Principles of Management

Chapter 2
Decision Making
Decision-making is the process of selecting a course of action among several alternative options based
on the evaluation of available information and analysis of potential outcomes.

Problem identification: Identifying the issue or problem that requires a decision.

Information gathering: Gathering relevant data and information about the problem and
potential solutions.

Alternative evaluation: Identifying and evaluating alternative solutions or courses of action.

Alternative selection: Selecting the best alternative based on criteria such as feasibility,
effectiveness, and cost.

Implementation: Putting the decision into action.

Evaluation and feedback: Assessing the outcomes of the decision and obtaining
feedback for future improvements.

Approaches of Decision Making:

Rational approach: This approach involves gathering information, identifying possible options, weighing
the pros and cons of each option, and selecting the one that offers the greatest benefit.

Example:
For instance, when deciding on which apartment to rent, a person might gather information on different
apartments, compare the rent, location, amenities, and safety features, weigh the pros and cons of each
apartment, and then choose the apartment that best meets their needs and budget.

Use assumption and POLC details to give detailed answers.

Bounded Rationality:
Bounded rationality is the concept that humans have limited cognitive abilities that prevent them from
making fully rational decisions

Example
when deciding which car to buy, a person may not have the time or cognitive resources to research
every possible option in depth. Instead, they may use heuristics, like only considering brands they are
familiar with or choosing the first car that meets their basic requirements. This is an example of
satisficing, or selecting an option that is "good enough" rather than searching for the optimal solution.

Planning
What are the organization’s long-term objectives?
What strategies will best achieve those objectives?
What should the organization’s short-term objectives be?

Organizing
How difficult should individual goals be?
How many employees should I have reported directly to me?
How much centralization should there be in an organization?
How should jobs be designed?
When should the organization implement a different structure?

Leading
How do I handle employees who appear to be unmotivated?
What is the most effective leadership style in a given situation?
How will a specific change affect worker productivity?
When is the right time to stimulate conflict?

Controlling
What activities in the organization need to be controlled?
How should those activities be controlled?
When is a performance deviation significant?
What type of management information system should the organization have?

Intuitive approach:
This approach relies on your gut feeling or instinct. You don't necessarily need to gather a lot of
information, but you use your experience, intuition, and judgment to make a decision.
Example:
When deciding whether to trust someone, a person might rely on their intuition or past experiences
with similar people, rather than conducting a thorough investigation or analysis of the person's
behavior. The person's gut feeling might lead them to either trust or distrust the individual.

Behavioral approach:
This approach considers the psychological and emotional factors that may influence your decision-
making. It takes into account your biases, beliefs, values, and emotions to help you make a decision.

Example:
When deciding whether to invest in a particular stock, a person may be influenced by their emotions,
such as fear of losing money or excitement about potential profits. They may also be influenced by
cognitive biases, such as the tendency to overestimate their knowledge or the tendency to conform to
the opinions of others. The behavioral approach recognizes that these psychological and emotional
factors can impact a person's decision-making process.

Collaborative approach:
This approach involves involving other people in the decision-making process. It can help you get
different perspectives and ideas, and make the decision-making process more democratic.

Example:
When deciding which smartphone to buy, a person might use cognitive heuristics, such as only
considering well-known brands or selecting the smartphone with the most features. They may also be
influenced by cognitive biases, such as the availability bias, which leads them to overestimate the
importance of information that is easily accessible. The cognitive approach recognizes that these
cognitive processes can impact a person's decision-making process.

Linear decision-making:
Linear decision-making is a decision-making process that involves a step-by-step approach to problem-
solving.

The Six Thinking Hats can be used within a linear decision-making process to ensure that all perspectives
are considered in a systematic way. Here's how it works:

White Hat: Collect all relevant data and information, and analyze it objectively.

Red Hat: Consider your intuition, feelings, and emotions about the problem or decision.

Black Hat: Identify potential problems, risks, or downsides of each option.

Yellow Hat: Identify potential benefits, opportunities, or positives of each option.

Green Hat: Use creative thinking to generate new ideas or solutions.

Blue Hat: Evaluate and organize the options and make a final decision.

By using each hat in turn, the Six Thinking Hats can help ensure that all perspectives are considered in a
linear decision-making process. The method can be especially useful when dealing with complex
problems or decisions that require a thorough and balanced approach.

Islamic Decision-making:
Islamic decision-making is based on seeking guidance from Allah, consulting with knowledgeable
individuals, considering Islamic principles, evaluating consequences, and choosing the best option.

Evidence-Based Management:
Evidence-based management (EBM) is an approach to decision-making that involves using the best
available evidence to inform and guide management practices.

Suppose a company wants to improve employee productivity. Instead of relying on intuition or hunches,
the company would use evidence-based management to identify the most effective strategies for
achieving this goal. They might conduct research, analyze data, and consult with experts to determine
which practices are most effective in improving productivity. Based on this evidence, they would then
implement the most effective strategies to achieve their desired outcome. By using evidence to guide
decision-making, the company is more likely to achieve its goals and make informed decisions that are
grounded in the best available evidence.

Types of Decisions and Decision-Making Conditions:

There are two main types of decisions: programmed and non-programmed. Programmed decisions are
routine and repetitive, while non-programmed decisions are unique and require problem-solving.

Decision-making conditions refer to the level of certainty or uncertainty surrounding a decision. There
are three conditions: certainty, risk, and uncertainty. Certainty involves a high level of confidence in the
outcome, risk involves a known probability of outcomes, and uncertainty involves an unknown or
unpredictable outcome.

Structured Problems:
Structured problems are well-defined and straightforward, with clear goals and solutions. These
problems can be easily solved using pre-existing procedures, rules, or algorithms, and do not require
extensive problem-solving or creativity. An example of a structured problem could be calculating the
monthly payroll for a company using a standardized formula.

Types of programmed decisions:

Procedure:
A procedure is a series of sequential steps a manager uses to respond to a structured problem. The only
di™culty is identifying the problem. Once it’s clear, so is the
procedure

Rule:
A rule is an explicit statement that tells a manager what can or cannot be done.
Rules are frequently used because they’re simple to follow and ensure consistency.

Policy:
The third type of programmed decision is a policy, a guideline for making a
decision. In contrast to a rule, a policy establishes general parameters for the decision
maker rather than specially stating what should or should not be done. Policies typically contain an
ambiguous term that leaves interpretation up to the decision maker.
Here are some sample policy statements:
• The customer always comes first and should always be satisfied.
• We promote from within, whenever possible.
• Employee wages shall be competitive within community standard

Unstructured Problem and unprogrammed decision:

Unstructured problems and unprogrammed decisions are complex, ambiguous, and often unique, with
no clear solution or process for decision-making. These problems require creativity, judgment, and
problem-solving skills to identify and evaluate alternatives, as well as a willingness to take risks and
experiment with new approaches. Examples of unstructured problems could include developing a new
product, entering a new market, or dealing with a crisis or unexpected event.

Decision-making conditions:
Decision-making conditions refer to the degree of certainty or uncertainty that surrounds a decision.
There are three main conditions:

Certainty: when the outcome of the decision is known with absolute certainty.
Risk: when the outcome of the decision is uncertain, but the probabilities of different outcomes are
known.

Uncertainty: when the outcome of the decision is completely unknown and unpredictable.
Decision-making Biases and Errors:

Here are some common decision-making biases and errors:

Confirmation bias: the tendency to search for or interpret information in a way that confirms one's pre-
existing beliefs.

Overconfidence bias: the tendency to overestimate one's abilities or the accuracy of one's beliefs and
predictions.

Anchoring bias: relying too heavily on the first piece of information encountered when making a
decision.

Availability bias: tendency to overestimate the importance of information that is readily available, while
underestimating the importance of information that is not.

Sunk cost fallacy: continuing to invest in a decision because of previously invested resources, even when
the costs outweigh the benefits.

Groupthink: the tendency for group members to conform and suppress dissenting opinions to maintain
consensus.