CHAPTER: FIVE

DECISION
MAKING
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

2
STEP 1: IDENTIFICATION
OF A 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

4
STEP 2: IDENTIFICATION OF DECISION CRITERIA

 Decision criteria are factors that are

important (relevant) to resolving the problem:
 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: ALLOCATION OF WEIGHTS TO 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
5
STEP 4: DEVELOPMENT OF ALTERNATIVES

 Identifying viable alternatives

 Alternativesare listed (without evaluation) that
can resolve the problem

STEP 5: ANALYSIS OF 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.

6
STEP 6: SELECTION OF AN ALTERNATIVE

Choosing the best alternative

The alternative with the highest total weight is
chosen
STEP 7: IMPLEMENTATION OF THE ALTERNATIVE

Putting the chosen alternative into action

– Conveying the decision to and gaining commitment from
those who will carry out the decision

7
 STEP 8: EVALUATION OF DECISION 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?

8
DECISIONS MANAGERS
MOSTLY MAKE…
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 i.e. no ambiguity
 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:
 Does not have knowledge about all alternatives so will
not analyze all alternatives
 Will satisfice*—choose the first alternative
encountered that satisfactorily solves the problem—
rather than maximizing the outcome of their decision
by considering all alternatives and choosing the best.
 Escalation of Commitment
 Increasing or continuing a
commitment to previous decision
despite mounting evidence that the decision may
have been wrong.
INFLUENCES ON DECISION
MAKING

 Role of Intuition
 Intuitive decision making
 Making decisions on the basis of experience,
feelings, and accumulated judgment
 One-third of managers and other employees said
they emphasized “gut feeling” over cognitive
problem solving

6–12
TYPES OF PROBLEMS AND
DECISIONS
 Structured Problems
 Involve goals that clear.
 Are familiar (have occurred before).
 Areeasily 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
 A Procedure
 A series of interrelated steps that a manager can
use to respond (applying a policy) to a structured
problem.

 A Rule
 An explicit statement that limits what a manager
or employee can or cannot do in carrying out the
steps involved in a procedure.

 A Policy
 A general guideline for making a decision about a
structured problem.
AN EXAMPLE OF POLICY, PROCEDURE, AND RULE

 Policy
 Accept all customer-returned merchandise.
 Procedure
 Followall 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 ideal 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
 Limitedinformation prevents estimation of
outcome probabilities for alternatives
associated with the problem and may force
managers to rely on intuition, hunches, and
“gut feelings”.
COMMON DECISION-MAKING ERRORS
AND BIASES

6–20
DECISION-MAKING BIASES
AND ERRORS
 Heuristics
 Using
“rules of thumb” to simplify decision
making.
 Overconfidence Bias
 Holdingunrealistically positive views of
one’s self and one’s performance.
 Immediate Gratification Bias
 Choosingalternatives that offer immediate
rewards and that to avoid immediate costs.
 DECISION-MAKING BIASES AND
ERRORS (CONT’D)
 Anchoring Effect
 Focusing and accepting initial information and
ignoring subsequent information.
 Selective Perception
 Selectively
organizing and interpreting events based
on the decision maker’s biased perceptions.
 Confirmation Bias
 Seekingout information that reaffirms past choices
and discounting contradictory information.
DECISION-MAKING BIASES AND
ERRORS (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.
DECISION-MAKING BIASES AND
ERRORS (CONT’D)
 Sunk Costs Errors
 Forgetting that current actions cannot influence past
events rather 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).
 THE END

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