Decision Making and Rationality

Decision Making

• Decision-making is the process of choosing one alternative from two or more options.
• A decision is a choice made after considering available options.
• Key factors to consider when making a decision include:
  • The problem
  • The decision criteria
  • The weights assigned to each criteria
  • Available alternatives
  • The strengths and weaknesses of each alternative
  • The implementation of the selected alternative
  • The evaluation of the decision's effectiveness and outcome

Rational Decision Making

• Assumes that decision-makers are perfectly rational and completely objective.
• Factors such as carefully defined problems, identified viable alternatives, specific goals, and maximizing organizational outcomes contribute to the assumptions of rational decision-making.

Bounded Rationality

• Recognizes that decisions are made rationally within the limitations of the decision-maker's ability to process information.
• Decision-makers may not seek out or have access to all information about alternatives, leading to satisficing, or choosing the first acceptable option rather than seeking the perfect solution.
• Escalation of commitment (continuing to invest in a failing course of action despite negative evidence) can be a factor in decision-making.

Intuitive Decision Making

• Decisions made based on accumulated experience, feelings, and judgment rather than purely logical reasoning.

Types of Decisions

• Structured Problems: Defined goals, familiarity, and readily available information characterize structured problems.
• Programmed Decisions: Repetitive decision that can be handled by familiar routines and procedures.
  • Procedures: Step-by-step guidelines to respond to a structured problem.
  • Rules: Explicit statements limiting actions of managers or employees.
  • Policy: General guidelines for decisions about structured problems.
• Unstructured Problems: New, unusual problems with ambiguous or incomplete information requiring custom solutions.
• Nonprogrammed Decisions: Unique and nonrecurring decisions requiring unique responses.

Decision-Making Conditions

• Certainty: Outcomes are known with certainty, allowing for a clear decision.
• Risk: The likelihood of outcomes can be estimated, allowing for a calculated decision.
• Uncertainty: Limited information prevents accurate estimation of outcomes, relying on intuition, hunches, and experience.
• Decision Choice Approaches:
  • Maximax: Optimistic approach seeking the maximum possible payoff.
  • Maximin: Pessimistic approach seeking the maximum possible outcome at the minimum level.
  • Minimax: Approach aiming to minimize the maximum possible regret.

Decision-Making Styles

• Linear Thinking Style: Focuses on external data and facts, processing information through logic and reason.
• Nonlinear Thinking Style: Relies on internal sources of information, intuition, feelings, and hunches.

Decision-Making Biases and Errors

• Heuristics: Rules of thumb used to simplify decision making.
• Overconfidence Bias: Overestimating one's own abilities and performance.
• Immediate Gratification Bias: Favoring immediate rewards and avoiding immediate costs.
• Anchoring Effect: Fixating on initial information, ignoring subsequent information.
• Selective Perception Bias: Interpreting information based on personal perceptions.
• Confirmation Bias: Seeking out information that confirms past choices and disregarding conflicting information.
• Framing Bias: Highlighting certain aspects while ignoring others when framing a situation.
• Availability Bias: Focusing on recent events, losing objectivity.
• Representation Bias: Drawing analogies between situations that are not similar.
• Randomness Bias: Finding meaning in random events.
• Sunk Costs Errors: Not recognizing that current actions cannot influence past events.
• Self-Serving Bias: Taking credit for success, blaming outside factors for failures.
• Hindsight Bias: Mistakenly believing events could have been predicted after knowing the outcome.

Explore the essential principles of decision making, including rational decision-making and bounded rationality. This quiz covers important concepts such as choice alternatives, decision criteria, and the evaluation of decision outcomes. Test your understanding of how these theories apply to effective decision making.