Explain the step-by-step process of rational decision making Describe how time constraints, lack of information, and complexity influence the rational decision-making process Describe the various biases that can influence an individual’s perspective and how these biases impact decision making Articulate how emotions, intuition, and social situations impact decision making Compare and contrast the different ways in which decisions are made in an organization Describe the ways in which managers can improve their decision- making abilities © South-Western, a part of Cengage Learning

Decision Making The process of identifying issues and making choices from alternative courses of action © South-Western, a part of Cengage Learning

Rational Decision Making The theory that individuals make decisions based on a rational thought process that optimizes self-interest Theory of rational choice When confronted with a choice, people try to make the best possible decision; one that maximizes their expected utility Expected utility Individuals assign a numerical value to each alternative and select the one that offers the highest payoff or profit © South-Western, a part of Cengage Learning

Factors that Impact Decision Making Incomplete, imperfect, or misleading information Limited ability or background to process information i.e. lack of experience Limited time to make a decision Conflicting preferences, incentives, or goals of various organizational players © South-Western, a part of Cengage Learning

How Managers Make Decisions A set of boundaries or constraints that tend to complicate the rational decision-making process Bounded rationality The act of choosing a solution that is good enough Satisficing © South-Western, a part of Cengage Learning

Decision-Making Conditions Conditions in which individuals have all of the information they need to make the best possible decision Conditions of certainty Situations that are characterized by uncertainty and risk and where the optimal decision is not clear or obvious Ambiguity Conditions in which individuals have information about an organization’s goals, objectives, priorities, and potential courses of action, but they do not have complete information about the possible outcomes for each course of action Conditions of risk Conditions in which individuals have information related to an organization’s objectives and priorities, but they do not have complete information about alternative course of action or about the possible outcomes for each one Conditions of uncertainty © South-Western, a part of Cengage Learning

How Biases Impact Decision Making Rules of thumb or short-cuts that individuals use to save time when making complex decisions Cognitive heuristics Contends that individuals assess the frequency, probability, or likely cause of an event by the degree to which instances or occurrences of that event are readily available in memory Availability heuristic Contends that individuals tend to look for traits in another person or situation that corresponds with previously formed stereotypes Representative-ness heuristic © South-Western, a part of Cengage Learning

How Biases Impact Decision Making Contends that individuals make estimates or choices based on a certain starting point Adjustment heuristic Alternative wordings for same information that significantly alters a decision Framing © South-Western, a part of Cengage Learning

Escalation of commitment Emotional Commitment The tendency to favor the “here and now” and to reject potential change Status quo bias A type of bias in which decision makers commit themselves to a particular course of action beyond the level suggested by rationality as a means of justifying previous commitments Escalation of commitment A bias in which people tend to seek information that confirms a decision before seeking information that disconfirms a decision, even if the disconfirming information is more powerful and important Confirmation bias © South-Western, a part of Cengage Learning

Intuitive Decision Making Insights that are tapped through intuition and are not always fully understood by the decision maker Referred to as gut feel or hunches Can emerge as a form of automated expertise if it is drawn from connections to past experiences © South-Western, a part of Cengage Learning

Social Influence on Decisions Solomon Asch’s experiment indicated that: Individuals tend to conform to majority when they rely less on their experience and insight Dominance of conformity can cause people to make decisions that go against their values Social decisions involving norms are shaped by: Appropriateness framework: The process of making decisions based on societal norms or expectations © South-Western, a part of Cengage Learning

Decision Making in Organizations Programmed decisions Nonprogrammed decisions Decisions that are made in response to recurring organizational problems that require individuals to follow established rules and procedures Decisions that are made in response to novel, poorly defined, or unstructured situations that require managers to use their best judgments © South-Western, a part of Cengage Learning

Models of Organizational Decision Making Seeks to maximize economic or other outcomes using a rational choice process Classical model Acknowledges that managers may be unable to make economically rational decisions because they lack sufficient information on which to base their decisions Administrative model © South-Western, a part of Cengage Learning

Models of Organizational Decision Making Acknowledges that most organizational decisions involve many managers who have different goals and who have to share information to reach an agreement Political model A model of decision making whereby, problems, solutions, participants, and choices flow throughout an organization. A decision process is not viewed as a sequence of steps that begins with a problem and ends with a solution Garbage can model Playfulness: The deliberate , temporary relaxation of rules to explore many possible alternatives © South-Western, a part of Cengage Learning

Improving Decision-Making Skills: Managing Your Biases Acquire experience and expertise Take an outsider’s view Actions can help to “de-bias” your judgments Reduce bias in your judgment Implement statistical models Engage in analogical reasoning Understand biases in others © South-Western, a part of Cengage Learning

SCRIPTS Process Helps managers prepare for high-stake decisions Involves following steps Search for signals of threats and opportunities Find the causes Evaluate the risks Apply intuition and emotion Take different perspectives Consider the time frame Solve the problem © South-Western, a part of Cengage Learning

KEY TERMS Adjustment heuristic Administrative model Ambiguity Anchoring Appropriateness framework Availability heuristic Bounded rationality Classical model Conditions of certainty Conditions of risk Conditions of uncertainty Confirmation bias Decision making Escalation of commitment Framing Garbage can model Heuristics Intuitive decision making Nonprogrammed decisions Playfulness Political model Programmed decisions Representativeness heuristic Satisficing Status quo bias Theory of rational choice © South-Western, a part of Cengage Learning