Decision Making We could use two films here, so we want lots of extra time. What to cut out? Dangerous minds is good hopefully for expectancy and equity theory. Dead Poets Society is internal / external

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Objective Central task of managers: making decisions Objective: understand how we make decisions

Types of Problems and Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions Types of Problems and Decisions Poorly-Structured Problems: New, unusual problems for which information is ambiguous or incomplete. Well-Structured Problems: Easily defined, familiar and straightforward. Non-Programmed Decisions: A unique decision to address (poorly-structured) problems needing customized solutions. Programmed Decisions: A “routine” (rate, procedure or policy) used to address repetitive (structured) problems

Rational Decision Making Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Rational Decision Making Definition: Decisions that are optimal Value-maximizing Select by analyzing alternatives and picking best solution

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions Rational Decision Making 3. Search for alternative solutions 4. Compare and evaluate alternative solutions 1. Define the issue 2. Set goals External and Internal environment forces 7. Follow up and control 6. Implement the solution selected 5. Choose among alternative solutions

The Feasibility of Rational Decisions Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 The Feasibility of Rational Decisions It’s desirable, but lets look closer… Assumptions of the model are very demanding Managerial decisions seldom meet all the tests Do we always want to make the best decision?

Assumptions of Rational Decisions Here, the perfect example is taking a job. Some people can approach this on individual elements … but if we roll through, we see that this is really tough to achieve. Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Assumptions of Rational Decisions Rational Decision Making Problem is clear and unambiguous Single, well- defined goal Alternatives & consequences are known Preferences are clear are constant and stable No time or cost constraints exist Final choice will maximize payoff

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Bound Rationality Bounded rationality = behaving rationally within limitations imposed by cognitive abilities and complexity of environment. Satisficing - Searching for and choosing an acceptable, or satisfactory response Choosing “good enough” rather than trying to make the optimal decision Intelligent satisficing means working on the decision only until the costs of further analysis outweigh the benefits from improving the decision.

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions Why Satisficing? Satisficing decision Uncertainty, Risk, Ambiguity Information processing biases Limited Information Perceived problem

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 BRD: Key concepts Certainty: Outcome of every alternative is known Risk: Able to estimate the probability of outcomes stemming from each alternative Uncertainty: Not certain about outcomes and unable to estimate probabilities Ambiguity: Not certain about what the meaning of the data is in the first place Limited Information: Search costs & time constraints prevents gathering information on all alternatives & outcomes

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 BRD and Heuristics Heuristics: Rules of thumb to deal with complex situations. Saves effort if the heuristic is right If heuristic is wrong, can have cognitive bias – systematically repeated errors that arise from the decision-making process in use.

BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Availability Bias Availability Bias: The frequency of an event is often assessed with how easily it is brought to mind.

Representativeness Bias Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Representativeness Bias Incorrectly generalizing from a small sample or a single incident.

Additional Key Cognitive Biases BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions Additional Key Cognitive Biases Illusion of Control: The tendency to overestimate one’s own ability to control activities and events. Escalating Commitment: Committing considerable resources to a project and then committing more even if evidence shows the project is failing.

Groups and Decision-Making BA 210 - Spring 2004 Lecture Notes, Part 1 Session 1-4 - Decisions Groups and Decision-Making Advantages of group decision-making (assuming the group is working well): Better decision: More complete information More creative decision: More and better alternatives Especially when expertise is diverse The decision is more likely to be perceived as legitimate Members are more likely to be committed to the decision 1 2 3 4

Groups and Decision-Making Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 Groups and Decision-Making Disadvantages of group decision-making Even if the group is working well: Group decision-making is time consuming And if the group is not working particularly well: Members may feel railroaded by a minority Who is responsible may be ambiguous Members may feel pressure to conform even though they disagree “Groupthink:” conformity marked by withholding different or unpopular views in order to give the appearance of agreement

So when do groups make better decisions than individuals? Session 1-4 - Decisions BA 210 - Spring 2004 Lecture Notes, Part 1 So when do groups make better decisions than individuals? Criteria of Effectiveness Groups Individuals Accuracy x Speed x Creativity x Degree of acceptance x Efficiency x Roll through why. Groups have more information and they can use it in creative ways; but they take more time to process it so if an individual can do it, it is more efficient.

Summary Different types of problems and decisions Rational and boundedly rational decision making models Biases and heuristics Groups and decision making