Chap 2-Managers as Decision

Makers
 Decision Making

• 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
 Identifying the 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
 Identifying Decision Criteria
• Decision criteria
• Factors that are important (relevant) to resolving the
problem such as:
• Costs(investments required)
• That will be incurred
• Risks(chance of failure)
• likely to be encountered
• Outcomes
• That are desired (growth of the firm)
 Allocating 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.
Criteria and Weights for Computer
Replacement Decision
 Developing Alternatives
• Identifying viable alternatives
• Alternatives are listed (without evaluation)
that can resolve the problem.
• Analyze Alternatives
• An alternative’s appraisal is based on its
ability to resolve the issues identified in steps
2
 Selecting an Alternative
• Choosing the best alternative
• The alternative with the highest total weight is
chosen
• Implementing the Alternative
• Putting the chosen alternative into action
• Conveying the decision to and gaining
commitment from those who will carry out
the decision
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?
 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

 Managers Making Decisions
• Decision making is part of all four managerial
functions.
• Decision making is the essence of
management.
• When managers ‒ plan, organize, lead, and
control ‒they are called decision makers.
 Making Decisions
• Rationality
• Managers make consistent, value-maximizing choices with
specified constraints
• Assumptions
• 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.
 Bounded Rationality
• Managers make decisions rationally, but are limited (bounded) by
their ability to process information (knowledge).
• 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.
 Decision Making
• Intuitive decision making
• Making decisions on the basis of experience,
feelings, and accumulated judgment.
Intuitive Decision Making
 Types of Decisions
• Structured Problems and Programmed
Decisions
• 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 Decision
• Procedure
• Series of interrelated steps that a manager can
use to respond a structured problem.
• Rules
• 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
 Decisions and Problems
• Un-Structured Problems and Non-
programmed Decisions
• 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
Decisions that generate unique responses
 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
• Managers face decision-making situations of
uncertainty. Under these conditions, the choice
of alternatives is influenced by the limited
amount of available information and by the
psychological orientation of the decision
maker.
• Maximax choice
• An optimistic manager will follow
• (maximizing the maximum possible payoff)
• Maximin choice
• A pessimist will follow
• (maximizing the minimum possible payoff)
• Minimax choice
• Manager who desires to minimize his
maximum “regret
 Decision Making Style
• 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
Decision Making Biases and Errors
 Decision Making Biases and Errors

• 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.
 Decision Making Biases and Errors

• Confidence Bias
• When decision makers tend to think they know
more than they do or hold unrealistically
positive views of themselves and their
performance, they’re exhibiting the
overconfidence bias.
 Decision Making Biases and Errors

• Gratification Bias
• The immediate gratification bias 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 payoffs in the future.
 Decision Making Biases and Errors

• Anchoring Effect
• Describes how decision makers fixate on
initial information as a starting point and then,
once set, fail to adequately adjust for
subsequent information. First impressions,
ideas, prices, and estimates carry unwarranted
weight relative to information received later
 Decision Making Biases and Errors
• Confirmation Bias
• Seeking out information that reaffirms past choices
and discounting contradictory information
• 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.
 Decision Making Biases and Errors

• Representation Bias
• Drawing analogies and seeing identical
situations when none exist.
• Randomness Bias
• Creating unfounded meaning out of random
events.
 Decision Making Biases and Errors

• The sunk costs error

• 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. Instead of
ignoring sunk costs, they can’t forget them
 Decision Making Biases and Errors
• The Self Service Bias
• Decision makers who are quick to take credit for
their successes and to blame failure on outside
factors
• The hindsight bias
• Tendency for decision makers to falsely believe
that they would have accurately predicted the
outcome of an event once that outcome is
actually known