Learning Outcomes After reading this chapter, I will be able to: Describe the steps in the decision-making process. Identify the assumptions of the rational decision-making model. Explain the limits to rationality. Define certainty, risk, and uncertainty as they relate to decision making. Describe the actions of the bounded-rational decision maker.

Learning Outcomes (cont’d) After reading this chapter, I will be able to: Identify the two types of decision problems and the two types of decisions that are used to solve them. Define heuristics and explain how they affect the decision-making process. Identify four decision-making styles. Describe the advantages and disadvantages of group decisions. Explain three techniques for improving group decision making.

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

Examples of Planning-Function Decisions What are the organization’s long-term objectives? What strategies will best achieve those objectives? What should the organization’s short-term objectives be? What is the most efficient means of completing tasks? What might the competition be considering? What budgets are needed to complete department tasks? How difficult should individual goals be? Exhibit 4.1

The Decision-Making Process The decision-making process begins when a problem is identified (step 1). Problem identification can be challenging. Most problems do not come with neon identification signs. Furthermore, the manager who identifies and solves the wrong problem is no better than the manager who identifies a problem and does nothing. Making a comparison between their current state of affairs and some standard, such as past performance or previously set goals, helps managers identify problems in the workplace. Exhibit 4.2

Criteria and Weight in Car-Buying Decision (Scale of 1 to 10) CRITERION WEIGHT Price 10 Interior comfort 8 Durability 5 Repair record 5 Performance 3 Handling 1 After identifying a problem, the manager should select appropriate decision criteria (step 2). These criteria reflect the factors which the manager thinks are relevant in a decision. Because all criteria are not equally important, the manager must prioritize each one by allocating weights to the decision criteria (step 3): that is, indicating the relative importance of the relevant criteria by assigning a weight to each. Exhibit 4.3

Assessment of Car Alternatives Next, the manager must list, but not evaluate, feasible problem-solving alternatives (step 4). Then, he or she must analyze each one (step 5). As each alternative is evaluated against the criteria, the strengths and weakness of each alternative will become evident. Exhibit 4.4

Weighting of Vehicles (Assessment Criteria X Criteria Weight) Obviously, most decisions contain judgments which are reflected in the criteria chosen, the weights assigned to them, and the evaluation of the alternatives. Then, the manager should select the alternative that scored the highest in the fifth step (step 6). Exhibit 4.5

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.

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.

Assumptions of Rationality The model contains seven assumptions: Problem clarity means the problem is clear and unambiguous. Single goal means that a single, well-defined goal is to be achieved. Known options mean that all relevant criteria and viable alternatives can be identified. Clear preferences show that criteria and alternatives have been ranked and weighted. Constant preferences reflect constant criteria and stable weights over time. No time or cost constraints allow for full information about criteria and alternatives. Maximum payoff means a decision maker will pick the alternative with the highest yield. Exhibit 4.6

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.

Three Elements of Creativity Creativity The ability to produce novel and useful ideas Source: T. M. Amabile. “Motivating Creativity in Organizations,” Califormia Management Review (Fall 1997), p. 43. Copyright © 1997, by The Regents of the University of California. Reprinted by permission of the Regents. Exhibit 4.7

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.

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.

How Do Problems 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.

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.

Types of Problems, Types of Decisions, and Level in the Organization The four organizational levels are top, middle, and first-line managers and operative employees. At which of these levels should decisions be made? Recurring or routine decisions, programmed decisions, should be made by lower levels of management: middle-level managers make coordinating decisions with short-term implications and first-line managers make localized decisions about what needs to be done. Nonrecurring or unique decisions, nonprogrammed decisions, are made by top management. Operative employees make job-related decisions to determine how a job should be done. Decisions are seldom fully programmed or fully nonprogrammed. Few programmed decisions can eliminate individual judgment completely; unusual decision-making situations can be helped by considering programmed routines. If possible, management decisions should be programmed. At the top of the organization, the programmed approach is not realistic. Most problems that top management confront are nonrecurring. There are strong economic incentives for top management to create policies, standard operating procedures, and rules to cut costs by minimizing the need for managers to exercise discretion guide other managers, The more nonprogrammed the decision, the greater the judgment required to make it. Exhibit 4.8

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

Decision Making: Styles Directive style Characterizes the low tolerance for ambiguity and a rational way of thinking of individuals who are logical and efficient and typically make fast decisions that focus on the short term. Analytic style Characterizes the high tolerance for ambiguity combined with a rational way of thinking of individuals who prefer to have complete information before making a decision. Personality and individual differences affect our decisions. Two of these variables are particularly relevant to organizational decisions: the individual’s decision-making style and level of moral development. The decision-styles model above identifies four approaches to decision making. The model illustrates that people differ along two dimensions: in their thinking styles (some are logical and rational, others intuitive and creative); in their tolerance for ambiguity. People using the directive style dislike ambiguity and prefer rationality. Those using the analytic style confront ambiguity by demanding more alternatives.

Decision Making: Styles (cont’d) Conceptual style Individuals who tend to be very broad in outlook, to look at many alternatives, and to focus on the long run and often look for creative solutions. Behavioral style Individuals who think intuitively but have a low tolerance for uncertainty; they work well with others, are open to suggestions, and are concerned about the individuals who work for them. Individuals using the conceptual style consider the “big picture” and seek multiple alternative. Those using a behavioral style work well with others and are receptive to suggestions.

Decision-Making Styles Exhibit 4.9

Group Decision Making Advantages Disadvantages Make 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 Minority domination can influence decision process Increased pressures to conform to the group’s mindset (groupthink) 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?

When Are Groups Most Effective? 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.

Improving Group Decision Making Brainstorming An idea-generating process that encourages alternatives while withholding criticism. Nominal group technique A decision-making technique in which group members are physically present but operate independently. Electronic meeting A type of nominal group technique in which participants are linked by computer. Group decision making can be improved by using the following techniques: brainstorming, nominal groups, and electronic meetings. To overcome conformity pressures that can stifle creative problem solving, managers can use brainstorming: an idea-generating process that specifically encourages all alternatives by withholding any criticism of those alternatives. The nominal group technique requires that group members must be present during the meeting, but they must operate independently. This technique obtains input from all group members but it does not restrict independent thinking. An electronic meeting is a type of nominal group technique in which participants are linked by computer. Electronic meetings have several advantages: anonymity, honesty, and speed. But, several drawbacks also exist: those who type well outshine those who are eloquent but lack keyboarding skills; those with the best ideas do not get credit for them; and the process lacks the informational richness of face-to-face communication. But, this technology is in its infancy. For example, real-time video conferencing is reinventing electronic meetings.