DECISION MAKING SKILLS

- Dr. Ian Dillion

Sr. Training Consultant – LL
AGENDA
1.
Introduction

2. Rational
decision making

3. Thought
Experiment

4. Conclusion
The Steps of
Rational
Decision
Making
 Rational decision making

“Decision making is the selection based on some

criteria from two or more possible alternatives”.
(G. R. Terry)

Decision making is a deliberative activity.

 Rational decision-making

Decision making is a maximising activity.

Should select alternatives that present the best-

expected scenario (according to specified criteria)
and with the highest probability of outcome.
The 6-Step Rational Decision-Making Model
1. Define the problem
2. Identify decision
criteria
3. Weight the criteria
4. Generate
alternatives
5. Rate each alternative
on each criterion
6. Select optimal
decision
 Deciders must correctly
identify and define the real
problem.
1. Define the problem
If they don’t, they might try to
solve the wrong problem,
worsen the real problem or
create a new problem.

(C) 2017 Language Link Limited

2. Identify the criteria

Deciders usually want/need to accomplish more than one

objective.

Example: a CEO is required to take decisions that maximise

profitability, provide dividends, ensure worker wellbeing, etc.

Deciders must identify all relevant criteria.

 While a decider might have more
than one objective, not all
objectives are equally important.

3. Weight the Must calculate the relative

value of identified objectives.
criteria

Then must weight criteria to

optimise decision making.

(C) 2017 Language Link Limited

4. Generate
The more important the decision, the
alternatives
more attention is directed to developing
alternatives.

Similarly, the more people affected by the

problem, the more likely an organization
will conduct a prolonged and
comprehensive search for alternatives
(Ehrgott, 2011).
 The process for generating alternatives is:

4. Generate  Specify the goal of the decision.

 Search for alternative ways to achieve this goal.
alternatives
 Collect information regarding each alternative
and its likely outcome.
 Analyse the probability that each alternative
will result in the achievement of various
outcomes.
 Determine the extent to which those outcomes
will contribute to the achievement of the goals
being sought.
5. Rate each alternative on each criterion

Rational deciders are able

to assess the potential
Ask, how effectively will
consequences of selecting
each alternative achieve
each alternative solution
defined criteria?
on each of the identified
criteria.

(C) 2017 Language Link Limited

 The process consists in:

multiplying the ratings in step 5 by

6. Selecting the weight of each criteria
optimal decision adding up the weighted ratings across
all of the criteria for each alternative
choosing the solution with the
highest sum of weighted ratings
(C) 2017 Language Link Limited
  accurately define the problem
To make a  identify all relevant criteria
rational decision,  accurately weight all of the criteria according
to their preferences
you must be able  know all relevant alternatives
to:  accurately assess each alternative based on
each criterion
 accurately calculate and choose the
alternative with the highest perceived value
 Lack of information
Rational
models: limits
 Time or cost constraints

 Limited usable memory

 Limited intelligence
 The rational model is normative.
Rational model
 It’s based on assumptions outlining
how a decision should be made
rather than describing how a
decision is actually made.
 It also assume that deciders try to
make optimal decisions.
 Normative decision theorists are Normative/descriptive
interested in providing the means to
make optimal decisions.
 Descriptive decision researchers
consider the bounded ways in which
decisions are actually made.
  Herbert Simon argued that rationality is
Bounded bounded.
rationality  We try to make rational decisions, but
we often lack information and are
limited by various internal and external
constraints.
 The irrational decisions that result are
based on intuitive biases or heuristics
that overlook the full range of possible
consequences.
  In practice, deciders don’t
examine examining all possible
Bounded alternatives; they simply search
Rationality until they find a solution that
meets a certain acceptable level of
performance.

 Deciders do not maximise; they

satisfice.
Herbert Simon “Most human decision making,
whether individual or organizational,
explains is concerned with the discovery and
“satisficing” as selection of satisfactory alternatives;
follows: only in exceptional cases is it
concerned with the discovery and
selection of optimal alternatives.”
(pp. 140-141)
Normative/descriptive

 Why use a descriptive approach when the normative

approach leads to optimal decisions?
 Answer: most people do not follow good advice.
 Why? Because they fall victim to a variety of errors that
undermine their intuition.
 One needs to understand these biases before moving on
to wiser decision strategies.
1. Thought experiment

You personally decided

to hire a new manager.
Should you dismiss
Early reports indicate
him?
that he is performing
badly.
1. Thought experiment

You decide to invest

more in his training. Two When should you give up
months later, he is still on your investment?
performing badly.

(C) 2017 Language Link Limited

When should
Deciders often continue with
you give up? previously selected courses of action
because they have “too much
invested to quit.”

However, ill-judged persistence can

cost time and money.
Non-rational
The degree to which an individual
escalation or organisation escalates
commitment to a previously
selected course of action to a
point beyond which a rational
model of decision making would
prescribe.
  Time and expenses already invested in
Sunk costs a decision are ‘sunk costs’ - old
investments that cannot be recovered.
 Sunk costs should not be considered in
any future course of action.
 Our reference point should be our
current situation, and we should assess
alternatives by evaluating only the
future costs and benefits associated
with each alternative.
Confirmation bias

Let’s return to the hiring example. Research suggests your

perception of the employee’s performance is also biased by
your initial decision to hire them.
For example, you may notice supporting information, while
ignoring information that undermines your initial hiring
decision.
This confirmation bias can intensify non-rational
commitment.
  When making a decision, search for
disconfirming evidence to balance out the
confirming information we naturally seek.
Disconfirming  Perhaps establish monitoring systems that help
you check your perception before making
evidence subsequent decisions.
 For example, get an objective observer to
evaluate our openness to disconfirming
information.

(C) 2017 Language Link Limited

  Individuals develop heuristics, or general rules
of thumb, to deal with decision-making.
 Intended to reduce information processing.
 Not guaranteed to be optimal or, logical, but
Heuristics instead sufficient for reaching an immediate
goal.
 Examples include using intuition, educated
guesses, or common sense.

(C) 2017 Language Link Limited

  By providing managers with efficient
ways of dealing with complex problems,
heuristics produce good decisions a lot
of the time.
 However, heuristics also can lead to
Heuristics & systematically biased mistakes.
cognitive bias  Cognitive bias occurs in situations in
which an individual inappropriately
applies a heuristic when making a
decision.

(C) 2017 Language Link Limited

 This heuristic causes people to judge
Representativeness probabilities “by the degree to which
heuristic A is representative of B, that is, by
the degree to which A resembles B”
(Tversky & Kahneman, 1974)

(C) 2017 Language Link Limited

 Essentially, people make a judgment Representativeness
of similarity. heuristic
 They replace a difficult question with
an easy question. Instead of
calculating probability, they’re asking
themselves, “Does this seem like
that?”
 Can lead to great decisions. Can also
lead to errors.
2. Thought experiment

(C) 2017 Language Link Limited

Mike is finishing his MBA at a famous university. He is very
interested in the arts and once considered a career as a
musician. Is he more likely to take a job:

 in arts management?
 as a management consultant for an internet start up
company?
2. Thought experiment: results

 Most people approach this problem by analysing the

extent to which Mike is representative of their image of
individuals who take jobs in each of the two areas.
 The majority think that Mike is more likely to move into
arts management.
 However, Mike is more likely to work for the internet start
up.
2. Thought experiment

 If you chose ‘arts management’, you overlooked base-rate

information.
 A lot of people in arts management may fit Mike’s
description, but there are undoubtedly more
management consultants fitting Mike’s description
because of the relative preponderance of MBAs in
internet start-ups.
2. Thought experiment

 People use base rate data when no other information is

included.
 In the absence of a description of Mike, people choose
‘internet start-up’ based on the frequency of this career path
for MBAs.
 Descriptive information seems to overwhelm logical base-rate
reasoning.
 Pay attention to base-rates.
Key takeaway
 Therefore, don’t get
lost in the details!

 The very specificity

that makes detailed
scenarios seem
representative also
lessens their
probability.
Thank
you.