feelings, and hunches
Exhibit 6–11 Common Decision-Making Errors and Biases
Decision-Making Biases and Errors
• Heuristics
 Using “rules of thumb” to simplify decision making.
• Overconfidence Bias
 Holding unrealistically positive views of oneself and
one’s performance.
• Immediate Gratification Bias

 Choosing alternatives that offer immediate rewards
and that to avoid immediate costs.
• Anchoring Effect
 Fixating on initial information and ignoring
subsequent information.
• 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
and discounting contradictory information.
(cont’d)
• Framing Bias
 Selecting and highlighting certain aspects of a
situation while ignoring other aspects.
• Availability Bias
 Losing decision making objectivity by focusing on the
most recent events.
• Representation Bias
 Drawing analogies and seeing identical situations
when none exist.
• Randomness Bias
 Creating unfounded meaning out of random events.
• 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).
Exhibit 6–12 Overview of Managerial Decision Making
Decision Making for Today’s World
• Guidelines for making effective decisions:
 Understand cultural differences.
 Know when it’s time to call it quits.
 Use an effective decision making process.
• Habits of highly reliable organizations (HROs)
 Are not tricked by their success.
 Defer to the experts on the front line.
 Let unexpected circumstances provide the solution.
 Embrace complexity.
 Anticipate, but also anticipate their limits.
Characteristics of an Effective
Decision-Making Process
• It focuses on what is important.
• It is logical and consistent.
• It acknowledges both subjective and objective thinking
and blends analytical with intuitive thinking.
• It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
• It encourages and guides the gathering of relevant
information and informed opinion.
• It is straightforward, reliable, easy to use, and flexible.

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Management tenth edition

6.1 The Decision-Making Process.

6.3 Types Of Decisions and Decision-Making

6.5 Effective Decision Making In Today’s World.

Step 3: Allocating Weights to the Criteria

Step 5: Analyzing Alternatives

Step 7: Implementing the

• Intuitive decision making

• Linear thinking style

• Nonlinear thinking style

• Immediate Gratification Bias

• Sunk Costs Errors

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