Decision Making(Part 2)

QSB2413 Management Science

Recap

• Seven steps of decision-making process

• Two types of decision-making

Models of Decision Making

• Two commonly used decision-making models:-

(1) Rational- economic model

(2) Behavioral model

Note: Refer to the Two Contrasting Decision Models (uploaded in FB group).

(1) Rational-Economic Decision Model

• It focuses on how decisions should be made.• The model makes the following important

assumptions about the decision maker and the decision-making process:

The decision maker has “perfect” (completely accurate) information and has relevant information for the decision situation.

The decision maker operates to accomplish objectives that are known and agreed on.

The decision maker has an extensive list of alternative choices.

(1) Rational-Economic Decision Model

The decision maker will be rational, systematic and logical in assessing each alternative and its associated probabilities.

The decision maker will work in the organization’s best interest.

Ethical dilemmas do not arise in the decision-making process.

• Ethical dilemma is a situation in which a person must decide whether or not to do something that may be unethical and illegal.

(1) Rational-Economic Decision Model

• Assumptions above provide guidelines to help the organization or group reach an ideal outcome (objectives / goals).

• In reality, there are several reasons why making a decision is not likely to be that simple.

• First, people rarely have access to complete and perfect information. Example, collecting data using questionnaire in order to survey how many percent of fresh graduates are willing to invest in Green building. (clear goal but hardly to obtain perfect information – study area is too wide)

(1) Rational-Economic Decision Model

• Second, even if information about all possible alternatives were available, individuals are limited in their ability to comprehend and process vast amounts of it.

• Third, decision makers seldom have adequate knowledge about the future consequences of alternatives. (Risk)

• Fourth, in most decision-making situations, personalfactors (emotions, attitudes) are likely to prevent a manager from always acting completely rationally.

• Lastly, an individual culture and ethical values may influence the decision process.

(1) Rational-Economic Decision Model

• Individuals from different backgrounds and cultures have different experiences, values and behaviors, which in turn influence the way they process information and make decisions.

• For example, Japanese managers follow a unique consensual decision-making process in which subordinates are involved in considering the future direction of their companies.

• What about Chinaman companies?

(1) Rational-Economic Decision Model

• How ethical dilemmas influence managers in decision-making?

• For example, managers have to decide to improve the below quality construction process / material detected or settle this case by using unethical way (paying an agreed amount to cover the default found).

• Is it right to cancel a contract with a loyal distributor when a cheaper supplier becomes available? What are the future consequences?

(2) Behavioral Decision Model

• Unlike rational-economic model, the behavioral decision model acknowledges human limitations that make rational decisions difficult to achieve. (Refer to the first point, people rarely have accessto complete and perfect information)

• The behavioral decision model is descriptive and provides a framework for understanding the process that managers actually use when selecting from among alternatives.

(2) Behavioral Decision Model

• The behavioral decision model operates on the premise that a person’s cognitive ability to process information is limited.

• A human being can handle only limited information (before overload occurs), even if complete information were available to decision makers.

• Cognitive limitations would impede them from making completely rational decisions.

(2) Behavioral Decision Model

• For examples, a developer wish to analyze the future property trend. But there are various factors affecting the future property trend, human needs technology advancement to do the analysis. (to process the complete information rationally)

• Managers usually attempt to behave rationally within their limited perception of a situation. But most organizational situations are complexthat managers are forced to view problems within sharply restricted bounds.

(2) Behavioral Decision Model

• This model introduces several concepts that are important to understand how we make decisions.

Bounded Rationality

Intuition

Satisficing

Escalation of commitment

(2) Behavioral Decision Model

Bounded Rationality

• People cannot know everything

• People are limited by organizational constraints (time, information, resources, mental capacities)

• Useful concept in explaining why different individuals with exact the same information may take different decisions. (unable to search out all possible alternatives – limitations)

(2) Behavioral Decision Model

Intuition

• “sixth sense” – unconscious analysis based on past experience to a paranormal ability

• Managers use intuition to obtain a quick understanding of a situation and to identify solutions without extensive analysis.

(2) Behavioral Decision Model

Satisficing• Searching for and accepting something that is

satisfactory rather than insisting on the perfect or optimal.

• Managers tend to satisfice rather than optimize in considering and selecting alternatives. (do not access to all possible contingencies in making decisions)

• Example, Hewlett-Package decided to enter the home computer business and becoming one of the top 3 competitors in PC market. This could be viewed as a satisficing decision. (level of performance is satisfactory but certainly not perfect)

(2) Behavioral Decision Model

Escalation of Commitment

• When managers see that an initial decision is failing, they frequently react by committing more resources, even when feedback indicates the action is wrong.

• One reason for escalation of commitment is that individuals feel responsible for negative consequences and try to justify their previous decisions.

How can managers tell whether they have made the best possible

decision?

One way is to wait until the results but that can take long time (step 7 –

monitoring and evaluating feedback). In the meantime, managers can focus

on the decision-making process.

Group Considerations

• We have examined how managers make decisions individually.

• In practice, managers often work with their employees and peers and may need to solicit input from them.

• Decision making is frequently entrusted to a group, which may be a board, a standing committee and ad-hoc committee or a task force.

• This process is referred to as participative decision making.

Participative Decision Making

• Organizations push decision making to lowerorganizational levels to increase focus on improving customer service through quality management.

• The effectiveness of a group decision is governed by both its quality and its acceptance (the degree to which group members are committed to their decision).

• Refer to Table 6.1 Vroom-Jago Decision-Making Styles (uploaded in FB group)

Participative Decision Making

Advantages:-

• Experience and expertise of several individuals available

• More information, data and facts accumulated

• Problems viewed from several perspectives

• Higher member satisfaction

• Greater acceptance and commitment to decisions

Participative Decision Making

Disadvantages:-

• Greater time requirement

• Minority domination

• Compromise

• Concern for individual rather than group goals

• Social pressure to conform

• Groupthink

Groupthink

• Groupthink is an agreement-at-any-cost mentality that results in ineffective group decision making.

• It occurs when groups are highly cohesive, have highly directive leaders, are too insulated to get objective information. Because of lack of outside information, resulted having little hope of finding better solution than that proposed by the leader.

Participative Decision MakingTechniques for enhancing the quality of participative decision making:-

• Brainstorming is a technique that encourages group members to generate as many novel ideasas possible on a given topic without evaluating them.

• Brainstorming can enhance creativity and reduces the tendency of groups to satisfice in considering alternatives.

• Brainstorming focuses on generating ideas rather than on choosing an alternatives.

Conclusion

• Decision making has always been one of the primary activities of business leaders.

• If leaders are to make high-quality decisions, they will have to become thoroughly familiar with the tools and techniques that can aid in the decision-making process.