Decision Theory “Decision: |. mel 'S1S"="mi: ‘Scientific aiechil vs aes ee _' eigenen” Presented by: Pr 7 Bina Gupta Shiva Shrestha e BIM Department,HSM 11/10/2014 See Contents « Definition ° Types of decisions ° Decision making conditions e Decision Making Process « Decision Tree Decision Styles « Decision Theories ° Group Decision Making « Improving Decision MakingDecision Making ° Decision making is a process of identifying and evaluating choices. ° Decision making is the process of choosing the best alternative from the number of available alternative. 6 toro. N Decision Making Decision making is very important in human life: In personal life, » Which profession to choose * What to have for dinner * Whether to do home work or watch movie » Whom to marry. « In Business environment, » How much to charge for a product. » Where and how much to invest . » Which candidate to hire for a job. » Which advertising media to adopt oe sinor2014 \7 ‘e Types of Decision Making Types by frequency « Programmed decisions * decision making that relate to the day to day running of an organization * predetermined rules and procedures * structured type and recurs with some frequency » Decision making is done by low level management s1itor2018 Types of Decision Making e Non-programmed decisions « decisions making with unusual and exceptional problems. Poorly structured * Decision making is done by top level management s1itor2018Types of Decision Making Types by nature ° Operating decisions Similar to programmed decision Day to day decision » Aim at maximizing the efficiency and probability of the organization's current operations. » Decision making is done by low level management team s1itor2018 Types of Decision Making ° Strategic decisions Focuses on the issues external to the organization. * Concerned with goals and objectives of the organization, selection of product- market mix etc. * Decision making is done by top level management Administrative decisions Link between operational and strategic decision deal with the issues such as rules, procedures, reward system etc. * Decision making is done by middle level management \e s1itor2018Decision Making Conditions/Environment ° Conditions of certainty Problems and alternatives are well known * Outcomes are predetermined * Conditions of uncertainty Problems are known but alternatives are unknown * Not enough knowledge about solutions ° Conditions _of_risk « Risk is involved in each actions of decision making * Outcomes are associated with risk s1itor2018 Decision Making Process | | Li] Fig: Steps in rational decision making: 5, ;2914Decision tree e Adecision tree is a graphic representation of the strategy-outcome combinations available to the decision maker. e Adecision tree consists of nodes, branches, probability estimates, and payoffs. ° There are two types of nodes: decision nodes and chance nodes. » Adecision node is usually represented by a square and indicates places where a decision- maker must make a decision. s1itor2018 Decision tree » The chance node is represented by a circle and indicates a point, at which the decision-maker will discover the response to his decision, i.e. different possible outcomes occurred from a chosen course of action. s1itor2018s1itor2018 Decision Styles ° There are four decision making styles: * Directive * Analytical » Conceptual * Behavioral s1itor2018Decision Styles « Directive: * The group leader solves the problem, using the information he possesses. » He/she does not consult with anyone else nor seek information in any form. * This style assumes that the leader has sufficient information to examine all the relevant options and make an effective decision, but that is rarely the case. oe sinor2014 x a Decision Styles Anal: « When the leader does not possess sufficient information to make an effective decision, they will need to obtain information or skill from others. * They may not tell them what the problem is; normally, they simply asks for information. The leader then evaluates the information and makes the decision. oe sinor2014 x SHDecision Styles The leader explains the situation to the group or individuals whom he provides with relevant information, and together they generate and evaluate many possible solutions. * This style tends to be have a long-term perspective and, as a result, will be more creative and expansive in their approach entailing a higher level of risk for the long-term benefit of the organization. eg \@ ) 7 Decision Styles ° Behavioral: The leader explains the situation to the group or individuals and provides the relevant information. * Together they attempt to reconcile differences and negotiate a solution that is acceptable to all parties. eg \@ )Decision Theories ° Classical De: n theory: Classical view assumes that decision making is based on rational process and always follows the sequence of steps for decision making. 1) Obtain the information End up with a ‘When faced with 2) Evaluate the information decision that serves decision making [>| 3) Match the choice with | —*] the objective ofthe objectives organization Fig: The classical mode of decision making s1itor2018 Decision Theories ¢ Behavioral Theory of Decision Making: » Developed By Herbert Simon « Based on administrative model i.e. how decisions are made 1. Use incomplete and When faced with the imperfect information and end up with decision situation, || 2. Are constrained by bounded || * décision that ‘managers actually. rationality may or may not 3. Tend to satisfies Serve the interests Fig: Behavioral model of decision making. s1itor2018Decision Theories « The two main component of this theory are: i. Bounded Rationality: * Decision maker is limited in their Rationality because of different factors such as: Attitude Ability Education Benefits Skills Habits s1itor2018 Decision Theories ii. Satisfying: » Decision Maker tries to satisfy organization objectives with his best efforts Satisfactory solution is obtained s1itor2018 ASGroup Decision Making ° Process of choosing best alternative from the available alternatives » Alternative is chosen through group discussion e Each member actively involved in decision making « Better and effective decision can be made s1itor2018 Group Decision Making ° Group formation: Group Formation Dealing with tensions and defining fF min Gein e wow eas cer ine [aPerferming: Waturation Disbanding: nrelationships And celebrating the nd task performance, Foc achievements. Bullsing relationships and working together s1itor2018 ASGroup Decision Making Advantages « Synergy: Ideas obtained from many minds * Sharing of information * Qualitative decision ° Overcome difficult problems Build leadership skill ° Disadvantages: * Time consuming » Misunderstanding because of poor communications s1itor2018 Improving the Decision Making e Some of the techniques employed to make the group decision making process more effective and decision making more efficient are: Brainstorming « Nominal Group Technique (NGT) * Delphi Technique * Electronic Meeting s1itor2018 2Improving the Decision Making e Brainstorming: * Ideas are generated for specific problem through group creativity » Group of people consist from five to ten It emphasizes on the generation of large number of ideas « This technique is used in advertising and some other fields 6 toro. S A 7 Improving the Decision Making ° Nominal Group Technique (NGT): * The nominal group technique restricts discussion or interpersonal communications during the decision making process « The group meets face-to-face » Each member presents one idea to the group Discussion and ranking is done High ranked idea is used for decision making oe toro. S AImproving the Decision Making Delphi Techniques: « A Delphi technique is the modification of NGT Each individual member independently writes down comments, suggestions and solution * All the comments are sent to a central location, where they are compiled « Finally decisions are made in written form through consensus (2) sinor2014 SS a 7 Improving the Decision Making Electronic Meeting Electronic Meeting is one of the techniques that combine the NGT with sophisticated computer technology. « Each member communicate by writing comments by using computer terminals oe sinor2014 SS SHoi ANY QUESTIONS