1. The Decision-Making Process

2. Objectives Identify when to use the decision making process.
Identify the eight steps of the decision making process
Identify misconceptions in the rational decision making paradigm
Identify and describe three common mistakes in decision making

3. Vocabulary Decision Problem Decision Making Process
Rational Decision Making
Certainty
Risk
Heuristic
Chapter 4 Lesson 1

4. The Decision-Making Process
The decision-making process is a set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution
Chapter 5 Lesson 1
Adapted from Fundamentals of Management, 5th Ed. By Robbins/DeCenzo, p. 121 Pearson Prentice Hall, 2005

5. The Decision Problem
Use the decision making process when you have a decision problem
A Decision Problem is a discrepancy, or gap, between the current situation (circumstances) and the desired situation (circumstances)
Examples
Desiring a new car (item)
Desiring Process Improvements

6. Step 1: Identification of a Problem
Actually, most problems that managers face aren’t that obvious. Identifying problems is a subjective business.
Managers who focus on the wrong problem, even if he or she solves them perfectly, is as ineffective as one who fails to identify the right problem and does nothing.
Managers must identify gaps, between the current situation (standard of operations) and a new desired situation (standard of operations)
Managers must identify what the new standards should be.
Past performance
Previously set goals
Comparison with some other part of the organization

7. Step 2: Identification of Decision Criteria
Decision criteria are factors that are relevant in a decision.
Every decision maker has criteria that guide a decision—even if they aren’t stated.
And what gets left off the list may be as important as what gets included.
Criterion
Price
Interior Comfort
Durability
Repair record
Performance
Handling
Chapter 5 Lesson 1

8. Step 3: Weighting Decision Criteria
Criterion
Weight
Price 10
Interior Comfort 8
Durability 5
Repair record
Performance 3
Handling 1
All criteria are not all equally important.
Step 3 in the process is to assign each one a different weight to reflect its differing importance..
Chapter 5 Lesson 1

9. Step 4: Identification of Alternatives
Jeep Cherokee
Ford Taurus
Mercedes (C230)
Pontiac GTO
Mazda Tribute
Dodge Durango
Volvo S40
Isuzu Axion
BMW 325
Audi A6
Toyota Camry
Volkswagen Passat
Managers may use brainstorming to simply identify all possible solutions.
Then the manager will reduce the options to currently viable options based on meeting the minimum criteria identified in step 2
Chapter 5 Lesson 1

10. Step 5: Analysis of Alternatives
Initial
Price
Interior
Comfort
Durability
Repair
Record
Jeep Cherokee 2 10 8 7
Ford Taurus 9 6 5
Mercedes (C230)
Pontiac GTO
Mazda Tribute
Dodge Durango 4
Volvo S40
Isuzu Axion
BMW 325
Audi A6
Toyota Camry
Volkswagen Passat
First managers will score each option against the criteria
Chapter 5 Lesson 1
Adapted from Fundamentals of Management, 5th Ed. By Robbins/DeCenzo, p. 123
Pearson Prentice Hall, 2005

11. Step 5: Analysis of Alternatives
Initial
Price
(10)
Interior
Comfort
(8)
Durability(5)
Repair
Record
(5)
Total
Jeep Cherokee
2 20
10 80
8 40
7 35 37
Ford Taurus
9 90
6 48
5 25
6 30 40
Mercedes (C230)
8 80
5 40 35
Pontiac GTO
5 40 38
Mazda Tribute
5 50
9 45
10 50 44
Dodge Durango
4 20 31
Volvo S40
4 40
8 64 42
Isuzu Axion
7 70
BMW 325
7 56
Audi A6
5 25
Toyota Camry
6 60 43
Volkswagen Passat
6 30
Then managers will combine the base score in each criteria with the weight for each criteria to come up with an overall score
Chapter 5 Lesson 1
Adapted from Fundamentals of Management, 5th Ed. By Robbins/DeCenzo, p. 123
Pearson Prentice Hall, 2005

12. Step 6: Choosing the Best Alternative
Ideally this kind of analysis puts numbers on a decision that intuitively feels right.
But here’s a tip: If you ever end up feeling dissatisfied with the result of an exercise like this, you may want to review your criteria and your weightings.
You may not have acknowledged preferences or needs correctly.
Or you may find you’ve identified another problem—
Chapter 5 Lesson 1

13. Step 7: Implementation of the Decision
Decision implementation means putting a decision into action
Enough analysis.
It’s time to buy the car!
Chapter 5 Lesson 1
Courtesy of Thinkstock Images

14. Step 8: Review the Decision
Review the decision to see whether it has really solved the problem.
Price?
Comfort?
Durability?
Repair?
Chapter 5 Lesson 1
Courtesy of Brand X Images

15. Buying a Computer Break into groups of three to five.
Use the decision-making process to prepare to buy a computer
(1) state the problem
(2) identify decision criteria
(3) weight the criteria
(4) identify alternatives
(5) analyze alternatives
(6) select an alternative based on criteria
Explain how you plan to evaluate the effectiveness of your decision
Chapter 5 Lesson 1

16. A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution.
Decision-making process
Problem
Decision criteria
Decision implementation 1
(LE400-U2C5L1:VQ5)

17. A discrepancy, or gap, between what is and what should be is called a/an
Problem.
Idea.
Conflict.
Issue. 1
(LE400-U2C5L1:LQ3)

18. Putting a decision into action is called
Moving.
Decision implementation.
Moving forward. 1
(LE400-U2C5L1:LQ4)

19. Factors that are relevant in a decision.
Decision-making process
Problem
Decision criteria
Decision implementation 1
(LE400-U2C5L1:VQ4)

20. The Rational Decision Making Paradigm
People assume that managers use rational decision making .
That is, their decision making is consistent and value-maximizing within certain constraints.
A value-maximizing decision is one that gets you as much as possible of what you say you value.
If performance is what matters most in your purchase of a car, you’ll buy the vehicle with the most powerful engine.
The problem
Is clear and
Unambiguous
A single,
well-defined
goal is to
be achieved
All alternatives
And
consequences are known
Preferences
are clear
are constant
and stable
No time or
cost constraints
Exist
Final choice
will maximize
economic
payoff
Rational Decision Making
Lead to

21. The Rational Decision Making Paradigm Assumptions
A decision maker who was perfectly rational would be fully objective and logical.
He or she would define a problem carefully and have a clear, specific goal.
What’s more, this perfectly rational decider would go through the eight steps to a decision consistently moving toward the alternative that maximizes the goal.
The problem
Is clear and
Unambiguous
A single,
well-defined
goal is to
be achieved
All alternatives
And
consequences are known
Preferences
are clear
are constant
and stable
No time or
cost constraints
Exist
Final choice
will maximize
economic
payoff
Rational Decision Making
Lead to

22. Misconceptions in Rational Decision Making Paradigm
But these assumptions often do not hold true. The rational model demands more certainty than usually exists.
Certainty, is the implication that the decision maker knows the outcome of every possible alternative.
Chapter 5 Lesson 1
Courtesy of Clipart.com

23. Misconceptions in Rational Decision Making Paradigm
Risk assessments are difficult to quantify.
Most managers have to try to assign probabilities to outcomes that may result.
This process is referred to as risk assessment.
Risk, means the probability that a particular outcome will result from a given decision
Chapter 5 Lesson 1
Courtesy of Pixland Images

24. Bounded Rationality
Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem.
A decision maker considers a handful of obvious choices, opts for highly visible choices, and will review and evaluate them only to the point of finding a good enough solution
Chapter 5 Lesson 1
Courtesy of Polka Dot Images

25. Three Common Mistakes in Decision Making
The availability heuristic is the tendency to base judgments only on information that is quickly available
heuristic – mental shortcut
The representative heuristic is the tendency for people to base judgment on the probability of things with which they are familiar
Escalation of commitment is an increased commitment to a previous decision despite negative information
Chapter 5 Lesson 1

26. The implication that the decision maker knows the outcome of every possible alternative.
Certainty
Risk
Creativity
Satisfice 1
(LE400-U2C5L1:VQ9)

27. The probability that a particular outcome will result from a given decision.
Certainty
Risk
Creativity
Satisfice 1
(LE400-U2C5L1:VQ7)

28. Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem.
Bounded rationality
Availability heuristic
Representative heuristic
Escalation of commitment 1
(LE400-U2C5L1:VQ13)

29. A kind of shortcut to decision making.
Satisifcing
Heuristic
Certainty
Coping 1
(LE400-U2C5L1:VQ11)

30. The tendency to base judgments on information that is readily available.
Bounded rationality
Availability heuristic
Representative heuristic
Escalation of commitment 1
(LE400-U2C5L1:VQ14)

31. The tendency for people to base judgment of probability on things with which they are familiar.
Bounded rationality
Availability heuristic
Representative heuristic
Escalation of commitment 1
(LE400-U2C5L1:VQ12)

32. An increased commitment to a previous decision despite negative information.
Bounded rationality
Availability heuristic
Representative heuristic
Escalation of commitment 1
(LE400-U2C5L1:VQ15)