CHAPTER 2:

DECISION
MAKING
DECISIONS WE MAKE…
DECISIONS WE MAKE…
DECISIONS WE MAKE…
DECISIONS WE MAKE…
DECISIONS WE MAKE…
DECISIONS WE MAKE…
DEFINITION
Decision-making is the action of selecting one
alternative from a set of several alternatives.

Decision-making is the process by which

managers respond to opportunities and threats by analyzing
options, and making decisions about goals and courses of action
• Decisions in response to opportunities: managers respond
to ways to improve organizational performance.
• Decisions in response to threats: occurs when managers
are impacted by adverse events to the organization.

Decision is a conclusion or resolution reached after

consideration of alternatives

Decision criteria are principles, guidelines or

requirements that are used to make a decision.
IMPORTANCE OF GOOD DECISION -MAKING

• Good decision-making is important for the following reasons:

• Achievement of objectives
• Optimum use of resources
• Higher efficiency
• Innovation
• Motivation
• Growth and expansion
• Facing new challenges
ELEMENTS OF DECISION MAKING
• A set of possible future conditions exists that will
have a bearing on the results of the decision. e.g.
Low or High Demand, Rainy or Hot Weather
FUTURE
CONDITIONS • A list of alternatives for the manager to choose
from e.g Expand or Do nothing, Indoor or
Outdoor

• A known payoff / outcome for each alternative

under each possible future condition e.g $50M
Profit, $20M Loss, Successful Event, Unsuccessful
Event
KNOWN PAY-
OFF / ALTERNATIVES PAYOFF TABLE – table showing the expected
OUTCOME payoffs for each alternative in every possible state
of nature. Theses tables are helpful in choosing
among alternatives because they facilitate
comparisons.
DECISION MAKING ENVIRONMENTS

1. Certainty – means that relevant parameters

such as costs, capacity, and demand have
known values
2. Uncertainty – environment in which it is
impossible to assess the likelihood of
various future events.
3. Risk – means that certain parameters have
probabilistic outcomes.
THE DECISION MAKING PROCESS
1 Recognize the need to make a decision

2 Determine decision criteria

3 Identify alternatives

4 Evaluate alternatives

5 Select best alternative

6 Implement chosen alternative

7 Follow-up and evaluate results

CAUSES OF POOR DECISIONS

1. Mistakes in Decision Process

2. Bounded rationality - limitations in decision making caused by costs, human
abilities, time, technology, and availability of information

3. Sub-optimization - result of different departments each attempting to reach a

solution that is optimum for that department
EVALUATING ALTERNATIVES

• Is it LEGAL? Managers must first be sure that an alternative is legal both in this
country and abroad for exports.

• Is it ETHICAL? The alternative must be ethical and not hurt stakeholders

unnecessarily.

• Is it ECONOMICALLY FEASIBLE? Can our organization’s performance

goals sustain this alternative?

• Is it PRACTICAL? Does the management have the capabilities and resources

to do it?
DECISION MAKING SKILLS

1. BEING INTUITIVE - simplest, and the one of the most common ways to take a decision. Though
it is not always the best.

Intuitive decision making includes that you have to rely on the decision that you feel
appropriate, without much thinking about the logic that makes you take the choice

CONS OF USING INTUITION:

1. Flawed information
2. Short-term emotional bias
3. Insufficient consideration of others
4. Prejudices
5. Lack of openness
DECISION MAKING SKILLS
2. BEING RATIONAL - decision making type which most people want to believe they do. It is the use
of logic to fix what is best, after reviewing all possible options then evaluating every
option using logic and rationality.

3. BEING WELL-INFORMED - more than finding the fact and logic of a decision, getting a
personal opinion also impacts your decision-making by giving you the confidence
and assurance that you’re taking the right decision.

4. SATISFICING - accepting the one which is satisfactory for the benefit of the
company. A nonworkplace example is deciding that you need coffee, and then visiting the
nearest coffee shop even though it’s not the best. Simply because you need it. This says you might
miss upon the best options.

5. CONFLICT MANAGEMENT - identify the differences between a win-lose situation (compromises

where one side sacrifices what they want to please one another) and win-win situations.
TYPES OF DECISIONS
1. Programmed and Non-ProgrammedDecisions
TYPES OF DECISIONS
2. Strategic, Tactical, and Operational Decisions
BEHAVIORAL ASPECTS OF DECISIONMAKING

I. Bounded Rationality Modelof Decision Making

• The rationality of decision makers is restricted by the actual information they have, the
cognitive biases of their psyches, and the limited time they have to decide.

• Decisions are rational only within the boundaries of the decision maker’s mental ability, values,
perceptions and skills.

• Under this model, managers satisfice

• A manager accepts the first alternative that is “good enough” in order to save effort and time.
BEHAVIORAL ASPECTS OF DECISIONMAKING

II. Intuitive Model of DecisionMaking

• Intuition is a cognitive means of decision making that relies on the decision maker’s
instinct, experience, and knowledge.

• It involves making choices without cognizant thinking.

• When making a decision, intuitive managers tend to screen the decision situation to
identify mental patterns.

• These mental patterns are usually a result of knowledge, practice, and familiarity,and
allows managers to know the potential outcomes of their decision.
BEHAVIORAL ASPECTS OF DECISIONMAKING

III. Creative Model of DecisionMaking

• Creativity is the invention of imaginative new ideas.

• Techniques managers can use in the creative decision making processinclude:

 Brainstorming, a collaborative effort where members suggest many ideas together.
 Wildstorming, where a group works on seemingly impossible ideas and suggests how
these ideas can be made possible.
 Pre-mortem, a method of imagining and preventing possible issues that could arise
RISK PROPENSITY AND DECISIONMAKING
• Risk propensity measures the tendency of decision makers to make risky
decisions.

• Managers with low risk propensity are more cautious and conservative
when making decisions, and so are likely to avoid mistakes that result in
huge losses.

• Managers with high risk propensity are more aggressive and hasty in their
decision making, relying heavily on intuition to make decisions that may
involve big investments.
ETHICS AND DECISION MAKING
• Ethical decision making issues emerge when decision alternatives include
conflicting moral or ethicalconsiderations.

• Managers must be able to thoroughly and sensibly consider the outcomes and ethical
ramifications of an alternative before implementing itasadecision.
CHALLENGES IN DECISION MAKING
Overconfidence • Decision makers overestimate their capability to foresee future events.
Bias • Can lead to risky behavior and faulty decision making.
• Individuals look back and view events as more predictable than they reallyare.
Hindsight Bias
• Managers may project this bias onto others when somethinggoes wrong.
• The tendency for decision makers to rely too much on one piece of information.
Anchoring
• May result in lost opportunities or faulty decisions
• The way a situation is presented has a strong influence on decision makers.
Framing Bias
• May lead topoor decisions simply based on how a problem is framed.
Escalation of • People proceed on a failing course of action because they already invested in it.
Commitment • Managers fear admitting their mistake or believe they can recover their losses.
• Members of a group put pressure on each other to conform and reach consensus,
Groupthink thereby increasing the risk of flaweddecisions.
• Reduces mental efficiency, reality testing, and moral judgment in makingdecisions.
THANK YOU!