Foundations of Decision Making © 2008 Prentice Hall, Inc. All rights reserved.

Decision-Making Decision-Making Process Problem Decision Criteria A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution Problem A discrepancy between an existing and a desired state of affairs Decision Criteria Factors that are relevant in a decision Decision making is a process rather than a simple act of choosing among alternatives. The decision-making process consists of eight steps which starts with identifying the problem, moves through selecting an alternative that can alleviate the problem, and concludes with evaluating the decision’s effectiveness © 2008 Prentice Hall, Inc. All rights reserved.

Decision-Making (cont’d) Decision Implementation Putting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it. The decision-making process can fail if the chosen alternative is not implemented properly. Successful decision implementation (step 7) includes identifying those who will be affected by the decision and gaining their commitment to the decision. The last step in the decision-making process (step 8) answers this question: Did the alternative that was chosen and implemented accomplish the desired result. © 2008 Prentice Hall, Inc. All rights reserved.

Making Decisions: The Rational Model Certainty The implication that the outcome of every possible alternative is known. Uncertainty A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined. Risk The probability that a particular outcome will result from a given decision. © 2008 Prentice Hall, Inc. All rights reserved.

What Is Creative Potential? Expertise Understanding, abilities, knowledge, proficiencies, necessary in the field of creative endeavor. Creative-Thinking Skills The personality characteristics associated with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light. Intrinsic Task Motivation The desire to work on something because it’s interesting, involving, exciting, satisfying, or personally challenging. © 2008 Prentice Hall, Inc. All rights reserved.

Making Decisions: The Rational Model Describes choices that are consistent and value-maximizing within specified constraints. Bounded Rationality (Herbert Simon) Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem. Satisfice Making a “good enough” decision: choosing the first-identified alternative that satisfactorily and sufficiently solves the problem. When confronted by a complex problem, most people will reduce the problem to its simplest level and satisfice by seeking solutions that are satisfactory and sufficient. Eschewing full rationality, they operate within bounded rationality and construct simplified models to extract the essential features of the problem and then behave rationally within the limits of the simple model. Here is how the bounded rationality typically operates: Once a problem is identified, the search for criteria and alternatives usually results in a limited list of choices that are easy to find or highly visible—familiar criteria and tried-and-true solutions. Once this limited set of alternatives is identified, the decision maker will begin reviewing them. The review will not be comprehensive—not all alternatives will be evaluated carefully. Instead, the decision maker will begin with alternatives that differ only to a small degree from the choice currently in effect. Following along familiar and well-worn paths, the decision maker will review alternatives only until one that is “good enough” (that meets acceptable levels of performance) can be found. The first alternative that meets the “good enough” criterion ends the search. So the final solution represents a satisficing choice rather than an optimizing one. © 2008 Prentice Hall, Inc. All rights reserved.

Common Decision-Making Errors Heuristics: Using Judgmental Shortcuts Availability heuristic The tendency to base judgments on information that is readily available. Representative heuristic The tendency to base judgments of probability on things (objects or events) that are familiar Escalation of commitment An increased commitment to a previous decision despite negative information about the decision’s present outcomes. To cope with information overload, we rely on two heuristics, or judgmental shortcuts, when we make decisions: availability and representativeness. Both types create biases in a decision maker’s judgment. Another bias is the tendency to escalate commitment to a failing course of action. Availability Heuristic. Using the availability heuristic, people tend to base their judgments on information that is readily available. Representative Heuristic. People often assess the likelihood of an occurrence by drawing analogies and seeing identical situations where they do not exist. Escalation of Commitment. In spite of negative feedback, some managers escalate commitment to a failing enterprise, “throw good money after bad,” if they believe that they are responsible for the failure. They do so to avoid admitting they made a poor decision and to appear behaviorally consistent. In contrast, effective managers differentiate between situations where persistence will or will not pay off. © 2008 Prentice Hall, Inc. All rights reserved.

How Do Problems and Decisions Differ? Well-Structured Problems Straightforward, familiar, easily defined problems Ill-Structured Problems New problems in which information is ambiguous or incomplete Programmed Decision A repetitive decision that can be handled by a routine approach Nonprogrammed Decisions Decisions that must be custom-made to solve unique and nonrecurring problems Well-structured problems are straightforward, familiar, and easily defined. In contrast, ill-structured (poorly structured) problems are so new that pertinent information is either ambiguous or incomplete. Repetitive, programmed decisions that can be handled routinely are the most efficient way to handle well-structured problems. Programmed decisions rely heavily on previous solutions. In many cases, such decisions are made according to some systematic procedure, rule, or policy. When problems are ill-structured, however, managers must develop unique solutions by using nonprogrammed decision making techniques. Such decisions are unique and nonrecurring. When a manager confronts an ill-structured problem, there is no cut-and-dried solution. A custom-made, nonprogrammed response is needed. © 2008 Prentice Hall, Inc. All rights reserved.

Programmed Decision-Making Aids Policy A general guide that establishes parameters for making decisions about recurring problems. Procedure A series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation). Rule An explicit statement that tells managers what they ought or ought not to do (limits on procedural actions). A guide for making programmed decisions is a policy. In contrast to rules and procedures, policies establish parameters for the decision maker rather than specifically stating how or what should or should not be done. A procedure is a series of interrelated sequential steps that a manager can use for responding to a well-structured problem. The only real challenge is to identify the problem. Once the problem is clear, so is the procedure. A rule is an explicit statement of limitations that tells a manager what he or she ought or ought not to do. Rules are simple to follow and promote consistency. © 2008 Prentice Hall, Inc. All rights reserved.

Technology And Decision Making Expert Systems Software that acts like an expert in analyzing and solving ill-structured problems Use specialized knowledge about a particular problem area rather than general knowledge Use qualitative reasoning rather than numerical calculations Perform at a level of competence higher than that of nonexpert humans. Neural Networks Software that is designed to imitate the structure of brain cells and connections among them © 2008 Prentice Hall, Inc. All rights reserved.

Group Decision Making Advantages Disadvantages Makes more accurate decisions Provides more complete information Offers a greater diversity of experiences and perspectives Generates more alternatives Increases acceptance of a solution Increases the legitimacy of a decision. Disadvantages Is more time-consuming and less efficient Can result in minority domination that influences decision process Can produce increased pressures to conform to the group’s mindset (groupthink) Can create ambiguous responsibility for the outcomes of decisions There are several advantages to group decision making. Group decisions provide more complete information than do individual ones. A group will bring a diversity of experience and perspectives to the decision process that an individual, acting alone, cannot. Groups also generate more alternatives, because of a greater quantity and diversity of information. Group decision making increases acceptance of a solution. If those who will be affected by a solution and who must implement it can participate in making it, they will be more likely to accept the solution. Since group decision-making is consistent with democratic ideals, decisions made by groups are perceived as being more legitimate than decisions made by a single person. There are several disadvantages to group decision making. Group decisions are time consuming, and groups almost always take more time to make a decision than an individual would take. There may also be minority group domination, because group members will differ in many ways: for example, status in the organization, experience, verbal skills, or assertiveness. A minority group that dominates the group decision-making process will have an undue influence on the final decision. Another problem focuses on the pressures to conform in groups. This pressure can result in groupthink—group members withhold deviant, minority, or unpopular views in order to give the appearance of agreement . Finally, there is ambiguous responsibility. Since group members share responsibility, who is actually responsible for the final outcome? © 2008 Prentice Hall, Inc. All rights reserved.

When Are Groups Most Effective? High Need for Creativity Groups tend to be more creative than individuals. Acceptance of the Final Solution Groups help increase the acceptance of decisions. Effectiveness of Group Decision Making Groups of five to seven members are optimal for decision process speed and quality. © 2008 Prentice Hall, Inc. All rights reserved.

National Culture and Decision-Making Practices Decision-making practices differ from country to country by: Participation: groups, teams, individuals Power distance: who will make the decision Level of risk: uncertainty avoidance Efficiency of decision making: pace of decisions Alternatives considered: many or few Consensus building: ringsei Decision-making style: rational, autocratic or participative © 2008 Prentice Hall, Inc. All rights reserved.

Quantitative Module QUANTITATIVE DECISION-MAKING AIDS © 2008 Prentice Hall, Inc. All rights reserved.

Queuing Theory Queuing Theory Balancing the cost of having a waiting line against the cost of service to maintain that line. where P = probability of n customers waiting in line, n = 3 customers, arrival rate = 2 per minute, and service rate = 4 minutes per customer © 2008 Prentice Hall, Inc. All rights reserved.

Economic Order Quantity Model Fixed-Point Reordering System A preestablished point for replenishing inventory Economic Order Quantity (EOQ) A technique for balancing purchase, ordering, carrying, and stock-out costs to derive the optimum quantity for a purchase order. D = forecasted demand for the item OC = cost of placing each order V = value or purchase price of the item CC = carrying cost (as percentage) of total inventory © 2008 Prentice Hall, Inc. All rights reserved.

Economic Order Quantity Example Forecast sales: 4,000 units a year Unit cost: $50.00 each Ordering cost: $35.00 per order Carrying costs: 20% of unit’s value. © 2008 Prentice Hall, Inc. All rights reserved.