1. Foundations of Decision Making
© 2008 Prentice Hall, Inc. All rights reserved.

2. 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
© 2008 Prentice Hall, Inc. All rights reserved.

3. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

4. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

5. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

6. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

7. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

8. How Do Problems and Decisions 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.
© 2008 Prentice Hall, Inc. All rights reserved.

9. 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.
© 2008 Prentice Hall, Inc. All rights reserved.

10. 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
© 2008 Prentice Hall, Inc. All rights reserved.

11. Group Decision Making Advantages Disadvantages
Makes 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
Can result in minority domination that influences decision process
Can produce increased pressures to conform to the group’s mindset (groupthink)
Can create 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?
© 2008 Prentice Hall, Inc. All rights reserved.

12. When Are Groups Most Effective?
High Need for 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.
© 2008 Prentice Hall, Inc. All rights reserved.

13. National Culture and Decision-Making Practices
Decision-making practices differ from country to country by:
Participation: groups, teams, individuals
Power distance: who will make the decision
Level of risk: uncertainty avoidance
Efficiency of decision making: pace of decisions
Alternatives considered: many or few
Consensus building: ringsei
Decision-making style: rational, autocratic or participative
© 2008 Prentice Hall, Inc. All rights reserved.

14. Quantitative Module QUANTITATIVE DECISION-MAKING AIDS
© 2008 Prentice Hall, Inc. All rights reserved.

15. Queuing Theory Queuing Theory
Balancing the cost of having a waiting line against the cost of service to maintain that line.
where P = probability of n customers waiting in line, n = 3 customers, arrival rate = 2 per minute, and service rate = 4 minutes per customer
© 2008 Prentice Hall, Inc. All rights reserved.

16. Economic Order Quantity Model
Fixed-Point Reordering System
A preestablished point for replenishing inventory
Economic Order Quantity (EOQ)
A technique for balancing purchase, ordering, carrying, and stock-out costs to derive the optimum quantity for a purchase order.
D = forecasted demand for the item
OC = cost of placing each order
V = value or purchase price of the item
CC = carrying cost (as percentage) of total inventory
© 2008 Prentice Hall, Inc. All rights reserved.

17. Economic Order Quantity Example
Forecast sales: 4,000 units a year
Unit cost: $50.00 each
Ordering cost: $35.00 per order
Carrying costs: 20% of unit’s value.
© 2008 Prentice Hall, Inc. All rights reserved.