MGT 201: Principles of Management

Chapter 6
Decision Making: The Essence of the Managers Job

Farzana Chowdhury
SPRING 2010

Objectives
The Decision Making Process
The Manager as Decision Maker
Making decisions: Rationality, Bounded Rationality, Intuition
Types of problems and decisions: Structured Problems &
Programmed decisions; Unstructured Problems & Nonprogrammed decisions
Decision making conditions: Certainty, Risk, Uncertainty
Decision making styles
Decision making biases and errors

Decision Making for Todays World

The Decision Making Process

Decisions

Making a choice from two or more alternatives.

Individuals at all levels and areas of organization make decisions

Top level managers make decisions on organizations goal, where to

locate next manufacturing plant, what new markets to move into,
what products or services to offer.

Middle and Lower level managers make decisions about weekly or

monthly production schedules, problems that arise, pay raises and
disciplining employees.

Decision making is a comprehensive process, not just a simple

act of choosing among alternatives.

Decision Making Process: A set of eight steps that include

identifying a problem, selecting and alternative and evaluating the
decisions effectiveness.

The Decision Making Process

Eight Steps of Decision Making
Step 1: Identifying the Problem
Problem
A discrepancy between an existing and desired state of affairs.

Managers have to be careful not to confuse problems with

symptoms of the problem.
A manager who mistakenly resolves the wrong problem is likely
to perform just a s poorly as the manager who doesnt identify
the right problem and does nothing.
Characteristics of Problems (how managers identify a problem)
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.

The Decision Making Process

Eight Steps of Decision Making
Problem
Identification
My salespeople
need new computers

Analysis of
Alternatives
Acer
Compaq
Gateway
HP
Micromedia
NEC
Sony
Toshiba

Identification of
Decision Criteria
Price
Weight
Warranty
Screen type
Reliability
Screen size

Selection of an
Alternative
Acer
Compaq
Gateway
HP
Micromedia
NEC
Sony
Toshiba

Allocation of
Weights to
Criteria
Reliability 10
Screen size 8
Warranty
5
Weight
5
Price
4
Screen type 3

Development of
Alternatives
Acer
Compaq
Gateway
HP
Micromedia
NEC
Sony
Toshiba

Implementation
of an Alternative

Gateway

Evaluation
of Decision
Effectiveness

The Decision Making Process

Eight Steps of Decision Making
Step 2: Identifying 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: Allocating Weights to the Criteria

Decision criteria (identified in Step2) 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.

The Decision Making Process

Eight Steps of Decision Making
Step 4: Developing Alternatives
Identifying viable alternatives
Alternatives are listed (without evaluation) that can resolve the
problem.

Step 5: Analyzing Alternatives

Appraising each alternatives strengths and weaknesses
Once alternatives are identified, decision maker must critically analyze
each one.
An alternative is appraised based on the criterions established in steps
2 and 3.
Weights given to the alternatives is only an assessment of each
alternative, it does not reflect the weighing done in step 3.
Multiply each alternative by its weight.
The sum of these scores represents and evaluation of each alternative
against both the establishes criterion and weights.

The Decision Making Process

Assessed Values of Notebook Computer Alternatives Against Decision Criteria

The Decision Making Process

Evaluation of Laptop Computer Alternatives Against Criteria and Weights

The Decision Making Process

Eight Steps of Decision Making
Step 6: Selecting an Alternative
Choosing the best alternative
The alternative with the highest total weight is chosen.

Step 7: Implementing the Decision

Putting the chosen alternative into action.
Conveying the decision to those affected by it and getting
their commitment to it
participation in decision-making process inclines people to
support the decision
decision may fail if it is not implemented properly

Step 8: Evaluating the Decisions 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?

The Manager as Decision Maker

Everyone in an organization makes decision, but decision making is
particularly important in a managers job.
Decision making is part of all four managerial functions.
That is why when managers plan, organize, lead or control, they are
frequently called decision makers.
All decisions taken does not need long, complex, elaborate steps /
systems.

The Manager as Decision Maker

Making decisions: Rationality, Bounded Rationality, Intuition
3 perspectives of how decisions are made -

Rational Decision Making

Managers assumed to make rational decisions, by this we mean Managers
make decisions are consistent, value-maximizing choices within specified
constraints
Assumptions of Rationality - decision maker would:
be objective and logical
carefully define a problem
have a clear and specific goal
select the alternative that maximizes the likelihood of achieving the goal
make decision in the firms best economic interests
Managerial decision making seldom meets all the tests

The Manager as Decision Maker

Managerial decision making will be rational if these conditions are met

All alternatives
and
consequences
are known

Preferences
are clear

Preferences
are constant
and stable

Single, welldefined goal

is to be achieved
Problem is
clear and
unambiguous

Rational
Decision
Making

Final choice
will maximize
payoff

No time or cost
constraints exist

The Manager as Decision Maker

Making decisions: Rationality, Bounded Rationality, Intuition
3 perspectives of how decisions are made -

Bounded Rationality
Despite the limits of perfect rationality managers are expected to be rational
when making decisions.
A good decision maker is supposed to
Identify problem
Consider alternatives
Gather information
Act decisively but prudently
Managers are expected to exhibit correct decision making behavior and by doing
so they show others that they are competent
Managers tend to operate under the assumptions of bounded rationality.

The Manager as Decision Maker

Making decisions: Rationality, Bounded Rationality, Intuition
3 perspectives of how decisions are made -

Bounded Rationality (contd)

Managers make decisions rationally, but are limited (bounded) by their ability to
process information.
Because managers / decision makers cant possibly analyze all information on all
alternatives they satisfice rather than maximize
satisfice - accept solutions that are good enough. choose the first alternative
encountered that satisfactorily solves the problemrather than maximize the
outcome of their decision by considering all alternatives and choosing the best.
- Most decisions managers make does not fit the assumption of perfect rationality,
instead they make those decisions using bounded rationality. They make decisions
based on alternatives that are satisfactory.

The Manager as Decision Maker

Making decisions: Rationality, Bounded Rationality, Intuition
3 perspectives of how decisions are made -

Bounded Rationality (contd)

Decision making is also strongly influenced by the organizations culture, internal
politics, power consideration and a phenomenon called escalation of
commitment.
escalation of commitment
- increased commitment to a previous decision despite evidence that it may have
been wrong
- refusal to admit that the initial decision may have been flawed

The Manager as Decision Maker

Making decisions: Rationality, Bounded Rationality, Intuition
3 perspectives of how decisions are made -

Role of Intuition
Managers regularly use intuition and it actually help improve their decision making.
intuitive decision making - subconscious process of making decisions on the
basis of experience and accumulated judgment
- does not rely on a systematic or thorough analysis of the problem
- generally complements a rational analysis
Why Intuition?
A manager who had experience with a particular or even similar type of problem or
situation can quickly act with what appears to be limited information.
One survey of managers and other organizational employees revealed that almost
one-third of them emphasized gut feeling over cognitive problem solving and
decision making.

The Manager as Decision Maker

What is Intuition?
Decisions based
on ethical values
or culture

Values or
ethics-based
decisions

Subconscious
mental
processing
Decisions based
on subconscious
data

Decisions based
on experience

Experiencedbased decisions

Intuition

Decisions based
on feelings and
emotions

Affectinitiated
decisions

Cognitivebased
decisions
Decisions based
on skills,
knowledge,
or training

The Manager as Decision Maker

Types of problems and decisions:
Structured Problems & Programmed decisions
Unstructured Problems & Non-programmed decisions

Structured Problems
Involve goals that clear.
Are familiar (have occurred before).
Are easily and completely definedinformation about the
problem is available and complete.
Programmed Decision
A repetitive decision that can be handled by a routine approach.

The Manager as Decision Maker

Types of Programmed Decisions
A Procedure
A series of interrelated sequential steps that a manager can use
to respond (applying a policy) to a well 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.

The Manager as Decision Maker

Types of problems and decisions:
Structured Problems & Programmed decisions
Unstructured Problems & Non-programmed decisions

Unstructured Problems
Problems that are new or unusual and for which information is
ambiguous or incomplete.
Problems that will require custom-made solutions.

Non-programmed Decisions
Decisions that are unique and nonrecurring.
Decisions that generate unique responses.
Few decisions in the real world are either fully programmed or non-programmed

The Manager as Decision Maker

Types Of Problems, Types Of Decisions, And Level In The Organization

Ill-structured

Type of
Problem

Top

Nonprogrammed
Decisions

Level in
Organization

Programmed
Decisions
Well-structured

Lower

The Manager as Decision Maker

Decision-Making Conditions
3 conditions Managers may face as they make decisions
Certainty - A ideal situation in which a manager can make an accurate decision
because the outcome of every alternative choice is known.
- outcome of every alternative is known
- idealistic rather than realistic
Risk - A situation in which the manager is able to estimate the likelihood
(probability) of outcomes that result from the choice of particular alternatives.
expected value - the conditional return from each possible outcome
multiply expected revenue from each outcome by the probability of each
outcome

The Manager as Decision Maker

Decision-Making Conditions

The Manager as Decision Maker

Decision-Making Conditions
3 conditions Managers may face as they make decisions
Uncertainty A situation in which a decision maker has neither certainty
nor reasonable probability estimates available.
Under this situation the choice of alternatives are influenced by
- Limited amount of information available and
- Psychological orientation of the decision maker
Psychological orientation of decision maker
maximax choice - optimistic
maximizing the maximum possible payoff
maximin choice - pessimistic
maximizing the minimum possible payoff
minimax - minimize the maximum regret

The Manager as Decision Maker

Payoff Matrix

The Manager as Decision Maker

Regret Matrix

The Manager as Decision Maker

Decision-Making Styles
Most managers will try to quantify a decision when possible by using
payoff and regret martices, however uncertainty often forces them to rely
on intuition, creativity, hunches and gut feeling. Regardless of the
decision situation, each manager has his or her own style of making
decisions.
Two dimensions define the approach to decision making
way of thinking - differs from rational to intuitive
Rational, orderly, and consistent
Intuitive, creative, and unique

tolerance for ambiguity - differs from a need for consistency and order
to the ability to process many thoughts simultaneously define four
decision-making styles
Low tolerance: require consistency and order
High tolerance: multiple thoughts simultaneously

The Manager as Decision Maker

Types of Decision Makers
Directive
Fast, efficient, and logical
Use minimal information and consider few alternatives.
Analytic
Make careful decisions in unique situations.
Able to adapt or cope with new situations
Conceptual
Maintain a broad outlook and consider many alternatives in making longterm decisions.
Able to find creative solutions
Behavioral
Avoid conflict by working well with others and being receptive to
suggestions.
Seek acceptance of decisions

The Manager as Decision Maker

Types of Decision Makers

Tolerance for Ambiguity

High

Analytic

Conceptual

Directive

Behavioral

Low
Rational

Way of Thinking

Intuitiv
e

The Manager as Decision Maker

Decision making biases and errors

The Manager as Decision Maker

Decision making biases and errors
Over Confidence - we overrate our own skills. 80 per cent of us think we are
better than average drivers. 90 per cent of managers think they are better than
average workers. This same overconfidence in our own abilities is seen when
making decisions, this is when they are exhibiting overconfidence bias.
Immediate Gratification this bias describes decision makers who tend to want
immediate rewards and avoid immediate cost. For these individuals, decision
choices that provide quick payoffs are more appealing than those in the future.
Anchoring Effect the tendency to rely too heavily, or "anchor," on a past
reference or on one trait or piece of information when making decisions (also
called "insufficient adjustment").
Selective Perception when decision makers selectively organize and interpret
events based on their biased perception.
Confirmation the tendency to search for or interpret information in a way that
confirms one's preconceptions. Seeking out information that reaffirms past choices
and discount information that contradicts past judgements.

The Manager as Decision Maker

Decision making biases and errors
Framing bias it is when decision makers select and highlight certain aspects of
a situation and highlight them, while at the same time downplaying or omitting
other aspects.
Availability While the confirmation bias leads us to put more value in
information we encounter more often, the availability effect is that we place more
value on information and events that have happened more recently. As the
information or event fades into the past, we discount its value.
Representation when decision makers assess the likelihood of an event
based on how closely it resembles other events or sets of events. Managers see
identical situation where they dont exist.
Randomness this happens when managers try to create meaning out of
random events. This happens because most decision makers have difficulty
dealing with chance even though random events happen to everyone and theres
noting that can be done to predict them.
Sunk Cost For some reason we feel that if weve invested a lot of time, effort
or money in something, we should keep going even if it is obvious that it is going to
fail.

The Manager as Decision Maker

Decision making biases and errors
Self-Serving the tendency to claim more responsibility for successes and to
blame failures on outside factors.
Hindsight the tendency for decision makers to falsely believe that they would
have accurately predicted the outcome of an event once the outcome is actually
known. Sometimes called the "I-knew-it-all-along" effect, the inclination to see past
events as being predictable
How to avoid these decision making errors and biases?
-Being aware of them, then trying not o exhibit them.
-Also pay attention to how they make decisions
-Try to identify the experience-based techniques they typically use and critically
evaluate how appropriate they are.
-Finally, managers may want to ask others around them to help them identify
weaknesses on their decision making style and try to improve them.

Overview of Managerial Decision Making

Decision-Making Approach
Rationality
Bounded Rationality
Intuition
Types of Problems and Decisions
Well-structured
- programmed
Poorly structured
- nonprogrammed

Decision-Making Conditions
Certainty
Risk
Uncertainty

Decision-Making
Process

Decision Maker Style

Directive
Analytic
Conceptual
Behavioral

Decision
Choose best
alternative
- maximizing
- satisficing
Implementing
Evaluating