Decision Making Old

8/6/2019 Decision Making Old

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Profile of a Decision

yThe Decision-Making Process

yThe Decision Maker

yThe Decision

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Decision Making and Problem Solving

y Problem solving is concerned with overcoming

obstacles in the path toward an objective.

y Problem solving may or may not require

action.

yA decision is an act requiringjudgment that is

translated into action.

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The Significance of Decision Making

y Decision making is the one trulydistinctive

characteristic of managers.

y Decisions made bytop managers commit the

organization toward courses of action.

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The Significance of Decision Making ..

y Decisions of top managers are

implemented bylower levels of

management.

y

Decisions involve organizational change

and the commitment of scarce resources.

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The Decision-Making Process


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Steps in the Managerial Decision MakingProcess

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Identify

Problem

The Decision-Making Process

Select

Alternative

Implement

Alternative

Evaluate

Results

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DevelopAlternatives

AnalyzeAlternatives

Develop

DecisionCriteria

Allocate

Weights toCriteria

2 3

4 5

6

7

8

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The Classical Model of Decision Making

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1. Identify and define the Problem

2. Identify decision criteria

3. Allocate weights to criteria

4. Develop alternatives

5. Analyze alternatives

6. Select the best alternative

7. Implement the alternative

8. Evaluate decision effectiveness


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The iffere ce etwee what is a what it ught t e

E.g. urchase f Car r

Shortage of cash/Money

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Step 2: Decision Criteria

Factors relevant in

aking the ecision

y Price

y

Interior comforty Dura ility

y Repair recor

y Performance

y Handling

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Determining the relative priority

of eachof the criteria

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Step 3: Allocating Weights


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Problem: To purchase a new car

FOM 4.13

Criterion Weight

Price 10

Interiorcomfort 8

Durability 5

Repairrecord 5

Performance 3

Handling 1


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Generate a list of possi le vehicle

manufacturers/ rands

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Assessing the value of each

alternative ymaking a value

judgment of the feature

Step 5: Analyzing Alternatives


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Concluding Steps in Making a Decision

Step 6: Select the est

Step 7: Implementdecision

Step 8: Evaluate decision


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Categories of Decisions

y Programmed

y Non-programmed

y Decisions such as these are known as programmed

decisions-routine decisions, made by lower-level

personnel that rely on predetermined courses of

action.

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Differences between P& NP decisions can be described with respect to 3

important questions.

y First, what types of tasks are involved?

y Second, how much reliance is there on organizational

policies?

y Finally, who makes the decisions?

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Programmed

Decisions

Non-programmed

Decisions

Relationship of Problems, Decisions, and Level

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Type of

ProblemLevel

ill-Structured

Well-Structured

Top

Lower


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Certain versus Uncertain Decisions

y Understanding Risk:

yAll organizational decisions involve some degree ofrisk-ranging from complete certainty (no risk) to

com

plete un

certain

ty, "a sta in

th

ed

ark" (h

igh

risk).y Tomake the est possi le decisions inorganizations,

people seek to "manage" the risks.

y Decision making under uncertainty

yA conditionof uncertainty exists when amanager isfacedwith reaching a decisionwithnohistorical dataconcerning the varia les and/or unknowns and theirprobabilityofoccurrence.

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Programmed and Nonprogrammed Decision Differences

Certainty

y all the information the decisionmaker needs is fully available.

Risk

y decisionhas clear-cut goals.

y good information is available.

y future outcomes associatedwith each alternative are subject to chance.

Uncertainty

y managers know which goals they with to achieve.

y information about alternatives and future events is incomplete.

y managersmayhave to come up with creative approaches to alternatives.

Ambiguity

y by far themost difficult decision situation.

y goals tobe achievedor the problem tobe solved is unclear.

y alternatives are difficult todefine.

y information aboutoutcomes is unavailable.

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Top-Down versus Empowered Decisions

y Top-downdecisionmaking, puts decision-making

power in the hands ofmanagers and leaves lower- level

workers little or noopportunities tomake decisions.

y The idea of empowereddecisionmaking allows

employees tomake the decisions required todo their

jobs without first seeking supervisory approval.

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Typology of Decisions

Decision-making strategies

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Computational

Judgmental

Compromise

Inspirational


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ATypology of Decisions

l Category I - routine, recurring, certainty with

regard to the outcome

l Category II - nonroutine,

nonrecurring, uncertainty with regard to the

outcome

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Decision categories


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ATypology of Decisions ..

l Category I / Computational strategy

l Category II /Judgmental strategy

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Decision combinations


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KnowledgeRegarding

the OutcomeStrong Preference Weak Preference

Preference for the Outcome

ComputationalDecision-Making

Strategy

CompromiseDecision-Making

Strategy

JudgmentalDecision-Making

Strategy

InspirationalDecision-Making

Strategy

Low LevelofKnowledge

High LevelofKnowledge


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The Locus ofChoice

y Top management makes Category II decisions.

y Operating management makes Category I

decisions.

y Middle management supervises the making of

Category I decisions and supports the making

ofCategory II decisions.

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Characteristics of Managerial Decisions (Category II)

y Long-range organizational objectives

y Best choice from among a set of alternatives

y Decision involves organizational change

y Decision requires a commitment of resources

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Perspectives on Managerial Decision Making

y The integrative perspective

y The interdisciplinary perspective

y The interlocking perspective

y The interrelational perspective

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Decision-Making Styles

Directive Conceptual

Styles of DecisionMaking

Analytic Behavioral


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Personal Decision Framework

Directive Style: usedby people who prefer simple, clear-cut solutions.

Analytical Style: usedbymanagers who like to consider complex solutions

basedon as muchdata as they can gather.

Conceptual Style: usedby people who like to consider a broad amount of

information, more sociallyoriented.

Behavioral Style: often the style adoptedbymanagers having a deep

concern for others.

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Situation: Programmed/non-

programmed Classical, administrative,

political Decision steps

Decision Choice:Best Solution toProblem

Personal Decision Style:DirectiveAnalyticalConceptualBehavioral


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Decision-Making Styles


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Selecting a Decision Making Model

y Depends on the managers personal preference.

y Whether the decision is programmedor non-

programmed.

y Extent towhich the decision is characterizedby risk,

uncertainty, or ambiguity.

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i i ki d l


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Decision-Making Models

yRational model

y

Organizational model

yPolitical model

yProcess model

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Three Decision Making Models

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Classical Model

Administrative Model

Political Model


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Classical Model-The Rational-Economic Model

y Decisionmakers have the necessary information togenerate possible alternative options and to evaluatethem

y managers have time to gather information andevaluation

y managers are therefore trying for a conditionofcertainty

y managers operate in a stable situationwhere thevariables are not changing

y goals ofmanagers are defined and agreedy decisionmakersmake rational choices by selecting

the option that will bring most benefit.

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Classical Model

Accomplishes goals that are known and agreed upon.

Strives for certaintyby gathering complete information.

Criteria for evaluating alternatives are known.

Decisionmaker is rational and uses logic.

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The Rational Model

y Founded on quantitative disciplines

y Maximized outcome

y Computational decision-making strategy

y Closed decision-making process

y Fixed objectives

y No bounded rationality

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Assumptions OfRationality

Rational

Decision

Making

Problem is

clear and

unambiguous

Single, well-

defined goalis to be achieved

All alternatives

and

consequences

are known

Preferences

are clear

Preferences

are constant

and stable

No time or cost

constraints exist

Final choice

will maximize

payoff


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The Administrative Modely Herbert Simon (1960) sought todevelop a model ofdecisionmaking based, on the actual behaviourofdecisionmakers.

y This approachhas come tobe known as the

bureaucratic or administrative model.y Simon recognized that the humanbeing has a limited

capacity for processing information, and thus thatthere are cognitive ormental limits tohuman

ration

ality.y These limits or constraints on individuals mean thatdecisionmaking is governed, according to Simon, bybounded rationality.

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Administrative Model

Howmanagers actuallymake decisions in situations characterizedbynon-programmeddecisions, uncertainty, and ambiguity.

Focusesonorganizational, rather than economic.

Two concepts are instrumental in shaping the administrativemodel.

y bounded rationality:means that people have limits or boundaries

onhow rational they canbe.

y satisficing:means that decisionmakers choose the first solution

alternative that satisfiesminimal decision criteria.

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The Administrative Model

yAttainable objectives

y Bounded rationality

y

Short-term horizon

y Qualitative orientation

yJudgmental decision-making strategy

y Open decision-making process

y Satisficing outcome

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The Political Model

yAcceptable outcomes

y Compromise decision-making strategy

y No bounded rationality

yAmbiguous or nonexistent objectives

y

Incremental or marginal choices

y Short-term horizon

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The Process Model

y Dynamic objectives

y Objectives-oriented outcomes

y Long-term horizon

yAccommodates innovation

y Bounded rationality

yJudgmental decision-making strategy

y Open decision-making process

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Image Theoryy

Image theorydeals primarily withdecisions about adopting a certaincourseof action (e.g., should the companydevelop a new productline?) or changing a current courseof action (e.g., should the companydrop a present product line?).

y According to the theory, peoplemake decisions on the basis of a simpletwo-step process. The first step is the compatibility test, a comparisonof the degree towhich a particular courseof action is consistent with

various images-particularly individual principles, current goals, andplans for the future.

y 'If any lack of compatibility exists with respect to these considerations,a rejectiondecision ismade.

y If the compatibility test is passed, then theprofitability test is carriedout.

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Garbage can modely

Relevant to turbulent situations.y decisions occur when four streams meet:

y choice opportunities these are scheduledor unscheduledmeetings where it is expected that decisions will be made

y

participants people whohave the opportunity toinfluencedecisions theyhave different knowledge andexperiences whichmay contribute to solutions of problems

y problems possibly a result of a performance gap theserequire attention

y Solutions these are separate from the problems that theymay eventually solve answers looking for questions.

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Garbage can model

y The choiceopportunities act as a garbage can for theother three constituents: participants, problems andsolutions.

y

A particular combinationof these three constituentsmight produce a decision that will deal with theproblem.

y The resultsmay involve radical and creative decisions.

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Comparisons of:

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Classical Model Administrative Model

Political Model

Clear-cut problem and goals.

Conditionof certainty.

Full information about

alternatives and their

outcomes.

Rational choiceby

individual formaximizing

outcomes.

Vague problem and goals.

Conditionof uncertainty.

Limited information about

alternatives and their

outcomes.

Satisfying choice for resolving

problemusing intuition.

Pluralistic; conflicting goals.

Conditionof

uncertainty/ambiguity.

Inconsistent viewpoints;

ambiguous information.

Bargaining anddiscussion among

coalitionmembers.


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Conditions that Affect the Possibility of Decision Failure

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OrganizationalProblem

ProblemSolution

Low HighPossibility ofFailure

Certainty Risk Uncertainty Ambiguity

Programmed

Decisions

Nonprogrammed

Decisions


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Behavioral Model of Decision Making

yClassical model is prescriptive: It tells managers

what they shoulddo

y Behavioralmodel is descriptive: It tells us how

managers actuallymake decisions

y Managers attempt tobe rational, but

y assumptions of complete rationality are relaxed (i.e., we

know managers dont have complete and accurate

information) bounded rationality

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y How domanagers actuallymake decisions?

y They satisfice rather thanoptimize

y They use their intuition

y

They act politically (e.g., coalitions)

y They take risks

y They escalate their commitment

y Theyhave their owndecisionmaking styles

y They use heuristics

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y

How domanagers actuallymake decisions?y They satisfice rather thanoptimize

y They use their intuition

y They act politically (e.g., coalitions)

y They take risks

y They escalate their commitment

y Theyhave their owndecisionmaking styles

y They use heuristics

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Common Biases and Errors

y Overconfidence Biasy Believing toomuch inour own ability tomake gooddecisions

yAnchoring Bias

y Using early, first received information as the basis formaking subsequent judgments

y Confirmation Bias

y Using only the facts that support our decision

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y Availability Bias

y Using information that is most readily at hand

y Recent

y Vivid

y Representative Bias

y Mixing apples withoranges

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y Escalation ofCommitment

y In spite ofnew negative information, commitmentactually increases

y RandomnessError

y Creating meaning out of random events

y Hindsight Bias

y Looking back, once the outcome has occurred, andbelieving that you accurately predicted the outcome ofan event

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Common Biases in Decision Makingy Heuristics are rules of thumb

y The availabilityheuristic: use information that is easilyrecalled

y The representativeness heuristic: categorize andstereotype basedon limited information (e.g., you cantell a book by its cover)

y The anchoring and adjustment heuristic: place too

muchweight on initial information

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Common Biases in Decision Making

y

Escalationof Commitmenty The tendencyofdecisionmakers to invest additional

time, money, or effort intowhat are essentiallybad

decisions or unproductive courses of action that are

alreadydraining organizational resources.

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Four key decision paradoxesy Inclusion versus efficiency

y Leaders often agonise over whether theyneed to

involve everybody tomake a decision;

y Inclusive decisionmaking canbe costly in terms of

time resources, but invites diversityof views increasing

the qualityof the decision.

y Conversely, whendecisions are largelyoperational,

leaders tend to prefer inclusionover efficiency.

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Empowerment versus control

y Leadersmust choose the extent ofdelegationof

responsibility for decisionmaking from problem

framing todecision announcement.

y Some leaders prefer todelegate, allowing appropriately

experienced staff to act autonomously.

y Other leaders will seek tobe involved in all decisions

at every stage.

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Instinct versus method

y Experienced leaders believe they know what todo incertain circumstances and can relyon instinct to arriveat a decision.

y The implication is that such leaders will prefer to use

experience and speedily impose solutions for emergingproblems.

y Others will bemore cautious, preferring to employ amethodical approach to every situation, considering

alternatives, risks andopportunities before a decisionis taken.

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Head versus Heart

y The dilemma here is that of problem solving through

creativity anddivergent thinking on the one hand, or

on emotion and compassionon the other.

y Leadersmust choose the degree towhich their own

andothers emotional preferences andneeds influence

or overridemore rational considerations.

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TYPES OF DECISION- Processes of decision making

Sporadic decision processes

y Sporadicdecision processes are those that are informal, andwill suffer from

delays throughbeing impededby all sorts of things fromwaiting for

information toovercoming resistanceor opposition.

y The decisionwill take a long time tomake (betweenone to three years) and

will eventuallybemade at the highest level.

y Political activitymay well come to the fore in these decisions.

y An examplemaybe a decision to purchase a stake in a supplier, where there is

un

certain

ty abo

ut th

e futureo

f th

em

arket.y This kindofdecisiondoes not happenon a routine basis and tends to entail

weighty and controversial considerations calledvortex matters.

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Constricted decision processes

yConstricted decision processes are narrowly channeled.

y There is a need formore sources of information, but

the information required is usually technical and is

readily available.

y the decision can usuallybemade at the local level or at

least at a lower level than the top of the hierarchy.

y This kindofdecisiondeals withfamiliar matters.

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Ways to Improve Group Decision-Making

y Brainstorming

y Nominal group technique

y The Stepladder Technique: Systematically Incorporating NewMembers

y Computer-Based Approaches

i. Electronic meeting systems

ii. Computer-assisted communication

iii. Group Decision Support Systems

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Steps of Delphi Techniques

yA problem is identified.

y Groupmembers are asked tooffer solution to the problemby providing anonymous response to carefullydesignedquestionnaire.

y Responses of all group members are compiled and sent out

to all members.y Individual group members are asked to generate a new

y individual solution to the problem after theyhave studiedthe individual responses of all other group members

com

piled

in

step 3.y Step 3 and 4 are repeated until a consensus problem

solution is reached.

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Steps of Nominal Group Techniques

y

Each groupmember writesdown individual ideason the problembeing discussed.

y Eachmember presents individual ideas orally. The ideas are usually

writtenon a board for all othermembers to see and refer to.

y After all members present their ideasorally, the entire groupdiscusses

these idea simultaneously.

y Whendiscussion is completed a secret ballot is taken to allow

members to support their favorite ideas without fear. The idea receivingthemost votes is adopted and implemented.

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Conclusion

What we know about decisions making generally

y In situations ofhigh stress /time pressure

y Inability to absorb complex & new information

y Tendency to engage in stereotypic thinking

y Tendency tonot to consider a rangeof alternatives

y Tendency to accept the acceptable alternative

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What does it result in ?

y Business as usual

y Limitedoptions

y Shallow analysis

y Best predictor of future behaviour is past behaviour

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What does it result in ?...

y People are not rational actors when facedwith

economicdecisions

y Relying on purely financial informationmayhave

limited success

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Decision Making Old

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