DECISION MAKING

CHAPTER 8
Learning objectives

 What is decision making? What is

programmed and non-programmed
decision making?
 Judgmental traps
 Decision making styles
 Vroom jago model of decision
making
Decisions

 Process of identifying problems and

opportunities and resolving them
 Is a choice made from available
alternatives
 May be difficult to make
 Made amid changing factors
 Information may be unclear
 May have to deal with conflicting points of
view
Difference Between Programmed
and Nonprogrammed Decisions
o Certainty
 all the information the decision maker needs is fully
available
o Risk
 decision has clear-cut goals
 good information is available
 future outcomes associated with each alternative are
subject to chance
o Uncertainty
 managers know which goals they will have to
achieve
 information about alternatives and future events is
incomplete
 managers may have to come up with creative
approaches to alternatives
o Ambiguity
 by far the most difficult decision situation
 goals to be achieved or the problem to be solved is
unclear
Is it certainty, risk, uncertainty,
ambiguity?

 I went to a hair cutting saloon. I knew I needed a

haircut and had a couple of good options but
didn’t knew which one would suit me the most so
I asked the stylist to advise me and do as
appropriate.
 I wanted to go on a trip to the southern region
but didn’t know about places in the south.
 I have given the students a project but the topic,
direction or guidelines have been kept open.
 ISO 9001 has banned some plastic products in
Pakistan due to pollution hazards. Managers of
these plants are unsure about the next step they
are going to take in case of such a ban.
Conditions that Affect the
Possibility of Decision Failure
Organizational
Problem

Low Possibility of Failure High

Certainty Risk Uncertainty Ambiguity

Programmed Nonprogrammed
Decisions Decisions

Problem
Solution
Six Steps in the Managerial
Decision Making Process
Evaluation Recognition of
and Decision
Feedback Requirement

Implementation Diagnosis
of Chosen Decision- and Analysis
Alternative Making of Causes
Process

Selection of Development of
Alternative Alternatives
Judgmental traps
Confirmation bias
 People naturally tend to seek information
that confirms their expectations and
hypotheses, even when disconfirming or
falsifying information is more useful or
true.
 An investor can interpret information in a biased way. The
bias is more pronounced with emotionally charged issues
and for deeply entrenched beliefs.
The Sunk-Cost Trap or Escalation of
commitment

 Making choices in a way that justifies past

choices, even when the past choices no
longer seem valid.
 We may refuse, for example, to sell a stock or a
mutual fund at a profit because past decisions
become what economists term sunk costs—old
investments of time or money that are now
irrecoverable.
The overconfidence trap.
 Even though most of us are not very good
at making estimates or forecasts, we
actually tend to be overconfident about
our accuracy.
The Conjunction Fallacy

 Salman is 31 years old, single, outspoken, and

very bright. He majored in philosophy. As a
student, he was deeply concerned with issues of
discrimination and social justice, and also
participated in anti-nuclear demonstrations.
 Which is more probable?
 Salman is a bank teller.
 Salman is a bank teller and is active in the feminist
movement
The Status-Quo Trap
 The tendency to like things to stay relatively the
same

 Some stock owners do not want to sell their

share. Although it would be a straightforward,
profitable proposition to sell those shares and put
the money into a different investment, a
surprising number of people don’t sell.
 They find the status quo comfortable, and they
avoid taking action that would upset it. “Maybe
I’ll rethink it later,” they say. But “later” is usually
never.
The Availability Heuristic

 People assess the frequency, probability, or

likely causes of an event
▪ by the degree to which instances or occurrences
of that event are readily "available" in memory or
how easily an example can brought to mind.
GAMBLER’S FALLACY
 A belief that a successful outcome is due after a run of bad
luck, or more generally, the belief that a series of
independent trials with the same outcome will soon be
followed by an opposite outcome

 Coin toss…….
 A gambler who looses a bet assumes that next time he will
win…..and looses again….

 “Past performance is no guarantee of future results."

 However, despite that statement being plastered
everywhere in the financial universe, individuals
consistently dismiss the warning and focus on past returns
expecting similar results in the future.
The Hot Hand
 The Hot Hand Phenomenon occurs where
people believe that 'success breeds success‘
 when a person succeeds at something, he’s more likely to believe that he will succeed in
subsequent attempts, whereas the truth is that they are still governed by the laws of chance.
 There may some truth in this, that a person may be particularly fit or their confidence is
boosted by an initial success

 A soccer player scores two goals. More of his

team mates start passing him the ball more
often in the assumption he is 'on the ball' and
will score more.
 Success in Project A makes you feel that
success in Project B is due……
The Affect Heuristic
 Most of our judgments are evoked by an
affective, or emotional, evaluation that occurs
even before any higher-level reasoning takes
place.

 Stock prices in Canada go up during sunny days.

Bounded Rationality and
Satisficing
 Decisions that are made within
limited rationality of an individual is
called bounded rationality.

 Decision makers taking the first

alternative available to them that
satisfies minimal criteria for the
decision to be taken.
Why jugdmental errors take
place
 Project characteristics
 Psychological determinants
 Social forces
 Organizational determinants
 Rationality

 Rationality is means towards an

end
 Objective rationality vs
Subjective rationality
 Conscious rationality vs
Deliberate rationality
 Organizational rationality vs
Personal rationality
Rational choice theory

 Rational choice theory states that individuals rely on

rational calculations to make rational choices that result
in outcomes aligned with their own best interests.
 Rational choice theory is often associated with the
concepts of rational actors, self-interest, and the invisible
hand.
 Many economists believe that the factors associated with
rational choice theory are beneficial to the economy as a
whole.
 Adam Smith was one of the first economists to develop
the underlying principles of the rational choice theory.
 There are many economists who dispute the veracity of
the rational choice theory and the invisible hand theory.
 Pros of Rational Choice Theory
 Helpful in explaining individual and collective behaviours

 All theories attempt to give meaning to the things we observe

in the world.

 Can help to explain behaviour that seems irrational

 Cons of Rational Choice Theory

 Individuals do not always make rational decisions.

 In reality, people are often moved by external factors that are

not rational, such as emotions.

 Individuals do not have perfect access to the information they

would need to make the most rational decision every time.
Decision making styles

 Directive
 Analytical
 Conceptual
 Behavioral

Other styles
 Charismatics, thinkers, skeptics,
followers, controllers
 Directive style:
Is used by people who prefer simple,
clear cut solutions to problems. They
make quick decisions because they do
not like to deal with a lot of information.
 Analytical style:
Is used by people who like to consider
complex situations based on as much
data as they can gather.
Careful consideration of alternatives.
 Conceptual style:
This style also likes to consider a broad amount
of information. However they are more socially
oriented and likes to solve problems via
consensus. Rely on information from both people
and systems.
 Behavioral style:
Adopted by managers having deep concern for
others as individuals. People with behavioral style
usually are concerned with the personal
development of others and may make decisions
that helps others achieve their goals.
Creativity techniques for
Management Decision making
 Guided imagery
 Journal keeping
 Lateral styles of thinking

Empathic design
Participation in Decision Making
Vroom-Jago Model
 helps gauge the appropriate amount of
participation for subordinates
Leader Participation Styles
 employs five levels of subordinate
 participation in decision making ranging from
highly autocratic to highly democratic
Diagnostic Questions
 decision participation depends on the responses
to seven diagnostic questions
 questions deal with the problem, the required
level of decision quality, and the importance of
having subordinates commit to the decision
 Decision Making Style
 Description
 Autocratic l (Al)Leader solves the problem along using
information that is readily available to him/her
 Autocratic ll (All)Leader obtains additional information from
group members, then makes decision alone. Group
members may or may not be informed.
 Consultative l (Cl)Leader shares problem with group
members individually, and asks for information and
evaluation. Group members do not meet collectively, and
leader makes decision alone.
 Consultative ll (Cll)Leader shares problem with group
members collectively, but makes decision alone
 Group ll (Gll)Leader meets with group to discuss situation.
Leader focuses and directs discussion, but does not impose
will. Group makes final decision.
BASED ON 8 QUESTIONS

 Quality Requirement (QR): How important is the technical

quality of the decision?
 Commitment Requirement (CR): How important is
subordinate commitment to the decision?
 Leader's Information (LI): Do you (the leader) have
sufficient information to make a high quality decision on
your own?
 Problem Structure (ST): Is the problem well structured
(e.g., defined, clear, organized, lend itself to solution,
time limited, etc.)?
 Commitment Probability (CP): If you were to make the
decision by yourself, is it reasonably certain that your
subordinates would be committed to the decision?
 Goal Congruence (GC): Do subordinates share the
organizational goals to be attained in solving the
problem?
 Subordinate conflict (CO): Is conflict among subordinates
over preferred solutions likely?
 Subordinate information (SI): Do subordinates have
sufficient information to make a high quality decision?
Exercise: situation
based
 While other stamp dealer hold public auctions, no other dealer has
been able to match the frequency of Jury’s 28 day cycle in the
market. It was at this point that Jury appointed managerial staff in the
firm. However, thefts and stock losses caused him to re-assess this
position and revert to exerting a higher degree of personal control
over the business, which he has maintained to the present day. Given
the highly specialized nature of Jury’s business, technical knowledge
remains a vital component. Much of this resides in Jury himself,
however, he has personally trained his present staff of 5, a number of
whom are long serving. Jury supplements his own knowledge through
regular attendance at international trade fairs and stamp shows,
which he attends four times a year. As a result, he is well networked
in the international stamp community and sees this as a source of
competitive advantage.

 Draw and explain an appropriate decision making path in light of the

above situation for Jury according to the Vroom-Jago model.