Managing Engineering and Technology

Fifth Edition
Morse and Babcock

Decision Making
Chapter 4

Objectives
Discuss how decision making relates to
planning
Explain the process of engineering
problem solving
Be able to solve problems using three
types of decision making tools
Discuss the differences between decision
making under certainty, risk, and
uncertainty
Describe the basics of other decision
making techniques

Decision Making
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 decisions effectiveness.

Types of Decisions
Routine
recur frequently, involve standard decision
procedures, and entail a minimum of
uncertainty e.g. paying suppliers, payroll
processing, 90% decisions

Non-routine
unstructured situations of a novel, nonrecurring
nature
Engineers not trained for such decisions!

The DecisionMaking
Process

Step 1: Identifying the 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.

Step 2: Decision Criteria

Decision criteria are factors that are important 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 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.

Criteria and Weights for Franchise Decision

Criterion

Weight

Start-up costs

10

Franchisor support

Financial qualifications

Open geographical locations

Franchisor history

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
An alternatives appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.

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 and gaining commitment
from those who will carry out the decision.

Assessed Values of Franchise Opportunities

Using Decision Criteria
Start-Up Franchise
Financial
Open
Franchisor
Costs
Support Qualifications Locations History
Franchise
Curves For Women

10

10

Quiznos Sandwiches

Jani-King

10

10

Jackson-Hewitt Tax Service

GNC Vitamins and

Nutritional Supplements

Radio Shack

10

Chem-Dry Carpet Cleaning

10

McDonalds

10

10

Evaluation of Franchise Alternatives Against

Weighted Criteria
Start-Up Franchise
Financial
Open
Franchisor
Costs
Support Qualifications Locations History
Total
Franchise
Curves For Women

100

24

60

32

15

231

Quiznos Sandwiches

80

56

42

32

21

231

Jani-King

80

40

42

40

30

232

Jackson-Hewitt Tax Service 80

56

42

32

21

231

GNC Vitamins and

Nutritional Supplements

70

64

42

32

21

229

Radio Shack

80

24

36

40

24

204

Chem-Dry Carpet

100

56

48

24

21

249

McDonalds

40

80

24

32

30

206

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?

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.
Have a clear and specific goal
Will select the alternative that maximizes outcomes in the
organizations interests rather than personal.

Rationality in Decisions
Objective vs Bounded Rationality
Objective Rationality
Optimizing or maximizing the outcome
Not possible in reality due to resource constraints
(time, money, information)

Bounded Rationality
taking into account only those few factors of which
one is aware, understands, and regards as relevant
Incomplete knowledge, anticipating future, incomplete
alternatives

Assumptions of Rationality

Making Decisions (contd)

Bounded Rationality
Managers make decisions rationally, but are
limited (bounded) by their ability to process
information.
Assumptions are that decision makers:
Will not seek out or have knowledge of all alternatives
Will satisficechoose the first alternative encountered
that satisfactorily solves the problemrather than
maximize the outcome of their decision by considering
all alternatives and choosing the best.

Influences on Decision Making

Escalation of Commitment
Increasing or continuing a commitment to
previous decision despite mounting evidence
that the decision may have been wrong.

The Role of Intuition

Intuitive decision making
Making decisions on the basis of experience,
feelings, and accumulated judgment.

Intuition as Part of D-M

Myers-Briggs Cognitive Styles
Thinking - facts
- things

Sensing
- short term
- concrete
- problem solving
Feeling - people
- values

Intuition
- long term
- big picture
- problem finding
- risk taking

What is Intuition?

Source: Based on L.A. Burke and M.K. Miller. Taking the Mystery Out of Intuitive
Decision Making. Academy of Management Executive. October 1999. pp. 9199.

Problems and Decisions

Structured Problems
Involve goals that are 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.

Types of Programmed Decisions

A Policy
A general guideline for making a decision about a
structured problem.

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.

Examples
Policy
Accept all customer-returned merchandise.

Procedure
Follow all 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

(contd)

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.

Types of Problems, Types of Decisions, and

Level in the Organization

Decision-Making Styles
Dimensions of Decision-Making Styles
Ways of thinking
Rational, orderly, and consistent
Intuitive, creative, and unique

Tolerance for ambiguity

Low tolerance: require consistency and order
High tolerance: multiple thoughts simultaneously

Decision-Making Styles(contd)
Types of Decision Makers
Directive
Use minimal information and consider few alternatives.

Analytic
Make careful decisions in unique situations.

Conceptual
Maintain a broad outlook and consider many alternatives in
making long-term decisions.

Behavioral
Avoid conflict by working well with others and being receptive
to suggestions.

Decision-Making Styles

Source: S.P. Robbins and D.A. DeCenzo, Supervision Today.

2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998). p. 166.

Common Decision-Making Errors and Biases

Decision-Making Biases and

Errors

Heuristics

E.g. rules of thumb to simplify decisions

Making an approximation without having to do exhaustive
research.

Overconfidence Bias
Holding unrealistically positive views of ones self and ones
performance.

Immediate Gratification Bias

Choosing alternatives that offer immediate rewards and that to
avoid immediate costs.

Decision-Making Biases and

Errors (contd)

Anchoring Effect

Fixating on initial information and ignoring

subsequent information.

Selective Perception
Selecting, organizing and interpreting events based
on biased perceptions.

Confirmation Bias
Seeking out information that reaffirms past choices
and discounting contradictory info.

Decision-Making Biases and

Errors
(contd)
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
available data/recent events.

Representation Bias
Drawing analogies and seeing identical situations when none
exist. E.g. Believing that all blondes are dumb

Randomness Bias
Creating unfounded meaning out of random events.

Decision-Making Biases and

Errors
(contd)
Sunk Costs Errors
Forgetting that current actions cannot influence past
events and 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-thefact).

Decision Making for Todays

World
Habits of highly reliable
organizations (HROs)
Are not tricked by their success.
Defer to the experts on the front line.
Let unexpected circumstances provide the
solution.
Embrace complexity.
Anticipate, but also anticipate their limits.

Characteristics of an Effective
Decision-Making Process
It focuses on what is important.
It is logical and consistent.
It acknowledges both subjective and objective
thinking and blends analytical with intuitive thinking.
It requires only as much information and analysis as
is necessary to resolve a particular dilemma.
It encourages and guides the gathering of relevant
information and informed opinion.
It is straightforward, reliable, easy to use, and
flexible.

Overview of Managerial Decision Making

Management Science
Characteristics
Historically known as Operations
Research, WW2, Radar/Submarine
Systems view of the problem
Heterogeneous team approach
Emphasis on use of formal
mathematical models and statistical
and quantitative techniques

Management Science Process

Formulate the Problem
Construct a Mathematical Model
An abstraction or simplification of reality

Test the Model

Derive a Solution from the Model

Apply the Models Solution to the

Real System

Planning Process
Scientific Method vs Engineering Problem Solving
Investigation
Define the problem
Collect data
Develop
hypotheses
Test hypotheses
Analyze results
Draw conclusion

Application
Define the problem
Collect and analyze
the data
Search for alternatives
Evaluate alternatives
Select solution and
evaluate the impact

Fundamentals of
Decision Making Terminology
Terms:
a. Alternative a course of action or
strategy that may be chosen by the
decision maker
b. State of nature an occurrence or a
situation over which the decision
maker has little or no control

A View of Decision-Making
Conditions The decision
maker faces
conditions of:

Certainty

Risk

Uncertainty

Level of ambiguity and chances of making a bad decision

Lower

Moderate

Higher

Decision-Making Conditions
State of certainty:
A condition in which the
decision maker knows with
reasonable certainty what
the alternatives are and
what conditions are
associated with each
alternative.

State of risk:
A condition in which the
availability of each
alternative and its potential
payoffs and costs are all
associated with probability
estimates.
2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions
Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

State of Uncertainty
A condition in
which the decision
maker does not
know all the
alternatives, the
risks associated
with each, or the
likely
consequences of
each alternative.
2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions
Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Decision-Making Conditions
Certainty
An 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
Limited or no information prevents estimation of
outcome probabilities for alternatives
associated with the problem and may force
managers to rely on intuition, hunches, and gut
feelings.

Decision-Making
Environments
Decision making under certainty
State of nature is known

Decision making under risk

Several states of nature may occur
Each has a probability of occurring

Decision making under uncertainty

Complete uncertainty as to which state
of nature may occur

Decision Making
Certainty
Linear Programming
One of best known tools of Management
Science
Used to determine optimal allocation of
an organizations limited resources

Linear Programming
State the problem
Decision Variables
Independent variables

Objective function
Desired benefit (profit) as mathematical function

Constraints
Limits, expressed as equations

Example

Decision Making
Under Risk
Expected Value
Decision Trees
Queuing
Simulation

Decision Making with Risk

Expected Value Approach
If probabilistic information regarding the states of
nature is available, one may use the expected
Monetary value (EMV) approach also known as
Expected Value (EV).
Here the expected return for each decision is
calculated by summing the products of the payoff
under each state of nature and the probability of
the respective state of nature occurring.
The decision yielding the best expected return is
chosen.

Expected Value of a
Decision Alternative
The expected value of a decision
alternative is the sum of weighted payoffs
for the decision alternative.
The expected value (EV) of decision
alternative di is defined as:
N

Ei p j Oij
j 1

where:
N = the number of states of
nature
pj = the probability of state of
nature
Oij = the payoff corresponding
to decision alternative and state of
nature pj

Example

Example 1

Example 2

Decision Trees

Queuing Theory
The essence of a typical QT problem
Identifying the optimum number of servers
to reduce overall cost
Most of the cases the serving facility (e.g.
airport) is not paying for the time in the
queue (airline) but wishes to avoid
disgruntled customers

Queuing Theory

Simulations
Live
Real people, equipment, simulated environment
E.g. Military exercises

Virtual
Real people, simulated equipment
Flight or driving simulators

Constructive
Simulated people, simulated equipment
Real people can stimulate (provide input)
Model of factory production layout

Decision Making under

Uncertainty
If the decision maker does not know
with certainty which state of nature will
occur, then:
1. the optimistic approach (Maximax)
2. the conservative approach (Maximin)
3. the minimax regret approach (Minimax regret)
4. Equally likely (Laplace criterion)
5. Criterion of realism with (Hurwicz criterion)

Optimistic Approach (Maximax:

maximum of the maximum)
The optimistic approach would be used
by an optimistic decision maker.
The decision with the largest possible
payoff is chosen.
If the payoff table was in terms of costs,
the decision with the lowest cost would
be chosen.

Conservative Approach
(Maximin: maximum of minimum)
The conservative approach would be used
by a conservative decision maker.
For each decision the minimum payoff is
listed and then the decision corresponding
to the maximum of these minimum payoffs
is selected. (Hence, the minimum possible
payoff is maximized.)

Regret Approach (Minimax)

The minimax regret approach requires the
construction of a regret table or an opportunity
loss table.
This is done by calculating for each state of
nature the difference between each payoff and
the largest payoff for that state of nature.
Then, using this regret table, the maximum
regret for each possible decision is listed.
The decision chosen is the one corresponding
to the minimum of the maximum regrets.

Criterion of Realizm (Hurwicz)

Often called weighted average, the criterion
of realism (or Hurwicz) decision criterion is a
compromise between optimistic and a
pessimistic decision.
First, select coefficient of realism, , with a
value between 0 and 1. When is close to 1,
decision maker is optimistic about future, and
when is close to 0, decision maker is
pessimistic about future.
Payoff = [x (best outcome) + (1-) x (worst outcome)]

Equally Likely (Laplace)

Criterion
Equally likely, also called Laplace,
criterion finds decision alternative with
highest average payoff.
First calculate average payoff for every
alternative.
Then pick alternative with maximum
average payoff.

Game Theory
Future states of nature and their probabilities
replaced by decisions of a competitor

Management Information
Management Information Systems (MIS)
Focus on generating better solutions for structured
problems
Improving efficiency in dealing with structured tasks

Decision Support Systems (DSS)

Provides user with easy access to decision models
and data in order to support semistructured and
unstructured decision making tasks

Expert Systems
A type of computer model
For average or neophyte practitioner
Created by reviewing step by step with
experts the reasoning methods
employed
Reduced to inference engine and
combined with a knowledge base of
facts and rules
E.g. Chess computer

Political Forces in Decision

Making
Coalition:
An informal alliance of
groups formed to
achieve a common
goal.

2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions
Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Risk Propensity and Decision

Making
Risk propensity:
The extent to which a
decision maker is
willing to gamble when
making a decision.

2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions
Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Group and Team Decision

Making in Organizations
Forms of Group and Team Decision
Making:
Interacting group or team:
A decision making group or team in which members
openly discuss, argue about, and agree on the best
alternative.

Delphi group:
A form of group decision making in which a group
solicits input from a panel of experts who contribute
individually; their opinions are combined and, in effect,
averaged.

Nominal Groups
Unlike the Delphi method where group
members do not see one another, this
group is brought together.
A structured technique used most
often to generate:
Creativity.
Innovative alternatives.
Ideas.

Advantages and
Disadvantages of Group and
Team
Decision Making
DISADVANTAGES
ADVANTAGES
More information and
knowledge available.
More alternatives
generated.
More acceptance.
Enhanced
communication.
Better discussions.

The process takes

longer.
Compromised
decisions result from
indecisiveness.
One person may
dominate.
Groupthink may occur.

Groupthink
A situation that
occurs when a
group or teams
desire for
consensus and
cohesiveness
overwhelms the
goal of reaching
the best possible
decision.
2010 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions
Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.