Rational Decision Making 8-step Process 1. Identification of problem 2. Identification of Decision Criteria 3. Allocation of weights to criteria 4. Development of alternatives 5. Analysis of alternatives 6. Decide on an alternative 7. Implementation of decision 8. Evaluation of decision

The Decision-Making Process Allocation of Weights to Criteria Problem Identification Identification of Decision Criteria Development of Alternatives “My salespeople need new computers” Price Weight Warranty Screen type Reliability Screen size Reliability 10 Screen size 8 Warranty 5 Weight 5 Price 4 Screen type 3 Acer Compaq Gateway HP Micromedia NEC Sony Toshiba Analysis of Alternatives Selection of an Alternative Implementation of an Alternative R S W W P S Acer 4 3 4 3 2 6 Compaq 3 4 5 2 6 7 Gateway 9 6 7 7 8 2 HP 3 5 6 7 6 5 Micromedia 2 2 3 4 5 4 NEC 3 4 5 6 7 2 Sony 7 5 6 4 2 8 Toshiba 3 4 5 6 7 3 Acer 125 Compaq 142 Gateway 246 HP 174 Micromedia 103 NEC 151 Sony 192 Toshiba 154 Gateway Evaluation of Decision Effectiveness

Decisions in the Management Functions

About Rational Decision Making Is it always possible to make rational decisions?

Rational Decision Making Single, well- defined goal is to be achieved Problem is clear and unambiguous All alternatives and consequences are known Rational Decision Making Preferences are clear Final choice will maximize payoff Preferences are constant and stable No time or cost constraints exist

Bounded Rationality behave rationally within the parameters of a simplified decision-making process that is limited by an individual’s ability to process information satisfice - accept solutions that are “good enough”

Intuitive decision making Based on “gut feeling” subconscious process of making decisions on the basis of experience, values, and emotions does not rely on a systematic or thorough analysis of the problem generally complements a rational analysis

Types of Problems & Decisions Well-Structured Problems - straightforward, familiar, and easily defined Programmed Decisions - used to address structured problems minimize the need for managers to use discretion facilitate organizational efficiency

Types of Problems and Decisions Poorly-Structured Problems - new, unusual problems for which information is ambiguous or incomplete Nonprogrammed Decisions - used to address poorly- structured problems produce a custom-made response more frequent among higher-level managers Procedure, Rule, & Policy

Types of Problems & Level In the Organization Top Lower Well-structured Ill-structured Type of Problem Programmed Decisions Nonprogrammed Decisions

Things to consider . . . Certainty – how certain is a particular outcome? Risk – how much risk can you take? expected value - the conditional return from each possible outcome Uncertainty – Limited information prevents estimation of outcome probabilities for alternatives.

What to do? maximax choice – optimistic maximizing the maximum possible payoff taking the best of all possible cases maximin choice – pessimistic maximizing the minimum possible payoff taking the best of the worst cases minimax - minimize the maximum “regret” (difference between what you get and the best case)

Decision-Making Styles Dimensions of Decision-Making Styles Value orientations Task and technical concerns People and social concerns Tolerance for ambiguity Low tolerance: require consistency and order High tolerance: multiple thoughts simultaneously

Decision-Making Styles Directive Prefer simple, clear solutions Make decisions rapidly Do not consider many alternatives Rely on existing rules Prefer complex problems Carefully analyze alternatives Enjoy solving Willing to use innovative methods Analytical Conceptual Socially oriented Humanistic and artistic approach Solve problems creatively Enjoy new ideas Behavioral Concern for their organization Interest in helping others Open to suggestions Rely on meetings

Decision Making Styles High Analytical Conceptual Directive Behavioral Tolerance for Ambiguity Low Tasks and Technical Concerns People and Social Concerns Value Orientation

Common Errors in Decision Making Over-confidence Hindsight Self-serving Sunk costs Randomness Representation Availability Framing Confirmation Selective perception Anchoring Immediate gratification

Advantages and Disadvantages of Group-Aided Decision Making Advantages Disadvantages 1. Greater pool of knowledge 1. Social pressure 2. Different perspectives 2. Minority domination 3. Greater comprehension 3. Logrolling 4. Increased acceptance 4. Goal displacement 5. Training ground 5. “Groupthink”

Decision-Making Approach Decision-Making Conditions Rationality Bounded Rationality Intuition Types of Problems and Decisions Well-structured - programmed Poorly structured - nonprogrammed Decision Choose best alternative - maximizing - satisficing Implementing Evaluating Decision-Making Process Decision-Making Conditions Certainty Risk Uncertainty Decision Maker Style Directive Analytic Conceptual Behavioral