©2008 by Nelson, a division of Thomson Canada Limited 1 Management Second Canadian Edition Chuck Williams Alex Z. Kondra Conor Vibert Slides Prepared by: Kerry Rempel, Okanagan College

©2008 by Nelson, a division of Thomson Canada Limited 2 Chapter 6 Decision-Making

©2008 by Nelson, a division of Thomson Canada Limited 3 What Would You Do? Inco has invested in the Voisey Bay project at the beginning. Further investment in the project could be 5 to 10 times the amount of the first investment The risk is high, but potential payoff could be significant. Do you decide to invest further dollars in the project?

©2008 by Nelson, a division of Thomson Canada Limited 4 Learning Objectives: What is Rational Decision-Making? After reading the next two sections, you should be able to: 1.explain the steps to rationaldecision- making 2.discuss the limits to rational decision- making

©2008 by Nelson, a division of Thomson Canada Limited 5 Steps to Rational Decision-Making 1.Define the problem 2.Identify the decision criteria 3.Weight the criteria 4.Generate alternative courses of action 5.Evaluate each alternative 6.Compute the optimal decision Adapted from Exhibit 6.1

©2008 by Nelson, a division of Thomson Canada Limited 6 Define the Problem A problem is a gap between a desired state and an existing state To make decisions to solve problems, managers must: be aware of the gap be motivated to reduce the gap have the knowledge, skills, abilities, and resources to fix the problem

©2008 by Nelson, a division of Thomson Canada Limited 7 Identify Decision Criteria Decision criteria are standards used to guide judgments and decisions generally, the more criteria a solution meets, the better that solution will be

©2008 by Nelson, a division of Thomson Canada Limited 8 Weight the Criteria Which criteria are more or less important? Absolute comparisons each criterion is compared to a standard or ranked on its own merits Relative Comparisons each criterion is compared directly to every other criterion

©2008 by Nelson, a division of Thomson Canada Limited 9 Absolute Weighting of Decision Criteria for a Car Purchase Performance Criteria Starting/acceleration Fuel efficiency Handling/steering Transmission Ride quality braking Adapted from Exhibit 6.3

©2008 by Nelson, a division of Thomson Canada Limited 10 Criteria Used to Evaluate Best Company Locations Commuting distance Operating costs Tax rates Education level Labour costs Housing costs Adapted from Exhibit 6.4

©2008 by Nelson, a division of Thomson Canada Limited 11 Rankings of Cities by Selection Criteria Values Regina6.10 Saskatoon5.40 Saint John5.35 Halifax5.05 Winnipeg4.25 Edmonton3.75 Calgary3.40 Ottawa2.75 Adapted from Exhibit 6.5

©2008 by Nelson, a division of Thomson Canada Limited 12 Limits to Rational Decision-Making Bounded Rationality Risk and Decision-Making Under Risky Conditions Common Decision-making Mistakes

©2008 by Nelson, a division of Thomson Canada Limited 13 Bounded Rationality Managers try to take a rational approach to decision-making. Constrained by: limited resources attention problems memory problems expertise problems

©2008 by Nelson, a division of Thomson Canada Limited 14 Problems Associated with Bounded Rationality Exhibit 6.6

©2008 by Nelson, a division of Thomson Canada Limited 15 Choosing Solutions Maximizing decisions choosing the best solution this is impossible to do Satisficing decisions choosing the “good enough” solution fits with bounded rationality

©2008 by Nelson, a division of Thomson Canada Limited 16 Risk and Decision-Making under Risky Conditions Rationality assumes decision- making under a condition of certainty complete information and knowledge of all possible outcomes Most decisions are made under a condition of risk there exists a real possibility of losing

©2008 by Nelson, a division of Thomson Canada Limited 17 Effects of Framing on Decision-Making Positive frame a problem presented as a gain become more risk-averse Negative frame a problem presented as a loss become more risk-seeking

©2008 by Nelson, a division of Thomson Canada Limited 18 Conditions of Uncertainty The odds of winning or losing are unknown. Risk propensity: a person’s tendency to take or avoid risks a high risk propensity needed to take risks under conditions of uncertainty

©2008 by Nelson, a division of Thomson Canada Limited 19 Common Decision- Making Mistakes Over-reliance on intuition Availability bias Representative bias Anchoring and adjustment bias

©2008 by Nelson, a division of Thomson Canada Limited 20 Over-Reliance on Intuition Intuition plays a part in many managerial decisions Intuition works best for experienced managers Over-reliance can cause people to become over confident, careless, and inconsistent

©2008 by Nelson, a division of Thomson Canada Limited 21 Availability Bias Tendency of decision makers to give preference to recent information, vivid images that evoke emotions, and specific acts and behaviours that they personally observe May overlook data

©2008 by Nelson, a division of Thomson Canada Limited 22 Representative Bias Unrecognized tendency of decision makers to judge the likelihood of an event’s occurrence based on its similarity to previous events

©2008 by Nelson, a division of Thomson Canada Limited 23 Anchoring and Adjustment Bias Judgment (good-bad, large-small, yes- no) is “anchored” by an initial value Once the anchor is “dropped”, two things happen all subsequent experiences are judged by their similarity to the anchor all possible decision alternatives tend to cluster around the anchor

©2008 by Nelson, a division of Thomson Canada Limited 24 Learning Objectives: Improving Decision-Making After reading the next two sections, you should be able to: 3. describe how individual decision- making can be improved 4. explain how group decisions and group decision-making techniques can improve decision-making

©2008 by Nelson, a division of Thomson Canada Limited 25 Improving Individual Decision Making Decision rules Multivariable testing Decision software Escalation of commitment

©2008 by Nelson, a division of Thomson Canada Limited 26 Decision Rules A set of criteria that alternative solutions must meet to be acceptable to the decision maker Two types: dictionary rule minimum threshold rule

©2008 by Nelson, a division of Thomson Canada Limited 27 Multivariable Testing A systematic approach of experimentation used to analyze and evaluate potential solutions Improves decision making by: Encouraging managers to conduct small-scale experiments and let the data decide Saving time and money by using mathematical shortcuts so that just a few quick tests get 70% of the information that is needed.

©2008 by Nelson, a division of Thomson Canada Limited 28 Multivariable Testing to Increase Amusement Park Attendance on Tuesdays Adapted from Exhibit 6.8

©2008 by Nelson, a division of Thomson Canada Limited 29 Decision Software Most decision makers satisfice Most decisions are intuitive and done in an unstructured manner Decision software can make decision making more simple, faster, and easier

©2008 by Nelson, a division of Thomson Canada Limited 30 Avoiding Escalation of Commitment The tendency to stick with a “wrong” decision Usually involves an increased commitment of resources To avoid escalation: require progress reports use outside auditors change managers label decisions as experimental projects

©2008 by Nelson, a division of Thomson Canada Limited 31 Using Groups to Improve Decision-Making Advantages and pitfalls Structured conflict Nominal group technique Delphi technique Stepladder technique Electronic brainstorming

©2008 by Nelson, a division of Thomson Canada Limited 32 Advantages of Group Decision-Making Improved problem definition and increased alternative generation groups view problems from several perspectives groups can find and access more information than individuals greater information and knowledge allows for more alternative solutions to be generated Group members will be more committed to making chosen solutions work

©2008 by Nelson, a division of Thomson Canada Limited 33 Pitfalls of Group Decision-Making Groupthink It takes considerable time One or two people dominate discussions Group members don’t feel accountable for the decision and actions taken by the group

©2008 by Nelson, a division of Thomson Canada Limited 34 Groupthink A barrier to good decision-making caused by pressure within the group for members to agree with each other. Occurs when: group is insulated from different perspectives leader expresses a strong preference for one solution no established procedure for defining and exploring alternatives group members are similar in background

©2008 by Nelson, a division of Thomson Canada Limited 35 Structured Conflict C-type conflict cognitive conflict focuses on problem- and issue-related differences of opinion A-type conflict affective conflict emotional reactions to disagreements

©2008 by Nelson, a division of Thomson Canada Limited 36 Devil’s Advocacy 1.Generate a potential solution 2.Assign a devil’s advocate to criticize and question the solution 3.Present the critique of the potential solution to decision makers 4.Gather additional relevant information 5.Decide whether to use, change, or not use the originally proposed solution

©2008 by Nelson, a division of Thomson Canada Limited 37 Dialectical Inquiry 1.Generate a potential solution 2.Identify the assumptions underlying the potential solution 3.Generate a conflicting counterproposal based on the opposite assumptions 4.Have advocates of each position present their arguments and debate them 5.Decide whether to use, change, or not use the originally proposed solution

©2008 by Nelson, a division of Thomson Canada Limited 38 What Really Works Devil’s Advocacy and Dialectical Inquiry

©2008 by Nelson, a division of Thomson Canada Limited 39 Nominal Group Technique Group members independently write down as many problem definitions and alternative solutions as possible Ideas are then shared one at a time Advantages and disadvantages are discussed Ideas independently ranked Idea with the highest average rank is selected

©2008 by Nelson, a division of Thomson Canada Limited 40 Delphi Technique Assemble a panel of experts Create a questionnaire of open-ended questions Analyze, summarize and feed back members’ responses in a report Experts list reasons for agreeing or disagreeing with the report Repeat steps 3 and 4 until consensus is reached

©2008 by Nelson, a division of Thomson Canada Limited 41 Stepladder Technique Group members are added to a group discussion one at a time, existing group members listen to each new member’s ideas, and then the group shares ideas it had already discussed, discusses the old and new ideas and then makes a decision requires time to consider the problem and present ideas new members must be unaware of previous group discussion

©2008 by Nelson, a division of Thomson Canada Limited 42 Electronic Brainstorming Four brainstorming rules: 1.the more ideas, the better 2.all ideas are acceptable 3.use others’ ideas to create more ideas 4.criticism or evaluation of ideas is not allowed Use computers to manage the process

©2008 by Nelson, a division of Thomson Canada Limited 43 Advantages of Electronic Brainstorming Overcomes production blocking technology allows everyone to record their ideas as they are created Overcomes evaluation apprehension anonymous process creates free expression

©2008 by Nelson, a division of Thomson Canada Limited 44 Disadvantages of Electronic Brainstorming Greater expense Anonymity may bother people who are used to having their ideas accepted by virtue of their position Some find it difficult to express themselves in writing Lack of typing skills can frustrate participants

©2008 by Nelson, a division of Thomson Canada Limited 45 What Really Happened? Inco went ahead with the decision to develop The project began production in 2005 (six years late) The price of nickel improved At this time, the decision was profitable