Decision Making the Essence of Managerial Life Management BBA & MBA Lecture 789 Decision Making the Essence of Managerial Life Course Lecturer: Farhan Mir

Learning Outcomes Describe the steps in the decision-making process Identify the assumptions of the rational decision-making model Explain the limits to rationality Define certainty, risk, and uncertainty as they relate to decision making Describe the actions of the bounded-rational decision maker 2

Learning Outcomes (…) Identify the two types of decision problems and the two types of decisions that are used to solve them Define heuristics and explain how they affect the decision-making process Identify four decision-making styles 3

Decision Making Decision making. The process of choosing a course of action for dealing with a problem or opportunity.

Decision Making Lots of attempts are carried out to scientifically examine the ability of humans to make decisions. But it is still somewhat a mystery!

Decision Making: our context

Managers choosing among alternatives

How are decisions made in organizations? Many Methods can be adopted by various managers for making decisions, one of these is called the “Systematic Decision Making” (Also known as the “Rational Model of Decision Making”)

How are decisions made in organizations? Steps in systematic decision making. Recognize and define the problem or opportunity. Identify and analyze alternative courses of action, and estimate their effects on the problem or opportunity. Choose a preferred course of action. Implement the preferred course of action. Evaluate the results and follow up as necessary.

Six Steps in Decision Making Figure 7.4

The Decision-Making Process Identify Problem The Decision-Making Process Select Alternative Implement Evaluate Results 1 Develop Alternatives Analyze Decision Criteria Allocate Weights to 2 3 4 5 6 7 8 The decision-making process is a set of 8 steps that allows a manager (or any other person) to “choose among alternatives.” The example in the text deals with a sales manager at Weyerhaeuser Canada who has spent nearly $5000 on auto repairs in the past few years and now has a blown engine in his car. Repair estimates indicate that it is not economical to repair the car and public transportation is not realistic. 4

Step 1: Identify a Problem The difference between what is and what it ought to be The first step in the decision-making process is identifying a problem. This can be a difference between past and present performance, or it can be the current performance compared to the planned performance, or it can be the difference against goals set. In this case, the sales manager has decided that he needs a new car. 5

Step 2: Decision Criteria Price Interior comfort Durability Repair record Performance Handling Factors that are relevant in making the decision The next step is to determine the factors that might be relevant in making the decision. In our example, John decides that price, interior comfort, durability, repair record, performance, and handling are the criteria he’ll use to make his decision. Interesting to note that the repair record is the 4th criterion even though he has had problems with excessive repairs on his current car. 6

Step 3: Allocating Weights Determining the relative priority of each of the criteria It is important to determine the relative ranking or priority of each of the criterion. Going back to our example, price has been determined to be the most important factor, then interior comfort with handling being the least important. 7

Problem: To purchase a new car Criterion Weight Price 10 Interior comfort 8 Durability 5 Repair record Performance 3 Handling 1 This slide illustrates the type of decision-making matrix being generated using the relevant factors for the decision and the weights you have assigned. Again, note that price is the most important on a scale of 1-10 with handling being the least important at a 1. 8

Generate a list of possible vehicle manufacturers Step 4: Alternatives Generate a list of possible vehicle manufacturers Step 4 is to identify the possible car manufacturers that John might be interested in. He has identified 12 vehicles that are viable choices: Jeep Cherokee, Ford Mustang, Mercedes E500, Chevrolet Camaro, Mazda Protégé, Chrysler PT Cruiser, Acura TSX, Hyundai Tiburon, BMW 320, Audi A6, Toyota Camry, and Volkswagen Passat. 9

Step 5: Analyzing Alternatives Assessing the value of each alternative by making a value judgment of the feature Step 5 now requires us to to assess the value of each alternative. We will use the criteria and weights established in steps 2 and 3. Each alternative is evaluated by appraising it against the criteria. Exhibits 4-4 and 4-5 take you through the decision-makers assessment of the value of each criterion and the weighting of each factor--which is the assessment times the criteria weight. 10

Concluding Steps in Making a Decision Step 6: Select the “best” Step 7: Implement decision The final steps in the decision making process is selecting the best choice, implementing the decision and evaluating the decision. Did the alternative chosen in Step 6 accomplish the desired result. You will note on Exhibit 4-5 (page91) in the text that the car with the highest total value is the Toyota Camry. On the basis of the criteria identified, the weights given given to the criteria, the decision maker’s assessment of each vehicle’s achievement on the criteria, the Toyota scored 224 which makes it the best alternative. Step 8: Evaluate decision 12

Assumptions Of Rationality Single, well- defined goal is to be achieved All alternatives and consequences are known Problem is clear and unambiguous Rational Decision Making Preferences are clear Final choice will maximize payoff When a manager makes a decision, it is assumed that the manager is able to do so with knowing all the information. But this is a perfect world that rarely exists for managers today. Remember that the assumptions of rationality often do not hold true because the level of certainty that the rational model demands rarely exists. Most managers then try to determine the amount of risk and make their decisions under a condition of uncertainty. Preferences are constant and stable No time or cost constraints exist FOM 4.12

But Managers don’t have time and are usually under stress

And are usually overloaded with information

How are decisions made in organizations? The systematic decision-making process may not be followed where substantial change occurs and many new technologies prevail. New decision techniques may yield superior performance in certain situations.

What are the useful decision making models? Decision making realities. Managers face complex choice processes. Decision making information may not be available. Bounded rationality and cognitive limitations affect the way people define problems, identify alternatives, and choose preferred solutions.

What Makes Decision Making so Difficult? Complexity Uncertainty Organizational & Environment Pressure Individual Decision Making Limitations Experience, Beliefs & Perceptions of the Decision Maker Results!!!! Satisfycing (sounds like….guess!!!!) Focusing on highly visible choices So managers make decisions in Bounded Rationality Key bounding constraints are time, uncertainty and other organizational and cultural influences

How do intuition, judgment, and creativity affect decision making? The ability to know or recognize quickly and readily the possibilities of a given situation. A key element of decision making under risk and uncertainty.

How do intuition, judgment, and creativity affect decision making? Judgmental heuristics. Simplifying strategies or “rules of thumb” used to make decisions. Makes it easier to to deal with uncertainty and limited information. Can lead to systematic errors that affect the quality and/or ethics of decisions.

How do intuition, judgment, and creativity affect decision making? Types of heuristics. Availability heuristic — bases a decision on recent events relating to the situation at hand. Representativeness heuristic — bases a decision on similarities between the situation at hand and stereotypes of similar occurrences

How do intuition, judgment, and creativity affect decision making? Creativity factors. Creativity in decision making involves the development of unique and novel responses to problems and opportunities. Creativity is especially important in a dynamic environment full of nonroutine problems.

Types of Decisions

Problems Well-Structured vs. ill-Structured Straightforward Familiar Easily-defined New or unusual Ambiguous information Incomplete information In today’s business environment, the nature of the problem in many situations determines how the problem will be approached. Those problems that are simple and straightforward such as a customer wanting a refund for a defective product are described as “well-structured.” They are familiar and easily-defined. However, in many cases a manager may be facing a new or unusual problem where information may be incomplete. An example would be the desire to have a capability on the company’s web site to purchase products and have them delivered more quickly and cheaply. 16

Structured and Unstructured Problems

Managers and Decision Making Decisions are classified as: Unstructured: Non-routine, decision maker provides judgment, evaluation, and insights into problem definition, no agreed-upon procedure for decision making Structured: Repetitive, routine, handled using a definite procedure

Programmed and Non-programmed Decisions Routine, virtually automatic decision making that follows established rules or guidelines. Managers have made the same decision many times before. There are rules or guidelines to follow based on experience with past decisions. Example: Disciplinary action to be taken concerning a tardy employee.

Procedure Rule Policy Programmed Decision Every manager will need to deal with and understand a procedure, rule and policy. Basically, a procedure is a series of related and sequential steps. For example, if a student wishes to appeal a grade on a course. A rule is an explicit statement that tells managers what they can and cannot do. An example would be a store rule that requires a manager to approve any refund of more than $25. A policy is a general guideline that establishes the parameters in which to make a decision. An organization may have a policy to “take appropriate steps to satisfy any customer complaint.” This gives the manager a great deal of freedom in which to make a decision. Policy 18

Programmed and Non-programmed Decisions Non-routine decision making that occurs in response to unusual, unpredictable opportunities and threats. The are no rules to follow since the decision is new. Decisions are made based on information, and a manager’s intuition, and judgment. Example: Deciding to invest in additional production equipment to meet forecasted demand.

Types of Decision and Management Levels

Relationship of Problems, Decisions, and Level Non-programmed Decisions Ill-Structured Programmed Decisions Top Type of Problem Level As you can see from this slide, the more senior managers tend to handle ill-structured problems with non-programmed decisions. This means that the problem may be new and therefore requires a unique solution. Likewise, lower level managers tend to handle more routine problems with solutions that were used in the past. Few managerial decisions in the real world are either fully programmed or fully non-programmed--no matter what level in the organization. Few programmed decisions are designed to eliminate individual judgment completely. At the other extreme, even the most unusual situation requiring a non-programmed decision can be helped by programmed routines. Lower Well-Structured 19

How can the decision-making process be managed? Reasons for decision making failure. Managers too often copy others’ choices and try to sell them to subordinates. Managers tend to emphasize problems and solutions rather than successful implementation. Managers use participation too infrequently.

Decision-Making Styles Analytical Conceptual High Tolerance for Ambiguity Directive Behavioral Because managers are unique, each manager will bring personal characteristics into the decision-making process. The styles that we will examine look at the way in which managers think and their tolerance for ambiguity. The directive style tends to be logical and focus on the short-term. The analytical style is characterized by high tolerance for ambiguity and a rational way of thinking. These people want to have complete information before making a decision. The behavioural style reflects someone who thinks intuitively but have a low tolerance for ambiguity. These managers work well with others and are open to suggestions. The conceptual style represents someone who can live with lots of ambiguity. These individuals will look at the big picture and look for creative solutions. As you can see on this slide, the more a person can handle ambiguity and thinks more intuitively, the more likely the decisions will be broad in outlook. Managers today need to be able to use each of these styles depending on the situation. However, each manager will tend to have a dominant style. Low Rational Intuitive Way of Thinking Source: S. P. Robbins, Supervision Today (Upper Saddle River, NJ: Prentice Hall, 1995), page 111. 21

Decision-Making and National Culture Differs from one country to another Need to recognize what is acceptable Managers can expect high payoff if they can accommodate the diversity Just as we saw in Chapter 2, managers who are able to recognize the cultural differences when making decisions will enable the manager to be more effective. For example, Japanese use consensus-forming group decisions Called ringisei after collecting large amount of information and data. In Germany, the culture is one of structure and order--therefore the decision-making needs to be more directive. 26