GENERAL MODELS OF DECISION MAKING

What is a decision?

A decision takes place when a person chooses among two or more alternatives in order to solve a problem.
What is a problem?

A problem is a discrepancy between the ideal and the real.

Types of Decisions 1. Programmed versus Non-programmed Decisions

Programmed decisions routine decisions standard responses to uncomplicated problems procedures already exist for how to appropriately handle the problem (there are rules or guidelines to follow) handled by lower-level managers Examples: a.) Reordering office supplies; b.) Accepting a check; c.) Granting an employee a day of personal

Types of Decisions
Non-programmed decisions
non-routine decisions
unique responses to complicated problems requires imaginative or creative thinking

handled by higher-level managers

Examples: a.) How to reduce costs in operating a store;

b.) Should the firm invest in a new technology?

Types of Decisions 2. Decision Environment

Certainty exists when the facts are well known and the outcome can be predicted accurately Example: A retail store manager might predict with certainty that more hours of operation will lead to more sales. Decision making is easiest under conditions of certainty.

Types of Decisions
Decision making is easiest under conditions of certainty.
Risk involves incomplete certainty regarding the outcomes of various

alternative courses of action there is some awareness of the probability associated with the alternatives based on past experiences, predictions can be made about the various outcomes Example: The management might be able to estimate how employees will react to an early retirement program based on previous company experience.
Uncertainty exists when a decision must be based on limited or no factual

information

1. Rational Model / Classical decision model

views the environment as certain and stable

views the manager as rational

the decision maker: a.) faces a clearly defined

problem, b.) knows all possible action alternatives and their consequences, and c.) chooses the optimum alternative often used as a model of how managers should make decisions Many economists view decision making in this manner.

2. Simons Normative Model / Bounded Rationality Model / Behavioral decision model

the decision maker accepts a world with bounded

rationality points out that decision makers have cognitive limitations and act only in terms of what they perceive in a given situation the decision maker: a.) faces a problem that is not clearly defined, b.) has limited knowledge of possible action alternatives and their consequences, c.) chooses a satisfactory alternative encourages satisficing decision making

BOUNDED RATIONALITY peoples finite (limited) mental abilities, combined with external influences over which they have little or no control, prevent them from making entirely rational decisions. Emphasizes that humans use problem-solving strategies that are reasonably rapid, reasonably accurate, and that fit the quantity and type of information available. People do the best with what they have while making decisions.

SATISFICING Decision Making decisions that suffice in providing a minimum standard of satisfaction.
Managers explore a limited number of options

and choose an acceptable decision rather than the optimum decision. This is the response of managers when dealing with incomplete information. Managers assume that the limited options they examine represent all options.

HEURISTICS a rule of thumb in decision making.

The seven steps in the process reflect both the classical and behavioral models.

1.Identify and diagnose the problem

identifying a gap between desired and actual conditions a thorough diagnosis of the problem is important because the

real problem may be different from the one suggested at first look 2. Establish decision criteria what constitutes a good decision decision criteria the standards of judgment used to evaluate alternatives the more explicit the criteria, the better the decision will be

The seven steps in the process reflect both the classical and behavioral models.

3. Develop creative alternatives

all kinds of possibilities are explored in this step even if

they seem unrealistic failed decisions often result from a limited search for alternatives creativity is such a key part of decision making

The seven steps in the process reflect both the classical and behavioral models.
Identify and diagnose the problem
"What really is our problem?"

Establish decision criteria

"What are we trying to accomplish?"

Develop creative alternatives

"Let's dream up some great ideas."

Evaluate the alternatives

"Some of these ideas are good; some are wacko."

Choose one alternative

"This alternative is a winner."

Implement the decision

"Now let's take action."

Evaluate and control

"How really good was that idea?

Repeat if necessary

The seven steps in the process reflect both the classical and behavioral models.

4. Evaluate the alternatives

compare the relative value of the alternatives examine the pros and cons of each alternative and consider

its feasibility compare each pros and cons against the decision criteria established

5. Choose one alternative

to actually make a decision an important factor influencing this step is the degree of

uncertainty associated with it people who prefer not to take risks choose alternatives that have the most certain outcomes risk takers are willing to choose alternatives with uncertain

The seven steps in the process reflect both the classical and behavioral models.

6. Implement the decision

convert the decision into action many decisions represent wasted effort because nobody is

held responsible for implementing them a decision is not a good one if employees resist its implementation

7. Evaluate and control

evaluate how effectively the chosen alternative solved the

problem and met the decision criteria a fruitful way of evaluating a decision is to observe its implementation results of the decision obtained are controlled when they are the ones set forth during the problem-identification stage

 Intuition a key personal characteristic that influences

INFLUENCES ON DECISION MAKING CONTRIBUTING TO BOUNDED RATIONALITY

decision making Personality and Cognitive Intelligence Emotional Intelligence how effectively you manage your feelings and read other people affect the quality of decisions Quality and Accessibility of Information Political Considerations present an ethical challenge Crisis and Conflict less rational and more emotional Values of the Decision Maker Value on the personal welfare of employees Pursuit of excellence Attempting to preserve the status quo Procrastination delay taking action without a valid reason

INFLUENCES ON DECISION MAKING CONTRIBUTING TO BOUNDED RATIONALITY

OVERCONFIDENCE BIAS
leads to predictable mistakes because the

same errors are repeated systematically personality traits, values, political factors overconfidence do not acknowledge the true uncertainty

THE NATURE OF CREATIVITY

Creativity
process of developing good ideas To be an effective decision maker, you must

think creatively. Three Perspectives: Steps in the creative process: 1. Opportunity or problem recognition 2. Immersion 3. Incubation 4. Insight 5. Verification and application

THE NATURE OF CREATIVITY

Characteristics of creative people
Knowledge Intellectual abilities Personality

Conditions necessary for creativity

Expertise, Creative-Thinking Skills, and Internal

Motivation Environmental Needs Conflict and Tension Encouragement from others and having creative coworkers Mood Moderate Time Pressures

ENHANCING AND IMPROVING CREATIVITY

Creative problem solving requires an ability to

overcome traditional thinking Brainstorming develop mental flexibility Idea quotas demand that workers come up with good ideas Heterogeneous groups diverse group brings various viewpoints Financial Incentives likely to spur imaginative thinking Architecture and physical layout to fire up creativity, harness energy, and enhance the flow of knowledge and ideas Inspiration Creativity training

GROUP DECISION MAKING

Groups tend to reduce cognitive biases and

can call on combined skills and abilities Role of synergy group members stimulate new solutions through the process of mutual influence and encouragement in the group Role of social decision schemes

Advantages and Disadvantages of Group-Aided Decision Making

Advantages
1. Greater pool of knowledge 2. Different perspectives 3. Greater comprehension required 4. Increased acceptance

Disadvantages
1. Social pressure 2. Minority domination 3. Amount of time 4. Goal displacement