chapter 14 DECISION MAKING 1

2 Decision Making The process by which members of an organization choose a specific course of action to respond to both problems and opportunities.

3 Types of Decisions Nonprogrammed Decisions: Decisions made in response to novel problems and opportunities. Programmed Decisions: Decisions made in response to recurring problems and opportunities. Often evolve from nonprogrammed decisions

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Classical Model of Decision Making 5 Classical Model of Decision Making A prescriptive model of decision making that rests on two assumptions: People have access to all the information they need to make a decision People make decisions by choosing the best possible solution to a problem or response to an opportunity

Classical Model: Four Steps 6 Classical Model: Four Steps List all alternatives from which a choice will be made. These alternatives represent different responses to the problem or opportunity. List the consequences of each alternative. The consequences are what would occur if a given alternative was selected. Consider one’s own preferences for each alternative or set of consequences and then rank the sets from most preferred to least preferred. Select the alternative that will result in the most preferred set of consequences.

Classical Model: Limitations 7 Classical Model: Limitations Decision makers do not have access to all necessary information. The amount of time and effort it would take to collect all the information might not be worthwhile. Even if they did have access to all the necessary information, decision makers would not be able to use it all. It is virtually impossible to identify the best solution to a given problem.

March & Simon’s Administrative Decision-Making Model 8 March & Simon’s Administrative Decision-Making Model A descriptive approach stressing that incomplete information, psychological and sociological processes, and the decision maker’s cognitive abilities affect decision making and that decision makers often choose satisfactory, not optimal, solutions. Psychological influences Personality and ability Perceptions Experiences and knowledge Sociological influences Groups Organizations National culture

9 Additional Concepts Satisficing: Searching for and choosing an acceptable response or solution, not necessarily the best possible one. Bounded Rationality: An ability to reason that is constrained by the limitations of the human mind itself.

10 Advice to Managers Realize that different members of an organization are going to define the same problem or opportunity in different ways depending on their personalities, abilities, knowledge, expertise, and the groups they belong to. Carefully examine how you define problems and opportunities. Explore the implications of defining these problems and opportunities in different ways. Realize there are limits to the amount of information you and your subordinates can take into account when making decisions. Focus on information that is most relevant to the decision at hand.

Sources of Error in Decision Making 11 Sources of Error in Decision Making Heuristics: The shortcuts people use to make decisions Escalation of commitment: The tendency of decision makers to invest additional time, money, or effort into what are essentially bad decisions or unproductive courses of action that are already draining organizational resources.

12 Heuristics Availability heuristic: The tendency to determine the frequency of an event and its causes by how easy events and causes are to remember. Representativeness heuristic: The tendency to predict the likelihood of an event from the extent to which the event is typical of similar kinds of events that have happened in the past. Anchoring and adjustment heuristic: The tendency to make decisions based on adjustments from some initial amount (or anchor).

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Escalation of Commitment 14 Escalation of Commitment A decision maker initially makes a decision that results in some kind of loss or negative outcome. Rather than change the course of action contained in the initial decision, the decision maker commits more time, money, or effort to the course of action. Further losses are experienced because of this escalation of commitment to a failing course of action.

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Reasons for Escalation of Commitment 16 Reasons for Escalation of Commitment Decision makers often do not want to admit to themselves or to other people that they have made a mistake. Decision makers erroneously believe that an additional commitment of resources is justified, given how much has been spent already, and may help to recoup some of the losses. Decision makers tend to take more risks when they frame or view decisions in negative terms rather than in positive terms.

Advantages of Technology 17 Advantages of Technology Technology can often help to reduce the effect of biases and heuristics on decision making. Information systems can make available much more information upon which managers can base their decisions in a form that has much more meaning and significance. Information technologies can help routinize many formerly nonprogrammed decisions and turn them into programmed ones. Technology allows managers to spend more time making nonprogrammed decisions that can raise organizational performance, and to be more creative.

18 Advice to Managers Do not give vivid or extreme instances of an event too much weight in decision making. If a vivid or extreme instance comes to mind, think about the extent to which less extreme or vivid events and causes have occurred. When making decisions, be sure to consider events and causes beyond the most recent ones. When trying to estimate the likelihood of an event or cause occurring, take into account the number of times this event or cause has actually occurred. Remember, rare events are unlikely to be repeated. Whenever you are making a decision based on adjusting some initial amount, stop and determine whether the initial amount was originally too high or too low.

19 Advice to Managers Realize that a sign of good decision making is the ability to recognize when a decision needs to be reversed. When deciding whether to commit resources to a course of action, take into account the costs only of the resources you are about to commit. Do not take into account costs that have already been incurred. If you are deciding whether to commit more resources to a course of action that has already resulted in some losses of money, time, or effort, ask yourself whether you would commit the resources if you had not already experienced the losses but had your current knowledge.

Group Decision Making Advantages Disadvantages 20 Group Decision Making Advantages Availability and diversity of members’ skills, knowledge, and expertise Enhanced memory for facts Increased capability to detect errors Greater decision acceptance Disadvantages Time Potential for groupthink

21 Groupthink A pattern of faulty decision making that occurs in cohesive groups whose members strive for agreement at the expense of accurately assessing information relevant to the decision.

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Preventing Groupthink 23 Preventing Groupthink The group leader encourages all group members to be critical of proposed alternatives, to raise any doubts they may have, and to accept criticism of their own ideas. The group leader refrains from expressing his or her own opinion and views until the group has had a chance to consider all alternatives. The group leader encourages group members to gather information pertaining to a decision from people outside the group and to seek outsiders’ perspectives on the group’s ideas. Whenever a group meets, the group leader assigns one or two members to play the role of devil’s advocate. If an important decision is being made and time allows, after a group has made a decision, the group leader holds a second meeting during which group members can raise any doubts or misgivings they might have about the chosen course of action.

Other Consequences of Group Decision Making 24 Other Consequences of Group Decision Making Diffusion of responsibility occurs when the group as a whole, rather than any one individual, is accountable for the decision. Group polarization is the tendency for groups to make more extreme decisions (either more risky or more conservative) than individuals. Potential for conflict is functional when it forces group members to evaluate alternatives carefully; however, it can become dysfunctional when group members are more concerned about winning the battle than about making a good decision.

25 Advice to Managers Use groups to make decisions when the decision requires a wide range of skills, knowledge, and expertise, or more information than a single individual could be expected to consider and remember, or when acceptance by others is necessary to implement the decision. But keep in mind that group decision making is time-consuming. Use individuals to make decisions when an individual has all the skills and knowledge necessary to make a good decision, when an individual can gather and accurately take into account all necessary information, and when acceptance by others for successful implementation is either unnecessary or likely to occur without their participation. Whenever a decision-making group is cohesive, follow the five steps to prevent groupthink. Impress on group members that each of them is responsible for helping the group make a good decision.

Group Decision-Making Techniques 26 Group Decision-Making Techniques Brainstorming is a spontaneous, participative decision-making technique that groups use to generate a wide range of alternatives from which to make a decision. The Nominal Group Technique is a decision-making technique that includes the following steps: group members generate ideas on their own and write them down, group members communicate their ideas to the rest of the group, and each idea is then discussed and critically evaluated by the group.

Group Decision-Making Techniques 27 Group Decision-Making Techniques The Delphi Technique is a decision-making technique in which a series of questionnaires are sent to experts on the issue at hand who never actually meet face to face. Benchmarking involves selecting a high-performing group or organization and using this group or organization as a model. Empowerment is the process of giving workers throughout an organization the authority to make decisions and be responsible for their outcomes.

Creativity and Innovation 28 Creativity and Innovation Creativity: A decision-making process that produces novel and useful ideas. Novel: the ideas represent new ways of thinking. Useful: the ideas have the potential to contribute to the performance and well-being of individuals, groups, and organizations. Innovation: The successful implementation of creative ideas.

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31 Advice to Managers Make sure that workers have knowledge that is relevant to the kinds of decisions they need to make. If a decision requires knowledge from a number of different areas, use a group to make the decision, and assign members to the group who bring with them some additional task knowledge. Give workers constructive feedback on what they are working on, but do not be too critical of their day-to-day activities. Do not punish workers when their creative ideas do not pan out. Be sure that extrinsic rewards are distributed to workers who have performed well and made a real contribution to the organization. Do not use extrinsic rewards to control day-to-day behaviors. Let workers know how the ideas and suggestions they come up with will affect the organization. If a group of workers is making an important decision, let them know why it is so important.