CHAPTER 5:

FOUNDATIONS OF DECISION
MAKING
• Decision-making process
• A set of eight steps that includes identifying a
problem, selecting a solution, and evaluating the
effectiveness of the solution
• Problem
• A discrepancy between an existing and a desired
state of affairs
• Decision criteria
• Factors that are relevant in a decision
DECISION MAKING PROCESS
Errors in decision making
 1. Overconfidence – unrealistically positive views
2. Immediate gratification – want immediate rewards but avoid immediate
COMMON ERRORS costs
3. Anchoring effect – fixate on initial information
4. Selective perception – biased
5. Confirmation bias – seek out information that only reaffirms their past
choices
6. Framing bias – highlight certain aspects only
7. Availability bias – focus on event that most recent and vivid in their
memory.
8. Representation bias – assess the likelihood of an event that look identical
9. Randomness bias – create meaning out of random event
10. The sunk costs errors – forget that current choices cannot correct the
past
11. Self-serving bias – take credit for the success and blame failures for
outside factors
12. Hindsight bias – falsely believe they accurately predict the outcome once
the outcome is actually known
Approaches to make
decision
Rational decision making
Choices that are consistent and value-maximizing within specified constraints.
Rationality is not a very realistic approach.
Bounded Rationality
• A more realistic approach
• This means that managers make decisions rationally but are limited (or bounded) by
their ability to process information.
• can’t possibly analyze all information on all alternatives, managers satisfice, rather
than maximize.
Intuitive Decision Making
Types of problem
• Well-structured problems
• Straightforward, familiar, easily defined problems
• Ill-structured problems
• New problems in which information is ambiguous or
incomplete
Types of decisions
• Programmed decision
• A repetitive decision that can be handled by a routine
approach
• Nonprogrammed decisions
• Decisions that must be custom-made to solve unique and
nonrecurring problems
DECISION MAKING
conditions
 Certainty:
The implication that the outcome of every possible alternative is known.
 Uncertainty:
A condition under which there is not full knowledge of the problem and reasonable
probabilities for alternative outcomes cannot be determined.
 Risk:
The probability that a particular outcome will result from a given decision.
Group decision making
Decisions are often made by groups
representing the people who will be most
affected by those decisions.
 Committees
 Task forces
 Review panels
 Work teams
• Advantages
• Make more accurate decisions
• Provides more complete information
• Offers a greater diversity of
experiences and perspectives
• Generates more alternatives
• Increases acceptance of a solution
• Increases the legitimacy of a
decision.
• Disadvantages
• Is more time-consuming and less
efficient
• Minority domination can influence
decision process
• Increased pressures to conform to
the group’s mindset (groupthink)
• Ambiguous responsibility for the
outcomes of decisions
GROUPTHINK
When a group exerts extensive pressure on
an individual to withhold his or her different
views in order to appear to be in agreement.
 What it does
 How it occurs
 How to minimize it
 When Are Groups
Most Effective?
Individual Group
 Faster decision making  More accurate decisions
 More efficient use of work  More creative
hours  More heterogeneous
representation
 Greater acceptance of final
solution
 Improving Group Decision Making

Make group decisions more creative by:

 Brainstorming
 The nominal group technique
 Electronic meetings