Chapter 8

Fundamentals of Decision Making

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Learning Objectives
State the conditions under which individuals make decisions. Describe the characteristics of routine, adaptive, and innovative decisions. Explain the three basic models of decision making.

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Decision making includes defining problems, gathering information, generating alternatives, and choosing a course of action.

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Conditions Under Which Decisions are Made

(adapted from Figure 8.1)

Certainty
Objective probabilities

Uncertainty
Subjective probabilities

Risk

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Framework for Decision Making

(adapted from Figure 8.2) Unusual and ambiguous Innovative Decisions
Uncertainty

Problem Types

Adaptive Decisions
Risk

Routine Decisions

Certainty

Known and well defined Solution Types (Alternative Solutions)

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Untried and ambiguous

Models of Decision Making

The rational model prescribes a set of phases that individuals or teams should follow to increase the likelihood that their decisions will be logical and optimal.

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Rational Decision-Making Model

(adapted from Figure 8.3)

Environmental forces
1 Define and diagnose problem 2 Set goals 3 Search for alternative solutions

4 Compare and evaluate alternative solutions

7 Follow-up and control results 6 Implement the solution selected 5 Choose among alternative solutions

Environmental forces
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A Simple Hierarchy of Goals

(adapted from Figure 8.4)
Increase profits per share of common stock [based on millions shares by 8% in 2006. Reduce manufacturing costs by average $0.50 per unit on volume of 1 million units in 2006. Total savings targeted at $500,000. Corporation
Organizational goals

Manufacturing Division

Divisional goals

Plant Engineering Departmental Department goals

Reduce internal and contract maintenance by $75,000 in 2006 without more that 3% equipment downtime

Maintenance Section

Sectional goals

Reduce overtime for preventive maintenance inspections by 200 labor hours during 2006 without decreasing frequency of inspections. Total overtime savings estimated at $6,000.

Mechanical Engineer

Individual goals

Purchase and install microcomputer software system for monitoring bearing wear in 10 machines, reducing overtime by 600 hours for production employees. 2006 overtime of $15,000. Purchase price estimated at $6,000.
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Models of Decision Making (cont.)

The bounded rationality model contends that the capacity of the human mind for formulating and solving complex problems is small, compared with what is needed for objectively rational behavior.

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Bounded Rationality Model

(adapted from Figure 8.5)

Decision Biases Inadequate Problem Description Limited Search for Alternatives Limited Information Satisficing

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Political Model of Decision Making

(adapted from Figure 8.6)

Multiple Stakeholders with power such as:

Customers
Investors Employees

Divergence in problem definition Divergence in goals Divergence in solutions

Unions

Political decision making

Competitors

Suppliers

Regulatory Agencies

Legislative Bodies
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