Decision Making

Decision Making

 Decision making is not easy

 It must be done amid

– ever-changing factors
– unclear information
– conflicting points of view

Manager’s Challenge: Tupperware

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 Decision Making

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 Decision Making and Decisions

 Decision-making is an essential part of

modern management. Whatever a manager
does he does by making decisions. A
manager makes hundreds of decisions
consciously or subconsciously every day.

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 Decision Making and Decisions

Decisions are made by the managers and actions

are taken by others. Major decisions are taken
carefully and consciously by the application of human
judgment and experience where as minor decisions
are made almost subconsciously using rules.

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 Decision Making and Decisions
Decision-making permeates through all managerial
functions namely planning, organizing, staffing,
directing and control.

Decision making is commitment to something, a

point of view, a principle or course of action.

It is selecting the best among alternative courses of

action.

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 Decisions and Decision Making

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 Decisions and Decision Making

 Decision = choice made from available

alternatives

 Decision Making = process of identifying

problems and opportunities and resolving
them

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 Types of Decisions

 Programmed Decisions
decisions that occur frequently enough that
–
we develop an automated response to them.
The automated response we use to make
these decisions is called the decision rule. 
 Nonprogrammed Decisions – in response to
unique, poorly defined and largely unstructured,
and have important consequences to the
organization

Ethical Dilemma: The No-Show Consultant

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 Ethical Dilemma: The No-Show Consultant

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  For example, many restaurants face customer
complaints as a routine part of doing business.
Because complaints are a recurring problem,
responding to them may become a programmed
decision. The restaurant might enact a policy
stating that every time they receive a valid
customer complaint, the customer should
receive a free dessert, which represents a
decision rule.
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  unique and important decisions require
conscious thinking, information gathering, and
careful consideration of alternatives. These are
called nonprogrammed decisions.

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  For example, in 2005 McDonald’s Corporation
became aware of the need to respond to growing
customer concerns regarding the unhealthy
aspects (high in fat and calories) of the food they
sell. This is a nonprogrammed decision, because
for several decades, customers of fast-food
restaurants were more concerned with the taste
and price of the food, rather than its healthiness.

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  Many decisions that managers deal with
every day involve at least some degree of
uncertainty and require nonprogrammed
decision making
 May be difficult to make
 Made amid changing factors
 Information may be unclear
 May have to deal with conflicting points of view
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Major and minor decisions: The decisions which
have their impact for long-period or which have impact
on other departments are known as major decision.

On the other hand decisions which does not have

long term effect or affecting one department are
known as minor decisions, diversification of existing
product lines, adopting new technology are the major
decisions.

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The decision to procure raw materials is a minor
decision. Major decisions are made at higher level
and minor decisions are taken at lower level in the
organizational hierarchy.

Simple and complex decisions: If very few variables

are to be considered for solving a problem the
decision is simple. If the variables are many, then it is
a complex decision.

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Individual and group decisions: Decision may be
taken either by an individual or group. Decisions
which are routine in nature, with few variables and
definite procedures exists to deal with them are taken
by individuals. On the other hand decisions which
have their impact on other departments, which may
result into some changes in the organization, are
generally taken by groups.

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Decision Making Process: Steps in Rational Decision Making

A decision is rational if appropriate means are chosen to reach the

desired end. The following steps are involved in the process
decision making.

(1) Recognizing the problem.

(2) Deciding priorities among the problems.

(3) Diagnosing the problem.

(4) Developing alternative solutions or courses of activities.

(5) Evaluating alternatives.

(6) Converting the decision into effective action and follow up of

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 ENVIRONMENT of DECISION MAKING

Complex certainty (all Risk (some data is Complete uncertainty

data are available) available) (No data available)

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 Decision-making under certainty: The term certainty refers to
accurate knowledge of the outcome of each alternative. All
relevant data are available for making decision.
For example a company wants to transport goods from five
warehouses to a number of customers. It is possible to obtain
the relevant facts for the problem like type of transport
available, the cost of transporting a unit from each warehouse
to each customer. With this it is possible to design least cost
distribution pattern.

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  Decision-making under risk: In decision making under risk,
the consequences of a particular decision cannot be
specified with certainty but can be specified with known
probability values. The value of probability is a measure of
likelihood of the occurrence of that event. In such cases,
alternatives are evaluated by computing the expected value
of the payoff associated with each alternative.

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 For example, while estimating the demand of a product for
future where there is great amount of uncertainty, a manager
can make three estimates of demand associated with the
probability of occurrence as show in the table 1

Table 1
Types of demand Demand Probability
High demand 1000 0.3
Medium demand 800 0.5
Low demand 500 0.2

Then the expected demand is computed as follows

Expected demand = 1000(0.3)+800(0.5)+500(0.2)

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  Decision making under uncertainty: Uncertainty is said to
exist when the decision maker does not know the
probabilities associated with the possible outcomes, though
he has been able to identify the possible outcomes and their
related pay-offs. Since the probabilities are not known, the
decision maker cannot use the criterion of maximizing the
pay off. He can however use MaxiMin criterion. MaxiMaxi
criterion or Minimax regret criterion.

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 If a manufacturer is pessimistic or cautions in his approach, he
can choose that decision act which maximizes the minimum
pay-off, which is called as MaxiMin criterion. If a manufacturer
is optimistic he may choose that decision act which maximizes
the maximum pay-off. This is called as max-max criterion. A
manager using minimax regrets criterion look at the decision
problem neither as pessimistic nor as optimistic. As the name
implies the minimax regret criterion is the one by which the
decision maker minimizes the maximum regret can occur, no
matter what the outcome.ax-max criterion.

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 Categories in Decision-Making

 Strategic Decision
 Tactical Decision
 Operational Decision

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 Strategic Decision – set the course of
an organization.

For instance, the manager

of a restaurant wants
to increase sales. He
decides to implement a
strategy of offering lower
prices during off hours to
attract more customers.

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 Tactical Decision – are decisions about
how things will get done.

These decisions relate to the

implementation of strategic
decisions. They are directed
towards developing divisional
plans, structuring workflows,
establishing distribution channels,
acquisition of resources such as
men, materials and money. These
decisions are taken at the middle
level of management.

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 Operational Decision - refer to decisions that
employees make each day to make the organization
run.
For example, think about the restaurant that routinely offers a

Free dessert when a customer complaint is received. The owner of

the restaurant made a strategic decision to have great customer

service. The manager of the restaurant implemented the free

dessert policy as a way to handle customer complaints, which is a

tactical decision. Finally, the servers at the restaurant are making

individual decisions each day by evaluating whether each customer

complaint received is legitimate and wants a free dessert.

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 Faulty Decision Making

Avoiding Decision-Making Traps No matter which model

you use, it is important to know and avoid the
Decision making traps that exist. Daniel Kahnemann
(another Nobel Prize winner) and Amos Tversky spent
decades studying how people make decisions. They
found that individuals are influenced by overconfidence
bias, hindsight bias, anchoring bias, framing bias, and
escalation of commitment

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 Overconfidence Bias

occurs when individuals

overestimate their
ability to predict future
events. Many people
exhibit signs of
overconfidence.

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 Hindsight Bias – opposite of the overconfidence bias
it occurs when looking
backward in time and mistakes
seem obvious after they have
already occurred. In other
words, after a surprising event
occurred, many individuals are
likely to think that they already
knew the event was going to
happen.

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 Anchoring
refers to the tendency for
individuals to rely too heavily on
a single / first piece of
information. Job seekers often
fall into this trap by focusing on a
desired salary while ignoring
other aspects of the job offer such
as additional benefits, fit with the
job, and working environment

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 Framing Bias – this kind of bias correlates the outcome with how a
problem or decision is framed.

Let’s say you need a surgical procedure and the surgeon tells you

there is a 98% survival rate with the procedure. How would you feel

about that? What if she told you there was a 2% mortality rate?

Would you feel same way? Probably not.

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 The framing effect is often exploited by those who are deliberately

trying to manipulate our reactions. Politicians, for example, can talk

about employment and unemployment rates. Events can give you

an early-bird discount or a late registration penalty. Products can

have a 4% fat or 96% fat free.

Framing is another way in which we construct our picture of reality,

but deciding what information is important.

In order to isolate a framing effect, the positively and negatively

framed information has to be identical (98% survival is exactly the

same thing as 2% mortality rate).

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 Escalating Commitment – this type of error happens when a manager,
despite his or her knowledge of a project’s failure, continues to
acquire more resources to pursue the project instead of abandoning
it.

The manager does this due to a feeling of personal responsibility

regarding the project. The manager may also attempting to salvage
the unsuccessful project to protect his or her reputation.

Consider a friend that has been dating his girlfriend for about 4years.
Although he admitted to you that things weren’t going too well in the
relationship, he said that he was still going to marry her. His
justification: I have a lot invested in the relationship.

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 In 1966 a project to build a nuclear power in Long Island, New York
began. It was anticipated it would cost $75 million and be able to
generate power for the growing city by 1973.No one anticipated the
pushback from local citizens, and because of that resistance the
project wasn’t completed until 1986 at a cost of more than $6 billion. In
the end; the plant never opened.

Again, escalation of commitment happen when someone continues to

dedicate resources, including time and money, to a failing course of
action.

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Activity 1:

Title : Decision Making Wheel

Focus: In this activity students begin to learn a decision
making strategy that will help them improve the quality of
the choices they make.
Guiding What makes a decision necessary?
Options: What are the options?
What are likely consequences of each option?
How important are the consequences?
Which options is best in light of the consequences
Rationale/ Students will learn to think about options and the
Background: consequences of those options in making
decisions
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Scenario 1:
It is recess. Everyone is out on the playing fields, including the
teacher. You have to go to the toilet. On the way to the toilet, you pass
your class and notice that there is someone in the room. You stop and
peek in out of curiosity. Just as you do, you see one of your best
friends reach into another person’s desk and take something out of it.
You quickly move past the door before you are seen.

Just before the lunch bell rings, the students whose desk you saw
your friend reach into walks up to the teacher. A moment later the
teacher announces that this student’s entire pencils, pens and lunch
money in it has been stolen. What do you do?
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 Scenario 2:

You are alone with your best friend at your best friend’s house.

He/she goes to a drawer in his/her wardrobe and pulls out a

pack of cigarettes. He/she lights up and invites you to do the

same. What do you do?

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 Enumerate the major and minor decisions that you
have made in the recent past.
List at least two decisions that you have made
under complete certainty,
risk and complete uncertainty.

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 Assignment:

Show how can you implement the environment in

decision making in your life. Identify a personal
issue or problem and use the environment in
decision making to plan and formulate strategies
to address it. Write a journal outlining your
decision model.

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