Chapter Six: Decision-Making Learning Objectives The decision-making process Assumptions of rationality Bounded rationality, satisficing, escalating commitment Intuition and its role in decision-making Types of problems and decisions (structured, programmed) Decision-making conditions (certainty, risk, uncertainty) Four decision-making styles Decision-making biases and errors

Decisions in the Management Functions Planning What niche should we fill? What strategies should we employ? Organizing How many employees should we hire? How should jobs be designed? Leading What leadership style should I use? What should I deal with unmotivated employees? Controlling How should our performance be measured? What type of management information system should we have?

The Decision-Making Process Identify a problem Identify decision criteria Allocate weights to the criteria Develop alternatives Analyze alternatives Select an alternative Implement the alternative Evaluate decision effectiveness

The Decision-Making Process Identification Of a Problem My salespeople need new computers. Identification Of Decision Criteria Price Brand Name and Model Warranties and Support Reliability Repair Record Allocation Of Weights To Criteria Reliability Brand Name and Model Warranties and Support Repair Record Price 10 8 6 4 2 4

Decision Effectiveness Development of Alternatives Fujitsu AST Sharp IBM HP TI NEC Analysis Selection of an Alternative Implementation of the Evaluation of Decision Effectiveness Reliability Brand Name and Model Warranties and Support Repair Record Price The Fujitsu is the best. Compaq 5

Criteria Score Alternatives ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

Assumptions of Rationality Problem is clear Goal is clear All alternatives are known Alternatives can be ranked based on criteria Criteria and weights are constant over time No time or cost constraints Maximum payoff

Bounded Rationality Is when you: Construct a simplified model that extracts features of problems without capturing all their complexity Attempt to behave rationally Result: a “satisficing” decision (basically what you guys did)

Bounded Rationality Identify a problem Identify decision criteria Allocate weights to the criteria Develop alternatives Analyze alternatives Select an alternative Implement the alternative Evaluate decision effectiveness Identify some criteria Identify some alternatives Select a “satisficing” alternative, then stop the search

The Role of Intuition Accumulated Judgment Previous Experience “Gut-Level Feeling” 16

Problems and Decisions Well-structured problems Programmed decisions Ill-structured problems Non-programmed decisions

Procedures, Rules and Policies Procedure: Steps to solve a structured problem Rule: Explicit statement that tells what ought/ought not do Policy: Guide that establishes parameters for making-decisions

Types of Problems, Types of Decisions, and Level in the Organization Well-Structured Programmed Decisions Top Ill-Structured Type Lower Nonprogrammed 17

Decision-Making Conditions Certainty Risk Uncertainty

This sort allows you to view funds by their risk levels This sort allows you to view funds by their risk levels. The five risk levels are: Conservative Conservative to Moderate Moderate Moderate to Aggressive Aggressive

Ways Managers Approach Problems Problem avoider Problem solver Problem seeker

Dimensions of Decision-Making Way of Thinking Rational Intuitive Tolerance for Ambiguity High Low

Decision-Making Styles Analytic Conceptual Behavioral Directive Rational Intuitive Way of Thinking High Low Tolerance for Ambiguity

One Giant Leap: First Lunar Landing What type of D-M was used? (rational or intuitive?) Well or ill-structured problem? Programmed or non-programmed decision? Condition of certainty, risk, or uncertainty?