Chapter 2 - Making Decisions PDF

MAKING DECISIONS Chapter 2 DECISION-MAKING  Decision ◦ Making choices from two or more alternatives  The Decision-Making Process ◦ Identifying a problem and decision criteria and allocating weights to the criteria ◦ Developing, analyzing, and selec...

MAKING DECISIONS Chapter 2 DECISION-MAKING  Decision ◦ Making choices from two or more alternatives  The Decision-Making Process ◦ Identifying a problem and decision criteria and allocating weights to the criteria ◦ Developing, analyzing, and selecting an alternative that can resolve the problem ◦ Implementing the selected alternative ◦ Evaluating the decision’s effectiveness 2 STEP 1: IDENTIFICATION OF A PROBLEM  Problem ◦ A discrepancy between an existing and desired state of affairs  Characteristics of Problems ◦ A problem becomes a problem when a manager becomes aware of it ◦ There is pressure to solve the problem ◦ The manager must have the authority, information, or resources needed to solve the problem 4 STEP 2: IDENTIFICATION OF DECISION CRITERIA  Decision criteria are factors that are important (relevant) to resolving the problem:  Costs that will be incurred (investments required)  Risks likely to be encountered (chance of failure)  Outcomes that are desired (growth of the firm) Step 3: Allocation of Weights to Criteria Decision criteria are not of equal importance: – Assigning a weight to each item places the items in the correct priority order of their importance in the decision- making process 5 STEP 4: DEVELOPMENT OF ALTERNATIVES  Identifying viable alternatives  Alternativesare listed (without evaluation) that can resolve the problem Step 5: Analysis of Alternatives  Appraising each alternative’s strengths and weaknesses – An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3. 6 STEP 6: SELECTION OF AN ALTERNATIVE Choosing the best alternative The alternative with the highest total weight is chosen Step 7: Implementation of the Alternative Putting the chosen alternative into action – Conveying the decision to and gaining commitment from those who will carry out the decision 7 STEP 8: EVALUATION OF DECISION EFFECTIVENESS  The soundness of the decision is judged by its outcomes:  How effectively was the problem resolved by outcomes resulting from the chosen alternatives?  If the problem was not resolved, what went wrong? 8 EXHIBIT 6-5 DECISIONS MANAGERS MAKE MAKING DECISIONS  Rationality  Managers make consistent, value-maximizing choices with specified constraints.  Assumptions are that decision makers:  Are perfectly rational, fully objective, and logical.  Have carefully defined the problem and identified all viable alternatives i.e. no ambiguity  Have a clear and specific goal  Will select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–10 MAKING DECISIONS (CONT’D)  Bounded Rationality  Managers make decisions rationally, but are limited (bounded) by their ability to process information.  Assumptions are that decision makers:  Does not have knowledge about all alternatives so will not analyze all alternatives  Will satisfice*—choose the first alternative encountered that satisfactorily solves the problem —rather than maximize the outcome of their decision by considering all alternatives and choosing the best.  Escalation of Commitment  Increasing or continuing a commitment to previous decision despite mounting evidence that the decision may have been wrong. 6–11  MAKING  Role of Intuition  Intuitive decision making  Making decisions on the basis of experience, feelings, and accumulated judgment  One-third of managers and other employees said they emphasized “gut feeling” over cognitive problem solving 6–12 EVIDENCE-BASED MANAGEMENT  Evidence-based management – The systematic use of the best available evidence to improve management practice.  Crowdsourcing – Relying on a network of people outside the organization’s traditional set of decision makers to solicit ideas via the internet. TYPES OF PROBLEMS AND DECISIONS  Structured Problems  Involve goals that clear.  Are familiar (have occurred before).  Areeasily and completely defined— information about the problem is available and complete.  Programmed Decision A repetitive decision that can be handled by a routine approach. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–14  TYPES OF PROGRAMMED DECISIONS  A Procedure  A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.  A Rule  An explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure.  A Policy  A general guideline for making a decision about a structured problem. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–15 AN EXAMPLE OF POLICY, PROCEDURE, AND RULE  Policy  Accept all customer-returned merchandise.  Procedure  Followall steps for completing merchandise return documentation.  Rules  Managers must approve all refunds over $50.00.  No credit purchases are refunded for cash. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–16 PROBLEMS AND DECISIONS (CONT’D)  Unstructured Problems  Problems that are new or unusual and for which information is ambiguous or incomplete.  Problems that will require custom-made solutions.  Nonprogrammed Decisions  Decisions that are unique and nonrecurring.  Decisions that generate unique responses. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–17 EXHIBIT 6-7 PROGRAMMED VERSUS NONPROGRAMMED DECISIONS DECISION-MAKING CONDITIONS  Certainty A ideal situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.  Risk A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–19 DECISION-MAKING CONDITIONS  Uncertainty  Limitedinformation prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–20 EXHIBIT 6-11 COMMON DECISION- MAKING ERRORS AND BIASES 6–21 DECISION-MAKING BIASES AND ERRORS  Heuristics  Using “rules of thumb” to simplify decision making.  Overconfidence Bias  Holdingunrealistically positive views of one’s self and one’s performance.  Immediate Gratification Bias  Choosingalternatives that offer immediate rewards and that to avoid immediate costs. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–22  DECISION-MAKING BIASES AND ERRORS (CONT’D)  Anchoring Effect  Focusing and accepting initial information and ignoring subsequent information.  Selective Perception  Selectively organizing and interpreting events based on the decision maker’s biased perceptions.  Confirmation Bias  Seekingout information that reaffirms past choices and discounting contradictory information. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–23 DECISION-MAKING BIASES AND ERRORS (CONT’D)  Framing Bias  Selecting and highlighting certain aspects of a situation while ignoring other aspects.  Availability Bias  Losing decision-making objectivity by focusing on the most recent events.  Representation Bias  Drawing analogies and seeing identical situations when none exist.  Randomness Bias  Creating unfounded meaning out of random events. Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–24 DECISION-MAKING BIASES AND ERRORS (CONT’D)  Sunk Costs Errors  Forgetting that current actions cannot influence past events rather relate only to future consequences.  Self-Serving Bias  Taking quick credit for successes and blaming outside factors for failures.  Hindsight Bias  Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the- fact). Copyright © 2005 Prentice Hall, Inc. All rights reserved. 6–25