Overview of Decision Making Harrison, Ch. 1 Fred Wenstøp

2 Focus  Managerial decision making at the organizational level  How can decision making techniques be improved? The emphasis is on normative theory To improve, it is useful to understand what is going on –descriptive theory is important as well

Fred Wenstøp3 Diverse Viewpoints of Goals of Decision Making  A decision may be considered good if It has been arrived at through consensus None of those affected shows bad reactions It is the alternative with the highest payoff All alternatives have been carefully scrutinized All relevant information has been available It has the best expected consequences How do these viewpoints link to ethics ?

Fred Wenstøp4 Definition of Decision  A decision is  a moment in an ongoing process for evaluating alternatives for meeting an objective  at which expectations about a particular course of action  impel the decision maker to select that course of action which is most likely to result in attaining the objective  A decision is first of all an act  but an act that requires judgement  A judgement requires a choice to become a decision 

Fred Wenstøp5 The Scope of Decision Making  Decision making occurs at several levels Metaorganisation Organization Individual Group

Fred Wenstøp6 Individual Decision Making  Problems with rationality of beliefs  Examples Logic (three cards) Updating beliefs with new information (LIZA) Consistency (Linda) Establishing theories –(2 4 6)

Fred Wenstøp7 Consistency of beliefs I  Wason 1966  Cards: A D 3 7  Each card has a number on one side and a letter on the other  Rule: If there is an A on one side, there is a 3 on the other  Which cards would you turn to check whether the rule has been applied properly?

Fred Wenstøp8 Consistency of beliefs II  Tversky & Kahneman 1983 Linda is 31 years old, single, out- spoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Please, rank the following statements by their probability. A. Linda is a teacher in an elementary school B. Linda works in a bookstore and takes Yoga classes C. Linda is active in the feminist movement D. Lina is a psychiatric social worker E. Linda is a member of the league of Women Voters F. Linda is a bank teller G. Linda is an insurance salesperson H. Linda is a bank teller and is active in the feminst movement

Fred Wenstøp9 Individual Decision Making Failure to Use a Rational Decision Rule  Common decision rule  Select the most important decision criterion  Delete those alternatives that do not meet the aspiration level for this criterion  Continue with the next criterion until only one alternative remains  A lexicographic decision rule  Select the most important decision criterion  Keep only the alternatives with maximum score on this  Continue with the next criterion until only one alternative remains

Fred Wenstøp10 The Cuban Missile Crisis Alternatives Objectives Do nothing Diplomatic approach to Castro Diplomatic pressures InvasionAir strikes Blockade Missiles removed immediately US world power leadership US defences preserved Favourable world opinion Favourable US public sentiment Not stronger Sino-Soviet pact No worse Soviet- US relations

Fred Wenstøp11 Group Decision Making  Strong points  Discuss consequences  Edit and react to documents  Find new alternatives  Narrow scope of alternatives  Create a climate of involvement  Represent stakeholders  Formulate managerial objectives  Reach conclusions that benefit the total organization rather than particular individuals  Weak points  Difficulty i drafting policies  Slow  Reactive rather than proactive

Fred Wenstøp12 Organizational Decision Making  Simon: decision making is synonymous with managing  Decision making at the organizational level takes place primarily through the basic functions of the manager  Planning  Organizing  Staffing  Directing  Controlling

Fred Wenstøp13 Decision Categories  Category I  Programmable, routine, computational, negotiated, compromise  Structure Procedural, predictable, recurring  Strategy Reliance upon rules and principles, habitual reactions, prefabricated response  Category II  Nonprogrammable, unique, judgemental, creative, adaptive, innovative, inspirational  Structure Novel, unstructured, consequential, complex  Strategy Reliance on judgement, intution and creativity; general problem solving processes