Describe the eight steps in the decision- making process Explain the four ways managers make decisions Classify decisions and decision-making conditions Identify effective decision-making techniques

Decision Making Problem - an obstacle that makes it difficult to achieve a desired goal or purpose. Decision - making a choice from two or more alternatives. Often not a clear cut answer, demands deeper thoughts and analysis in management and business.

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 decision’s effectiveness Please Read Exhibit-7.1

Decision-Making Process A decision is a choice made from two or more alternatives. The decision-making process is a comprehensive process, involving eight steps, that begins with identifying a problem and decision criteria and allocating weights to those criteria; moves to developing, analyzing, and selecting an alternative that can resolve the problem; implements the alternative; and concludes with evaluating the decision’s effectiveness.

Step 1: Identifying a Problem Characteristics of Problems: A problem becomes a problem when a manager becomes aware of it. Before a problem can be determined, a manager must be aware of any discrepancies. There is pressure to solve the problem. The manager must have the authority, information, or resources needed to solve the problem. Managers must effectively identify the problem Step 1 is identify a problem. A problem is defined as a discrepancy between an existing and a desired state of affairs. Some cautions about problem identification include the following: 1. Make sure it’s a problem and not just a symptom of a problem. 2. Problem identification is subjective. 3. Before a problem can be determined, a manager must be aware of any discrepancies. 4. Discrepancies can be found by comparing current results with some standard. 5. Pressure must be exerted on the manager to correct the discrepancy. 6. Managers aren’t likely to characterize a discrepancy as a problem if they perceive that they don’t have the authority, information, or other resources needed to act on it.

Step 2: Identifying Decision Criteria Decision criteria are factors that are important (relevant) to resolving the problem, such as: Costs that will be incurred (investments required) Risks likely to be encountered (chance of failure) Outcomes that are desired (growth of the firm) Managers are advised to identify the most ‘relevant’ criteria’s reflecting the ‘problem’. Step 2 is identify the decision criteria. Decision criteria are criteria that define what is relevant in making a decision.

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. Weight the most important criteria with- the highest value, and then accordingly weight others. Step 4: Developing Alternatives Step 3 is allocate weights to the criteria. The criteria identified in Step 2 of the decision-making process aren’t all equally important, so the decision maker must weight the items in order to give them correct priority in the decision. Step 4 involves development of alternatives. The decision maker now needs to identify viable alternatives for resolving the problem. Identifying viable alternatives: Alternatives are listed (without evaluation) that can resolve the problem.

Example: Possible Alternatives

Step 5: Analyzing Alternatives Appraising each alternative’s strengths and weaknesses An alternative’s appraisal is based on its ability to resolve the issues related to the criteria and criteria weight (identified in steps 2 and 3). Multiply the weight of the criteria and the score- weight x score given. Step 6: Selecting an alternative Choosing the best alternative the alternative with the highest total weight is chosen. Step 5 is analyze alternatives. Each of the alternatives must now be critically analyzed. Each alternative is evaluated by appraising it against the criteria. Step 6 is selecting an alternative. The act of selecting the best alternative from among those identified and assessed is critical. If criteria weights have been used, the decision maker simply selects the alternative with the highest score from Step 5.

Example of Score

Step 7: Implementing the Alternative Putting the chosen alternative into action Conveying the decision to and gaining commitment from those who will carry out the alternative. Reassess the environment for any changes, specially if it’s a long term decision, and again check the alternatives. Step 8: Evaluating 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?

Decisions Managers May Make

Rational Decision-Making Rational Decision-Making - describes choices that are logical and consistent while maximizing value. Bounded Rationality - decision making that’s rational, but limited (bounded) by an individual’s ability to process information. Will not seek out or have knowledge of all alternatives Will satisfice Can be influenced by escalation of commitment Satisfice - accepting solutions that are “good enough”, rather than maximizing payoffs. Managerial decision-making is assumed to be rational; that is, choices are consistent and value-maximizing within specified constraints. a. These assumptions are problem clarity (the problem is clear and unambiguous); goal orientation (a single, well-defined goal is to be achieved); known options (all alternatives and consequences are known); clear preferences; constant preferences (preferences are constant and stable); no time or cost constraints; and maximum payoff. b. The assumption of rationality is that decisions are made in the best economic interests of the organization, not in the manager’s interests. c. The assumptions of rationality can be met if: the manager is faced with a simple problem in which goals are clear and alternatives limited, in which time pressures are minimal and the cost of finding and evaluating alternatives is low, for which the organizational culture supports innovation and risk taking, and in which outcomes are concrete and measurable In spite of these limits to perfect rationality, managers are expected to “appear” rational as they make decisions. But because the perfectly rational model of decision making isn’t realistic, managers tend to operate under assumptions of bounded rationality, which is a behavior that is rational within the parameters of a simplified decision-making process that is limited (or bounded) by an individual’s ability to process information. a. Under bounded rationality, managers make satisficing decisions —in which managers accept solutions that are “good enough,” rather than maximizing payoffs. b. Managers’ decision-making may also be strongly influenced by the organization’s culture, internal politics, power considerations, and by a phenomenon called escalation of commitment—an increased commitment to a previous decision.

Assumptions of Rationality Lead to •   The problem is clear and unambiguous. •   A single, well-defined goal is to be achieved. Rational •   All alternatives and consequences are known. Decision •   Preferences are clear. Making •   Preferences are constant and stable. •   No time or cost constraints exist. •   Final choice will have maximize payoff.

Intuitive Decision-Making Making decisions on the basis of experience, feelings, and accumulated judgment. One-third of managers and other employees said they emphasized “gut feeling” over cognitive problem solving. Managers also regularly use their intuition. Intuitive decision-making is a subconscious process of making decisions on the basis of experience and accumulated judgment. a. Making decisions on the basis of gut feeling doesn’t happen independently of rational analysis. The two complement each other. b. Although intuitive decision making will not replace the rational decision-making process, it does play an important role in managerial decision making.

What Is Intuition?

Programmed vs. Non- Programmed Decisions Programmed Decision - a repetitive decision that can be handled by a routine approach. There are three possible programmed decisions. A procedure is a series of interrelated sequential steps that can be used to respond to a structured problem. Ex: Follow all steps for completing merchandise return documentation. A rule is an explicit statement that tells managers what they ought or ought not do. Ex: Managers must approve all refunds or no credit purchase are refunded for cash. A policy is a guide that establishes parameters for making decisions rather than specifically stating what should or should not be done. Ex: Accept all customer-returned merchandise. Non-programmed Decisions - unique and nonrecurring decisions that require a custom-made solution.

Programmed Versus Non-programmed Decisions

Types of Problems Structured Problems - straightforward, familiar, and easily defined problems. Unstructured Problems - problems that are new or unusual and for which information is ambiguous or incomplete.

Decision-Making Situations Certainty a 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. 1. Certainty is a situation in which a manager can make accurate decisions because the outcome of every alternative is known. This isn’t characteristic of most managerial decisions. 2. More common is the situation of risk, in which the decision maker is able to estimate the likelihood of certain outcomes

Decisions Under Uncertainty Limited information prevents estimation of outcome probabilities for alternatives . Limited information forces managers to rely on intuition, hunches, and “gut feelings.” Maximax: the optimistic manager’s choice to maximize the maximum payoff. Maximin: the pessimistic manager’s choice to maximize the minimum payoff. Minimax: the manager’s choice to minimize maximum regret.

Decision-Making Styles Linear Thinking Style - a person’s tendency to use external data/facts; the habit of processing information through rational, logical thinking. Nonlinear Thinking Style - a person’s preference for internal sources of information; a method of processing this information with internal insights, feelings, and hunches.

Decision-Making Biases and Errors Heuristics - using “rules of thumb” to simplify decision making. Overconfidence Bias - holding unrealistically positive views of oneself and one’s performance. Immediate Gratification Bias - choosing alternatives that offer immediate rewards and avoid immediate costs.

Decision-Making Biases and Errors (cont.) Anchoring Effect - fixating on initial information and ignoring subsequent information. Selective Perception Bias - selecting, organizing and interpreting events based on the decision maker’s biased perceptions. Confirmation Bias - seeking out information that reaffirms past choices while discounting contradictory information.

Decision-Making Biases and Errors (cont.) 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 recent events. Representation Bias - drawing analogies and seeing identical situations when none exist. Randomness Bias - creating unfounded meaning out of random events.

Decision-Making Biases and Errors (cont.) 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-the-fact).

Common Decision-Making Biases

Decision Making for Today’s World Guidelines for making effective decisions: Understand cultural differences Know when it’s time to call it quits Use an effective decision making process 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

Terms to Know Decision criteria Rational decision making Bounded rationality Satisfice Escalation of commitment Intuitive decision making Evidence-based management (EBMgt) Structured problems Programmed decision Procedure Rule Policy Unstructured problems Nonprogrammed decisions Risk Linear thinking style Nonlinear thinking style Heuristics 30

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