1. Management, by Williams South-Western College Publishing Copyright © 2000 Chapter 5 Decision Making

2. Management, by Williams South-Western College Publishing Copyright © 2000 2 What Would You Do? 4Mercedes has lost market share 4Costs must be reduced 4Will employees have to be laid off? 4Are there creative alternatives?

3. Management, by Williams South-Western College Publishing Copyright © 2000 3 After discussing this section you, should be able to: Learning Objectives What is Rational Decision Making? ¬explain the steps to rational decision making. ­discuss the limits to rational decision making.

4. Management, by Williams South-Western College Publishing Copyright © 2000 4 Blast From The Past 4Rational decision making can be traced back to Benjamin Franklin’s “moral algebra” 4Frederick W. Taylor Tscientific study of work Tscientifically select, train, and develop workers Tcooperate with employees Tpartnership between employees and management

5. Management, by Williams South-Western College Publishing Copyright © 2000 5 Steps to Rational Decision Making Identify Decision Criteria Generate Alternative Course of Action Adapted from Figure 5.1 Define the Problem Evaluate Each Alternative Compute the Optimal Decision Weight the Criteria

6. Management, by Williams South-Western College Publishing Copyright © 2000 6 Define the Problem 4Problem exists when there is a gap between a desired state and an existing state 4To make decisions about problems, managers must: Taware of the gap Tmotivated to reduce the gap Thave the knowledge, skills, abilities, and resources to fix the problem

7. Management, by Williams South-Western College Publishing Copyright © 2000 7 Weight the Criteria 4Absolute comparisons Teach criterion is compared to a standard or ranked on its own merits 4Relative comparisons Teach criterion is compared directly to every other criterion

8. Management, by Williams South-Western College Publishing Copyright © 2000 8 Adapted from Table 5.1

9. Management, by Williams South-Western College Publishing Copyright © 2000 9 Adapted from 5.2

10. Management, by Williams South-Western College Publishing Copyright © 2000 10 Criteria Ratings Used to Evaluate the Best Locations for Insurance Companies Source: K. Galloway, “America's Best Insurance Cities,” Best's Review/Property ‑ Casualty Insurance Edition, 1 November 1994, 38 Adapted From Table 5.3

11. Management, by Williams South-Western College Publishing Copyright © 2000 11 Cities Ranked by Optimal Value and Average Ratings Source: K. Galloway, “America's Best Insurance Cities,” Best's Review/Property ‑ Casualty Insurance Edition, 1 November 1994, 38 Adapted From Table 5.4

12. Management, by Williams South-Western College Publishing Copyright © 2000 12 Been There, Done That Disney’s “Gong Shows” 4New movie ideas are pitched to top management Tdon’t worry about egos and feelings T“healthy” tension between the business and creative side of movie making

13. Management, by Williams South-Western College Publishing Copyright © 2000 13 Limits to Rational Decision Making Bounded Rationality Risk & Risky Conditions Common Decision Making Mistakes

14. Management, by Williams South-Western College Publishing Copyright © 2000 14 Bounded Rationality 4Managers try to be rational Tthey are restricted by real-world constraints Tcannot be completely rational 4Four constraints on rational decision making

15. Management, by Williams South-Western College Publishing Copyright © 2000 15 Four Constraints to Rational Decision Making Limited Resources Information Overload Memory Problems Expertise Problems

16. Management, by Williams South-Western College Publishing Copyright © 2000 16 Choosing Solutions 4Maximizing decisions Tchoosing the optimal solution Trequires fully rational decision conditions 4Satisficing decisions Tchoosing the “good enough” solution Tmaximization is not possible due to constraints Tfits with bounded rationality

17. Management, by Williams South-Western College Publishing Copyright © 2000 17 Common Decision-Making Mistakes Over Reliance on Intuition Availability Bias Representative Bias Anchoring and Adjustment Bias

18. Management, by Williams South-Western College Publishing Copyright © 2000 18 Back to the Future Decision Software Slays Satisficing? 4DecideRight software Thelps to organize decision options Tranks options on criteria you select Texplains how rankings were determined

19. Management, by Williams South-Western College Publishing Copyright © 2000 19 Over Reliance on Intuition 4Intuition plays a part in many managerial decisions 4Intuition works best for experienced managers 4Over use, however, causes decision makers to ignore available data

20. Management, by Williams South-Western College Publishing Copyright © 2000 20 Availability Bias 4The tendency of decision makers to give preference to recent information, vivid images that evoke emotions, and specific acts and behaviors that they personally observed 4May overlook “rational data”

21. Management, by Williams South-Western College Publishing Copyright © 2000 21 Representative Bias 4When decision makers judge the likelihood of an event’s occurrence based on its similarity to previous events and their likelihood of occurrence 4We ignore objective data that does not fit our experiences

22. Management, by Williams South-Western College Publishing Copyright © 2000 22 Anchoring & Adjustment Bias 4When judgment (good-bad, large-small, yes-no, etc.) is “anchored” by an initial value 4Once the anchor is “dropped,” two things happen: Tall subsequent experiences are judged by their similarity to the anchor Tall possible decision alternatives tend to cluster around the anchor

23. Management, by Williams South-Western College Publishing Copyright © 2000 23 Risk & Decision Making under Risky Conditions 4Rationality assumes a certain decision condition Tcomplete information and knowledge of all possible outcomes 4Most decisions made under conditions of risk Tthere exists a real possibility of failure

24. Management, by Williams South-Western College Publishing Copyright © 2000 24 4A large car manufacturer has recently been hit with a number of economic difficulties, and it appears as if three plants need to be closed and 6,000 employees laid off. The vice- president of production has been exploring alternative ways to avoid this crisis. She has developed two plans: TPlan A: This plan will save one of three plants and 2,000 jobs. TPlan B: This plan has a 1/3 probability of saving all three plants and 6,000 jobs, but has a 2/3 probability of saving no plants and no jobs.

25. Management, by Williams South-Western College Publishing Copyright © 2000 25 4A large car manufacturer has recently been hit with a number of economic difficulties, and it appears as if three plants need to be closed and 6,000 employees laid off. The vice- president of production has been exploring alternative ways to avoid this crisis. She has developed two plans: TPlan C: This plan will result in the loss of two of the three plants and 4,000 jobs. TPlan D: This plan has a 2/3 probability of resulting in the loss of all three plants and all 6,000 jobs, but has a 1/3 probability of losing no plants and no jobs.

26. Management, by Williams South-Western College Publishing Copyright © 2000 26 Framing Effects on Decision Making 4Positive Frame Ta problem presented as a gain Tbecome more risk-averse 4Negative Frame Ta problem presented as a loss Tbecome more risk-seeking + -

27. Management, by Williams South-Western College Publishing Copyright © 2000 27 Conditions of Uncertainty 4The odds of winning or losing are unknown 4Risk propensity Ta person’s willingness to take risks Ta high risk propensity need by individuals in uncertain conditions

28. Management, by Williams South-Western College Publishing Copyright © 2000 28 After discussing this section you should be able to: Learning Objectives Improving Decision Making ®describe how rules and testing can improve decision making. ¯explain how group decisions and group decision making techniques can improve decision making.

29. Management, by Williams South-Western College Publishing Copyright © 2000 29 Using Rules & Testing to Improve Decision Making Decision Rules Multivariable Testing

30. Management, by Williams South-Western College Publishing Copyright © 2000 30 Decision Rules 4A set of criteria that alternative solutions must meet to be acceptable 4Two types: Tdictionary Tminimum threshold

31. Management, by Williams South-Western College Publishing Copyright © 2000 31 Multivariable Testing 4A much more systematic approach to analyzing and evaluating potential solutions 4Improves decision making by: Tforces decisions made based on data Tencouraging the simultaneous evaluation of several potential solutions

32. Management, by Williams South-Western College Publishing Copyright © 2000 32 Multivariable Testing to Increase Amusement Park Attendance on Tuesdays Adapted from Table 5.5

33. Management, by Williams South-Western College Publishing Copyright © 2000 33 Using Groups to Improve Decision Making Advantages and Pitfalls Structured Conflict Nominal Group Technique Delphi Technique Electronic Brainstorming

34. Management, by Williams South-Western College Publishing Copyright © 2000 34 Advantages of Group Decision Making 4Improved problem definition Tview problems from multiple perspectives Tfind the cause of the problem 4Generate more alternative solutions Thave access to greater information than individuals Tinvolvement leads to greater decision commitment

35. Management, by Williams South-Western College Publishing Copyright © 2000 35 Pitfalls of Group Decision Making 4Groupthink 4It takes more time 4One or two people dominate discussions

36. Management, by Williams South-Western College Publishing Copyright © 2000 36 Groupthink 4Internal pressures prevent the group from openly evaluating all alternatives 4Most likely: Tthe group is insulated from different ideas Tthe group leader stifles discussions Tthere is no established procedure for defining and exploring alternatives Tgroup members have similar backgrounds and experiences

37. Management, by Williams South-Western College Publishing Copyright © 2000 37 Structured Conflict 4C-type conflict Tcognitive conflict Tfocuses on problem-related differences of opinion 4A-type conflict Taffective conflict Temotional reactions to disagreements

38. Management, by Williams South-Western College Publishing Copyright © 2000 38 Devil’s Advocacy - 5 Steps Generate a potential solution Assign a devil’s advocate to criticize and question the solution Gather additional relevant information Present the critique of the potential solution to key decision makers Decide whether to use, change or not use the original proposed solution

39. Management, by Williams South-Western College Publishing Copyright © 2000 39 Dialectical Inquiry Generate a potential solution Identify the assumptions underlying the potential solution Have advocates of each position present their arguments and debate them Generate a conflicting counterproposal based on the opposite assumptions Decide whether to use, change or not use the original proposed solution

40. Management, by Williams South-Western College Publishing Copyright © 2000 40 What Really Works? Devil’s Advocacy & Dialectical Inquiry Devil’s Advocacy 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Probability of success58% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Probability of success55% Dialectical Inquiry

41. Management, by Williams South-Western College Publishing Copyright © 2000 41 Nominal Group Technique 4Decreases negative group behaviors by having group members work individually Tbegin with “quiet time” Tmembers write out ideas 4Ideas are then posted to the group 4Advantages/disadvantages are discussed 4Members individually reflect on discussion 4Ideas are then ranked by the group

42. Management, by Williams South-Western College Publishing Copyright © 2000 42 Delphi Technique Select a panel of experts Experts list their reasons agreeing/disagreeing with report Compile and summarize expert responses into written report Create a questionnaire of open-ended questions Repeat steps 3 & 4 until consensus is reached

43. Management, by Williams South-Western College Publishing Copyright © 2000 43 Electronic Brainstorming 4Four brainstorming rules: Tthe more ideas, the better Tall ideas are acceptable Tuse others’ ideas to create more ideas Tcriticism or evaluation of ideas is not allowed 4A modification of traditional brainstorming Tuse computers to manage the process

44. Management, by Williams South-Western College Publishing Copyright © 2000 44 Advantages of Electronic Brainstorming 4Overcomes production blocking Ttechnology allows everyone to record their ideas as they are created Tno ideas lost “waiting your turn” to speak 4Overcomes evaluation apprehension Tanonymity creates free expression

45. Management, by Williams South-Western College Publishing Copyright © 2000 45 Disadvantages of Electronic Brainstorming 4Greater expense 4No automatic acceptance of ideas because of one’s position 4Some find it difficult to express themselves in writing 4Lack of type skills can frustrate participants

46. Management, by Williams South-Western College Publishing Copyright © 2000 46 What Really Happened? 4They defined the problem as low revenues caused by poor customer service 4Employees reengineered the work 4Their “unique” process led to innovation