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ANNOTATED OUTLINE 1. INTRODUCTION Every manager should strive to make good decisions because the overall uality of managerial decisions has a ma!or influence on organi"ational success or failure# The concept of decision making is e$plored in this chapter# 2. THE DECISION-MAKING PROCESS % decision is a choice made from t&o or more alternatives# The decision-ma in! "#ocess is a set of eight steps that include identifying a problem' selecting an alternative' and evaluating the decision’s effectiveness# ()ee E$%i&i' (-1 and Po)e#Poin' s*ide (-( for an illustration of the decision*making process#+ %# )tep ,: Identifying a problem. % "#o&*em is a discrepancy bet&een an e$isting and a desired state of affairs# -n order to identify a problem' you as a manager should recogni"e and understand the three characteristics of problems: ,# .ou must be a&are of the problem# /e sure to identify the actual problem rather than a symptom of the problem# 0# .ou must be under pressure to act# % true problem puts pressure on the manager to take action1 a problem &ithout pressure to act is a problem that can be postponed# 2# .ou must have the authority or resources to act# 3hen managers recogni"e a problem and are under pressure to take action but do not have necessary resources' they usually feel that unrealistic demands are being put upon them# /# C# )tep 0: )tep 2: Identifying decision criteria# Decision c#i'e#ia are Allocating weights to the criteria # The criteria )tep 0 of the decision*making process do not criteria that define &hat is relevant in a decision# identified in
.# 6# )tep 6: Selecting an alternative# This step to select the best alternative from among those identified and assessed is critical# -f criteria &eights have been used' the decision maker simply selects the alternative that received the highest score in )tep 5# 7# )tep 8: Implementing must be the alternative# The by selected effectively alternative implemented Developing alternatives# The decision maker must no& identify viable alternatives that could resolve the communicating the decision to the individuals &ho &ill be affected by it and &inning their commitment to the decision# 9# )tep :: Evaluating decision effectiveness # This last step in the decision*making process assesses the result of the decision to determine &hether or not the problem has been resolved# . THE MANAGER AS DECISION MAKER %t this point in the study of Chapter )i$' students &ill learn about the manager as a decision maker and ho& decisions are actually made in organi"ations# -n this section' students e$amine ho& decisions are made' the types of problems and decisions faced by real*life managers' the conditions under &hich managers make decisions' and decision*making styles# %# Managers can make decisions on the basis of rationality' bounded rationality' or intuition# .' sho&ing evaluation of her alternatives' reflect the &eighting for each alternative' as illustrated in E$%i&i's (-2 and (-.have e ual importance' so the decision maker must assign a &eight to each of the items in order to give each item accurate priority in the decision# E$%i&i' (-2 and Po)e#Poin' s*ide (-+ list the criteria and &eights for Joan’s franchise purchase decision# D# )tep 4: problem# E# )tep 5: Analyzing alternatives# Each of the alternatives must no& be critically analy"ed by evaluating it against the criteria established in )teps 0 and 2# E$%i&i' (-. and Po)e#Poin' s*ide (-11 sho& the values that Joan assigned to each of her eight alternatives for a franchise opportunity# E$%i&i' (-and Po)e#Poin' s*ide (-1.
an increased commitment to a previous decision despite evidence that it may have been &rong# .+ goals are clear and alternatives limited' (0+ time pressures are minimal and the cost of finding and evaluating alternatives is lo&' (2+ the organi"ational culture supports innovation and risk taking' and (4+ outcomes are concrete and measurable# 0# 0o1nded #a'iona*i'2# -n spite of these limits to perfect rationality' managers are e$pected to >appear? rational as they make decisions# /ecause the perfectly rational model of decision making isn’t realistic' managers tend to operate under assumptions of bounded rationality' &hich is decision*making behavior that a# is rational' but limited (bounded+ managers they by an individual’s ability to process information# @nder bounded rationality' in make accept sa'is/icin! b# decisions' &hich solutions that are >good enough#? Managers’ decision making may be strongly influenced by the organi"ation’s culture' internal politics' po&er considerations' called and by a o/ phenomenon esca*a'ion commi'men'.that is' making choices that are consistent and value*ma$imi"ing &ithin specified constraints# -f a manager could be perfectly rational' he<she &ould be completely logical and ob!ective# The assumptions of rationality are summari"ed in E$%i&i' (-( and Po)e#Poin' s*ide (1.# Ra'iona* decision ma in!# Managerial decision making is assumed to be rational..# a# =ational decision making assumes that the manager interests# is making decisions in the best interests of the organization' not in his<her o&n b# The assumptions of rationality can be met i/ the manager is faced &ith a simple problem in &hich (.
# S'#1c'1#ed "#o&*ems are straightfor&ard' familiar' and easily a defined# -n dealing use &ith a structured problems' manager may "#o!#ammed decision5 &hich is a repetitive decision that can be handled by a routine approach# Managers rely on three types of programmed decisions: a# % "#oced1#e is a series of interrelated se uential steps that can be used to respond to a structured problem# b# c# 0# % #1*e is an e$plicit statement that tells managers &hat they can or cannot do# % "o*ic2 is a guideline for making decisions# Uns'#1c'1#ed "#o&*ems are problems that are ne& or unusual and for &hich information is ambiguous or incomplete# These problems are best handled by a non"#o!#ammed decision that is a uni ue decision that re uires a custom*made solution# 2# E$%i&i' (-6 and Po)e#Poin' s*ide (-27 describe differences a# bet&een programmed versus nonprogrammed decisions# %t higher levels in the organi"ational hierarchy' .2# In'1i'i3e decision ma in!# Managers also regularly use their intuition# -ntuitive decision making is a subconscious process of making decisions on the basis of e$perience and accumulated !udgment# E$%i&i' (-. and Po)e#Poin' s*ide (-24 describe the five different aspects of intuition# a# Making decisions on the basis of gut feeling doesn’t necessarily happen independently of rational analysis1 the t&o complement each other# b# %lthough intuitive decision making &ill not replace the rational decision*making process' it does play an important role in managerial decision making# /# Types of Aroblems and Decisions Managers encounter different types of problems and use different types of decisions to resolve them# .
# Ce#'ain'2 is a situation in &hich a manager can make accurate decisions because all outcomes are kno&n# 6e& 0# managerial decisions are made under the condition of certainty# More common is the situation of #is 5 in &hich the decision maker is able to estimate the likelihood of certain outcomes# E$%i&i' (-+ sho&s an e$ample of ho& a manager might make decisions using >e$pected value'? considering the conditions of risk# 2# Unce#'ain'2 is a situation in &hich the decision maker is not certain and cannot even make reasonable probability alternatives# a# The choice of alternative is influenced by the limited amount of information available to the decision maker# b# -t’s .8 0+ % pessimistic manager &ill pursue a maximin choice' ma$imi"ing the minimum possible payoff# ()ee E$%i&i' (-14 and Po)e#Poin' s*ide (-26.managers deal more often in &ith and difficult' make to unstructured nonprogrammed b# problems decisions attempting resolve these problems and challenges# Bo&er*level managers handle routine decisions themselves' using programmed decisions# They let upper*level managers handle unusual or difficult decisions# C# Decision*Making Conditions .+ also %n influenced optimistic by the psychological &ill follo& a the orientation of the decision maker# manager maximax choice' ma$imi"ing estimates concerning outcomes of ma$imum possible payoff# ()ee E$%i&i' (-14 and Po)e#Poin' s*ide (-26.8 2+ The manager &ho desires to minimi"e the ma$imum regret &ill opt for a minimax .
8 Managers have different styles in making decisions and solving problems# Cne perspective proposes that people differ along t&o dimensions in the &ay they approach decision making# .lo& or high# 0# Diagramming these t&o dimensions lead to a matri$ sho&ing four different decision*making styles# ()ee E$%i&i' (-12 and Po)e#Poin' s*ide (-.+ a# The di#ec'i3e s'2*e is characteri"ed by lo& tolerance for ambiguity and a rational &ay of thinking# b# The ana*2'ic s'2*e is one characteri"ed by a high tolerance for ambiguity and a rational &ay of thinking# c# The conce"'1a* s'2*e is characteri"ed by a high tolerance for ambiguity and an intuitive &ay of thinking# d# The &e%a3io#a* s'2*e is characteri"ed by a lo& tolerance for ambiguity and an intuitive &ay of thinking# 2# -n reality' most managers have both a dominant style and alternate styles' &ith some managers relying almost e$clusively on their dominant style and others being more fle$ible' depending on the particular situation# E# Decision*Making /iases and Errors Managers .# Cne dimension is an individual’s way of thinking.# use different styles and >rules of thumb? (%e1#is'ics+ to simply their decision making# verconfidence bias occurs &hen decision makers tend to think that they kno& more than they do or hold unrealistically positive vie&s of themselves and their performance# 0# Immediate gratification bias describes decision makers &ho tend to &ant immediate re&ards and avoid ..4. rational or intuitive# The other is the individual’s tolerance for ambiguity.choice# D# Decision*Making )tyles ()ee E$%i&i' (-11 and Po)e#Poin' s*ide (-..
+ provide an overvie& of managerial decision making# Managers &ant to make good decisions because doing so is in .and Po)e#Poin' s*ide (-.# Self$serving bias is e$hibited by decision makers &ho are ..immediate costs# 2# The anchoring effect describes &hen decision makers fi$ate on initial information as a starting point and then' once set' fail to ade uately ad!ust for subse uent information# 4# Selective perception bias occurs &hen decision makers selectively organi"e and interpret events based on their biased perceptions# 5# !onfirmation bias occurs &hen decision makers seek out information that reaffirms their past choices and discount 6# information that contradicts their past !udgments# "raming bias occurs &hen decision makers select and highlight certain aspects of a situation &hile e$cluding others# 8# Availability bias is seen &hen decision makers tend to remember events that are the most recent and vivid in their memory# :# Decision makers &ho sho& representation bias assess the likelihood of an event based on ho& closely it resembles other events or sets of events# D# .E# #andomness bias describes the effect &hen decision makers try to create meaning out of random events# The sunk costs error is &hen a decision maker forgets that current choices cannot correct the past# -nstead of ignoring sunk costs' the decision maker cannot forget them# -n assessing choices' the individual fi$ates on past e$penditures rather than on future conse uences# .0# uick to take credit for their successes and blame failure on outside factors# %indsight bias is the tendency for decision makers to falsely believe' once the outcome is kno&n' that they &ould have accurately predicted the outcome# 6# )umming @p Managerial Decision Making .# E$%i&i' (-1.
@nderstand cultural differences# Gno& &hen it is time to call it uits# @se an effective decision*making process# /uild highly reliable organi"ations (9=Cs+ that practice five habits: .their best interests# 0# =egardless of the decision' it has been shaped by a number of factors' &hich have been discussed in Chapter )i$# -. C.S <ORLD Today’s business &orld revolves around making decisions' &hich are often risky ones made &ith incomplete or inade uate information and under intense time pressure# 9o& can managers make effective decisions under these conditionsF A. B. but also recognize the limits to your ability to anticipate. DECISION MAKING 9OR TODA:.# 0# 2# solution# 4# Embrace comple$ity# Do not be tricked by your o&n success# Defer to the e$perts on the front lines# Bet une$pected circumstances provide the 5. D. Anticipate. .
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