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CHAPTER 4

FOUNDATIONS OF DECISION MAKING

DECISION MAKING PROCESS

WHAT IS A PROBLEM?

Problem

Discrepancy between an existing and a desired state of affairs.

How do managers become aware of the discrepancy?

They have to make a comparison between past performance, previously set goals, or the performance of some other unit within the organization or in other organizations.

WHAT IS DECISION CRITERIA?

Factors that are relevant in a decision.

WHAT IS DECISION IMPLEMENTATION?

Decision implementation

Putting a decision into action.

ERRORS AND BIASES

Overconfidence bias

When they tend to think they know more than they do or hold unrealistically positive views of themselves and their performance.

Immediate gratification bias

People who tend to want immediate rewards and to avoid immediate costs.

Anchoring effect

People who fixated on initial information as a starting point and ignore additional information.

ERRORS AND BIASES (cont…)

Selective Perception

Selectively organize and interpret events based on their biased perceptions.

Confirmation

Only seek out information that reaffirms their past choices and ignore information that contradicts past judgment.

Framing

Select and highlight certain aspects of situation while excluding others.

ERRORS AND BIASES (cont…)

Availability

Tend to remember events that are the most recent and vivid in their memory.

Representation

Assess the likelihood of an event based on how closely it resembles other events or sets of events.

Randomness

Try to create meaning out of random events.

ERRORS AND BIASES (cont…)

Sunk costs error

People who tends to forget that current choices can’t correct the past.

Self serving

Who are quick to take credit for their successes and to blame failure on outside factors.

Hindsight

Who falsely believe that they would have accurately predicted the outcome of an event once that outcome is actually known.

THREE PERSPECTIVES ON HOW MANAGERS MAKE DECISIONS

  • 1. Rational decision making

They’ll make logical and consistent choices to maximize value.

Would be fully objective and logical.

Problem faced would be clear and unambiguous.

Decision maker would have a clear and specific goal and know all possible alternatives and consequences.

Decisions are made in the best interests of the organization.

THREE PERSPECTIVES ON HOW MANAGERS MAKE DECISIONS (cont…)

  • 2. Bounded rationality

Making decisions that are rational within the limits of a manager’s ability to process information.

Managers accept solutions that are “good enough”.

Decision making is also likely influenced by the organization’s culture, internal politics, power considerations, and escalation of commitment.

An increased commitment to a previous decision despite evidence that it may have been wrong.

WHAT IS INTUITIVE DECISION MAKING?

Making decisions based on experience, feelings, and accumulated judgment.

Also described as “unconscious reasoning”.

INTUITION ROLE IN DECISION MAKING

INTUITION ROLE IN DECISION MAKING

TYPES OF DECISIONS

Structured problem

A straightforward, familiar, and easily defined problem. Eg: student applying for financial aids.

Unstructured problem

A problem that is new or unusual for which information is ambiguous or incomplete.

Eg: entering new market segment.

TYPES OF SOLUTIONS

Programmed decision

A repetition decision that can be handled using routine approach.

To solve the problem, manager refers to systematic procedure, rule or policy.

Procedures: series of interrelated sequential steps that a manager can use when responding to a well-structured problem.

TYPES OF SOLUTIONS (cont…)

Programmed decision

Rules: an explicit statement that tells a manager what he or she ought or ought not to do.

Policies: Provides guidelines to channel manager’s thinking in a specific direction.

TYPES OF SOLUTIONS (cont…)

Non programmed decision

Include deciding whether to acquire another organization, deciding which global markets offer the most potential, or deciding whether to sell off an unprofitable division.

A custom-made, non programmed respond is required.

HOW PROBLEMS, TYPES OF DECISIONS, AND ORGANIZATIONAL LEVEL INTEGRATED?

Lower level managers always confront familiar and repetitive problems, so they rely on programmed decisions.

Problems faced by managers are likely to become less structured as they move up.

Programmed decisions minimize the need for managers to exercise discretion.

The more nonprogrammed decision making a manager required to do, the greater the judgment needed.

DECISION-MAKING CONDITIONS

Certainty

A situation in which decision maker can make accurate decisions because all outcomes are known.

Uncertainty

A situation in which decision maker has neither certainty nor reasonable probability estimates available.

Risk

A situation in which decision maker is able to estimate the likelihood of certain outcomes.

CONTEMPORARY ISSUES IN MANAGERIAL DECISION-MAKING

National culture

Swedish push the decisions to their employees, Italian managers rely on tried and proven alternatives to solve problems.

Decision making in Japan is group oriented and focus on long term perspectives which are different than the Americans.

France managers are more autocratic in decision making while Germans focus on structure and order.

CONTEMPORARY ISSUES IN MANAGERIAL DECISION-MAKING (cont…)

Creativity

The ability to produce novel and useful ideas. Important because it allows the decision maker to appraise and understand the problem more fully, and think outside of the box. Studies confirm that the higher the 3 components, the higher the creativity.

CONTEMPORARY ISSUES IN MANAGERIAL DECISION-MAKING (cont…)

Creativity

3 components are:

Expertise: foundation of all creative work.

Creative-thinking skills: personality characteristics such as intelligence, independence, self-confidence, risk-taking, internal locus of control, tolerance for ambiguity and perseverance; ability to use analogies; and the talent to see the familiar in a different light.

Intrinsic task motivation: the desire to work on something because it’s interesting, involving, exciting, satisfying, or personally challenging.