Decision Making Chapter 2 PDF

Be A Better Decision-Maker A key to success in management and in your career is knowing how to be an effective decision-maker. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved What is a Decision? Decision—a choice among two or more alternatives Copyright © 2018 Pearson Education, Ltd...

Be A Better Decision-Maker A key to success in management and in your career is knowing how to be an effective decision-maker. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved What is a Decision? Decision—a choice among two or more alternatives Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-1 Decision-Making Process Exhibit 2-1 shows the eight steps in the decision-making process. This process is as relevant to personal decisions as it is to corporate decisions. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 1: Identify a Problem • Problem: an obstacle that makes it difficult to achieve a desired goal or purpose. • Every decision starts with a problem, a discrepancy between an existing and a desired condition. • Example: Amanda is a sales manager whose reps need new laptops. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 2: Identify the Decision Criteria • Decision criteria are factors that are important to resolving the problem. • Example: Amanda decides that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 3: Allocate Weights to the Criteria • If the relevant criteria aren’t equally important, the decision maker must weight the items in order to give them the correct priority in the decision. • Example: The weighted criteria for Amanda’s computer purchase are shown in Exhibit 2-2. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-2 Important Decision Criteria Criterion Weight Memory and storage 10 Battery life 8 Carrying weight 6 Warranty 4 Display quality 3 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 4: Develop Alternatives • List applicable alternatives that could solve the problem. • Example: Amanda identifies eight laptops as possible choices (shown in Exhibit 2-3). Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-3 Possible Alternatives Laptop Memory and Storage Battery Life Carrying Weight Warranty Display Quality 10 3 10 8 5 Lenovo IdeaPad 8 5 7 10 10 Apple MacBook 8 7 7 8 7 Toshiba Satellite 7 8 7 8 7 Apple MacBook Air 8 3 6 10 8 10 7 8 6 7 4 10 4 8 10 HP ProBook Dell Inspirion HP Pavilion Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 6: Select an Alternative • Choose the alternative that generates the highest total in Step 5. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-4 Evaluation of Alternatives Laptop Memory and Storage 10 Battery Life 8 Carrying Weight 6 Warranty 100 24 Lenovo IdeaPad 80 Apple MacBook Total 4 Display Quality 3 60 32 15 231 40 42 40 30 232 80 56 42 32 21 231 Toshiba Satellite 70 64 42 32 21 229 Apple MacBook Air 80 24 36 40 24 204 100 56 48 24 21 249 40 80 24 32 30 206 HP ProBook Dell Inspirion HP Pavilion Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 7: Implement the Alternative • Put the chosen alternative into action. • Convey the decision to those affected and get their commitment to it. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Process Step 8: Evaluate Decision Effectiveness • Evaluate the result or outcome of the decision to see if the problem was resolved. • If it wasn’t resolved, what went wrong? Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-5 Decisions Managers May Make: Planning and Organizing Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-5 Decisions Managers May Make: Leading and Controlling Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Approaches for Decision Making: 1-Rationality • Rational Decision-Making: choices that are logical and consistent and maximize value • Assumptions of rationality: – Rational decision maker is logical and objective – Problem faced is clear and unambiguous – Decision maker would have clear, specific goal and be aware of all alternatives and consequences – The alternative that maximizes achieving this goal will be selected – Decisions are made in the best interest of the organization Copyright © 2018 Pearson Education, Ltd. All Rights Reserved 2-Bounded Rationality • Bounded rationality: decision making that’s rational, but limited by an individual’s ability to process information • Satisfice: accepting solutions that are “good enough” • Escalation of commitment: an increased commitment to a previous decision despite evidence it may have been wrong (likely influenced by the organization’s culture, internal politics, power considerations) Copyright © 2018 Pearson Education, Ltd. All Rights Reserved 3-Intuition • Intuitive decision-making: making decisions on the basis of experience, feelings, and accumulated judgment Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-6 What is Intuition? Exhibit 2-6 shows the five different aspects of intuition identified by researchers studying managers’ use of intuitive decision-making. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Evidence-Based Management • Evidence-based management (EBMgt): the systematic use of the best available evidence to improve management practice. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Types of Decisions: Structured Problems and Programmed Decisions • Structured problems: straightforward, familiar, and easily defined problems • Programmed decisions: repetitive decisions that can be handled by a routine approach Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Types of Programmed Decisions • Procedure: a series of sequential steps used to respond to a well-structured problem • Rule : an explicit statement that tells managers what can or cannot be done • Policy: a guideline for making decisions Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Types of Decisions: Unstructured Problems and Nonprogrammed Decisions • Unstructured problems: problems that are new or unusual and for which information is ambiguous or incomplete • Nonprogrammed decisions: unique and nonrecurring and involve custom made solutions Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-7 Programmed vs Nonprogrammed Decisions Characteristic Programmed Decisions Nonprogrammed Decisions Type of problem Structured Unstructured Managerial level Lower levels Upper levels Frequency Repetitive, routine New, unusual Information Readily available Ambiguous or incomplete Goals Clear, specific Vague Time frame for solution Short Relatively long Solution relies on… Procedures, rules, policies Judgment and creativity Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Conditions • Certainty: a situation in which a manager can make accurate decisions because all outcomes are known • Risk: a situation in which the decision maker is able to estimate the likelihood of certain outcomes • Uncertainty: a situation in which a decision maker has neither certainty nor reasonable probability estimates available Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Managing Risk • Managers can use historical data or secondary information to assign probabilities to different alternatives • This is used to calculate expected value—the expected return from each possible outcome—by multiplying expected revenue by the probability of each alternative Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-8 Expected Value Event Expected Revenues Probability Expected Value of Each Alternative Heavy snowfall $850,000 0.3 $255,000 Normal snowfall $725,000 0.5 $362,000 Light snowfall $350,000 0.2 $70,000 Blank Blank Total expected revenue: $687,500 For each Event in the table, Expected Revenues multiplied by Probability gives the Expected Value of Each Alternative. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-9 Payoff Matrix Visa Marketing Strategy (in millions of dollars MasterCard CA 1 MasterCard CA 2 MasterCard CA 3 Strategy 1 13 14 11 Strategy 2 9 15 18 Strategy 3 24 21 15 Strategy 4 18 14 28 Exhibit 2-9 shows the various Visa strategies and the resulting profit, depending on the competitive action (CA) used by MasterCard. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-10 Regret Matrix Visa Marketing Strategy (in millions of dollars MasterCard CA 1 MasterCard CA 2 MasterCard CA 3 Strategy 1 11 7 17 Strategy 2 15 6 10 Strategy 3 0 0 13 Strategy 4 6 7 0 Exhibit 2-10 shows the regret for each category, which is found by subtracting all possible payoffs in each category from the maximum possible payoff for each given event, in this case for each competitive action. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Heuristics • Heuristics or “rules of thumb” can help make sense of complex, uncertain, or ambiguous information. (Similar situation in the past) • However, they can also lead to errors and biases in processing and evaluating information. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-11 Common Decision-Making Biases Exhibit 2-11 identifies 12 common decision errors of managers and biases they may have. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Biases and Errors (1 of 4) • Overconfidence Bias: holding unrealistically positive views of oneself and one’s performance • Immediate Gratification Bias: choosing alternatives that offer immediate rewards and avoid immediate costs • Anchoring Effect: fixating on initial information and ignoring subsequent information Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Biases and Errors (2 of 4) • Selective Perception Bias: selecting, organizing and interpreting events based on the decision maker’s biased perceptions • Confirmation Bias: seeking out information that reaffirms past choices while discounting contradictory information • Framing Bias: selecting and highlighting certain aspects of a situation while ignoring other aspects Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Biases and Errors (3 of 4) • 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 © 2018 Pearson Education, Ltd. All Rights Reserved Decision-Making Biases and Errors (4 of 4) • Sunk Costs Errors: forgetting that current actions cannot influence past events and 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 © 2018 Pearson Education, Ltd. All Rights Reserved Exhibit 2-12 Overview of Managerial Decision Making Exhibit 2-12 provides an overview of managerial decision making. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Guidelines for Making Effective Decisions • Understand cultural differences • Create standards for good decision making • Know when it’s time to call it quits • Use an effective decision-making process • Develop your ability to think clearly Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Characteristics of an Effective DecisionMaking Process • Focuses on what’s important • Is logical and consistent • Acknowledges subjective and analytical thinking, blends analytical with intuitive thinking • Requires only as much information as is needed to resolve particular dilemma • Encourages the gathering of relevant information • Is straightforward, reliable, easy-to-use, flexible Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Design Thinking and Decision Making • Design thinking: approaching management problems as designers approach design problems Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Big Data and Decision-Making • Big data: the vast amount of quantifiable data that can be analyzed by highly sophisticated data processing • Can be a powerful tool in decision making, but collecting and analyzing data for data’s sake is wasted effort Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.1 • Describe the eight steps in the decisionmaking process. – – – – – – – – 1. Identify problem 2. Identify decision criteria 3. Weight the criteria 4. Develop alternatives 5. Analyze alternatives 6. Select alternative 7. Implement alternative 8. Evaluate decision effectiveness Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.2 (1 of 2) • Explain the four ways managers make decisions. – Assumptions of rationality  The problem is clear and unambiguous  A single, well-defined goal is to be achieved  All alternatives and consequences are known  The final choice will maximize the payoff Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.2 (2 of 2) • Satisficing: when decision makers accept solutions that are good enough • Escalation of commitment: managers increase commitment to a decision, even when they have evidence it may have been a wrong decision • Intuitive decision making: making decisions on the basis of experience, feelings, and accumulated judgment • Evidence-based management: a manager makes decisions based on the best available evidence Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.3 (1 of 2) • Classify decisions and decision-making conditions. – Programmed decisions are repetitive decisions that can be handled by a routine approach and are used when the problem being resolved is straightforward, familiar, and easily defined (structured). – Nonprogrammed decisions are unique decisions that require a custom-made solution and are used when the problems are new or unusual (unstructured) and for which information is ambiguous or incomplete. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.3 (2 of 2) • Classify decisions and decision-making conditions. – Certainty is a situation in which a manager can make accurate decisions because all outcomes are known. – Risk is a situation in which a manager can estimate the likelihood of certain outcomes. – Uncertainty is a situation in which a manager is not certain about the outcomes and can’t even make reasonable probability estimates Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.4 • Describe how biases affect decision-making. – The 12 common decision-making errors and biases:  Overconfidence  Immediate gratification  Anchoring effect  Selective perception  Confirmation  Framing  Availability  Representation  Randomness  Sunk costs  Self-serving  Hindsight Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.5 (1 of 2) • Identify effective decision-making techniques. – An effective decision-making process: 1. Focuses on what’s important 2. Is logical and consistent 3. Acknowledges subjective and objective thinking and blends analytical and intuitive approaches 4. Requires only “enough” information as is needed to solve a problem 5. Encourages and guides gathering relevant information and informed opinions 6. Is straightforward, reliable, easy to use, and flexible Copyright © 2018 Pearson Education, Ltd. All Rights Reserved Review Learning Objective 2.5 (2 of 2) • Design thinking: approaching management problems as designers approach design problems • Big Data: when tempered with good judgment, it can be a powerful tool in decision making Copyright © 2018 Pearson Education, Ltd. All Rights Reserved