Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 1 Chapter 8 Fundamentals of Decision Making

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 2 Learning Objectives State the conditions under which individuals make decisions. Describe the characteristics of routine, adaptive, and innovative decisions. Explain the three basic models of decision making.

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 3 Decision making includes defining problems, gathering information, generating alternatives, and choosing a course of action.

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 4 Conditions Under Which Decisions are Made (adapted from Figure 8.1) Risk Objective probabilities Subjective probabilities CertaintyUncertainty

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 5 Framework for Decision Making (adapted from Figure 8.2) Solution Types (Alternative Solutions) Adaptive Decisions Innovative Decisions Routine Decisions Conditions under which decisions are made Certainty Uncertainty Risk Unusual and ambiguous Known and well defined Untried and ambiguous Problem Types

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 6 Models of Decision Making The rational model prescribes a set of phases that individuals or teams should follow to increase the likelihood that their decisions will be logical and optimal.

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 7 Rational Decision-Making Model (adapted from Figure 8.3) 1 Define and diagnose problem Environmental forces 7 Follow-up and control results 6 Implement the solution selected 5 Choose among alternative solutions 4 Compare and evaluate alternative solutions 3 Search for alternative solutions 2 Set goals

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 8 A Simple Hierarchy of Goals (adapted from Figure 8.4) Corporation Increase profits per share of common stock [based on millions shares by 8% in Organizational goals Manufacturing Division Reduce manufacturing costs by average $0.50 per unit on volume of 1 million units in Total savings targeted at $500,000. Divisional goals Reduce internal and contract maintenance by $75,000 in 2006 without more that 3% equipment downtime Plant Engineering Department Departmental goals Reduce overtime for preventive maintenance inspections by 200 labor hours during 2006 without decreasing frequency of inspections. Total overtime savings estimated at $6,000. Maintenance Section Sectional goals Purchase and install microcomputer software system for monitoring bearing wear in 10 machines, reducing overtime by 600 hours for production employees overtime of $15,000. Purchase price estimated at $6,000. Mechanical Engineer Individual goals

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 9 Models of Decision Making (cont.) The bounded rationality model contends that the capacity of the human mind for formulating and solving complex problems is small, compared with what is needed for objectively rational behavior.

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 10 Bounded Rationality Model (adapted from Figure 8.5) Satisficing Decision Biases Inadequate Problem Description Limited Search for Alternatives Limited Information

Copyright © 2005 by South-Western, a division of Thomson Learning All rights reserved 11 Political Model of Decision Making (adapted from Figure 8.6) Political decision making Multiple Stakeholders with power such as: Divergence in problem definition Divergence in goals Divergence in solutions Customers Investors Employees Unions Competitors Suppliers Regulatory Agencies Legislative Bodies