Managerial Decision Making

Learning Outcomes

To help build my decision-making skill, when studying this chapter, I will attempt
to acquire:
◉ A fundamental understanding of the term decision
◉ Describe the steps in the decision-making process.
◉ An appreciation for the various situations in which decisions are made
◉ Explain the four ways managers make decisions.
◉ Describe different decision-making styles
◉ An understanding of probability theory and decision trees as decision-making
tools

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Decision-making skill is the ability to choose alternatives
that increase the likelihood of accomplishing objectives

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 FUNDAMENTALS OF DECISIONS

◉ Managers at all levels and in all areas of organizations make

decisions
◉ A decision is a choice made between two or more available
alternatives
◉ Decision making is the process of choosing the best alternative
for reaching objectives

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 Types of Decisions

Depending on the nature of the problem, a manager can use one of

two different types of decisions
1. A programmed decision is a repetitive decision that can be
handled by a routine approach
2. A non- programmed decisions is a unique and nonrecurring
decisions that require a custom-made solution

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Programmed Versus
Non-programmed Decisions

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 Decision Making Conditions

◉ When making decisions, managers may face three different conditions:

certainty, risk, and uncertainty
1) Certainty: A situation in which a manager can make accurate decisions
because all outcomes are known
2) Risk :A situation in which the decision maker is able to estimate the likelihood
of certain outcomes
3) Uncertainty: A situation in which a decision maker has neither certainty nor
reasonable probability estimates available

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 Decision Making without Probabilities

Decision Making Approaches

◉ Maximax (Optimistic)
◉ Maximin (Pessimistic)
◉ Minimax Regret

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 Decision-Making Styles

◉ Your thinking style reflects two things:

(1) the source of information you tend to use (external data and facts or internal sources such
as feelings and intuition),
(2) whether you process that information in a linear way (rational, logical, analytical) or a
nonlinear way (intuitive, creative, insightful).
Linear thinking style, is characterized by a person’s preference for using external data and
facts and processing this information through rational, logical thinking to guide decisions and
actions
Nonlinear thinking style, is characterized by a preference for internal sources of information
(feelings and intuition) and processing this information with internal insights, feelings, and
hunches to guide decisions and actions
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Decision Making Process

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 1.Recognition of Decision Requirement

◉ Every decision starts with a problem, a discrepancy between an existing

and a desired condition
◉ A problem occur when organizational accomplishment is less than
established goals
◉ Awareness of a problem or opportunity is the first step in the decision-
making sequence, and it requires surveillance of the internal and external
environment

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 2. Diagnosis and Analysis of Causes
◉ Diagnosis is the step in the decision-making process in which managers analyze underlying
causal factors associated with the decision situation.
◉ Managers ask a series of questions to specify underlying causes, including the following
◉ What is the state of disequilibrium affecting us?
◉ When did it occur?
◉ Where did it occur?
◉ How did it occur?
◉ To whom did it occur?
◉ What is the urgency of the problem?
◉ What is the interconnectedness of events?
◉ What result came from which activity?
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 Development of Alternatives

◉ Decision alternatives can be thought of as tools for reducing the

difference between the organization’s current and desired performance
◉ For a programmed decision, feasible alternatives are easy to identify.
◉ Non-programmed decisions, however, require developing new courses of
action that will meet the company’s needs

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 4. Selection of the Desired Alternative

◉ In this stage, managers try to select the most promising of several alternative courses
of action.
The best alternative solution is the one that best fits the overall goals and values of the
organization and achieves the desired results using the fewest resources
Selection
◉ Least amount of risk and uncertainty
◉ Try to gauge the prospect of success
◉ Rely on their intuition and experience
◉ Depends on mangers 'personality
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Four Criteria to Evaluate Alternative course of
action

◉ Legality
◉ Ethicalness
◉ Economic feasibility
◉ Practicality

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 5. Implementation of the Chosen Alternative

◉ The implementation stage involves the use of managerial,

administrative, and persuasive abilities to ensure that the
chosen alternative is carried out.
◉ The ultimate success of the chosen alternative depends on
whether it can be translated into action.
◉ Successful implementation may require discussion, trust
building, and active engagement with people affected by
the decision.
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 Evaluation and Feedback
The last step in the decision-making process involves evaluating the outcome or result of
the decision to see whether the problem was resolved.
If the evaluation shows that the problem still exists, then the manager needs to assess
what went wrong.
• Was the problem incorrectly defined?
• Were errors made when evaluating alternatives?
• Was the right alternative selected but poorly implemented?

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 How Managers Make Decisions

Rational decision making Describes choices that are logical and

consistent and maximize value
Assumptions of Rationality
◉ The decision maker would be logical and objective
◉ The problem would be clear and unambiguous
◉ The decision maker would have a clear and specific goal and know all
possible alternatives and consequences
◉ Decision making lead to selecting the alternative that maximizes the
likelihood of achieving that goal
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 How Managers Make Decisions

Bounded rationality--- managers make decisions rationally, but are

limited (bounded) by their ability to process information

Because they can’t possibly analyze all information on all alternatives, managers
satisfice, rather than maximize. That is, they accept solutions that are “good
enough.” They’re being rational within the limits (bounds) of their ability to
process information.
Escalation of commitment an increased commitment to a previous decision
despite evidence it may have been wrong

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 How Managers Make Decisions

Intuitive decision making

Making decisions on the basis of experience, feelings, and accumulated
judgment
Making Decisions: the Role of Evidence-Based Management
The systematic use of the best available evidence to improve management
practice

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Decision Making Tools

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 Probability Theory
◉ Probability theory is a decision-making tool used in risk situations—situations in which decision
makers are not completely sure of the outcome of an implemented alternative.
◉ Probability refers to the likelihood that an event or outcome will actually occur. It is estimated by
calculating an expected value for each alternative considered.
◉ Specifically, the expected value (EV) for an alternative is the income (I ) that alternative would
produce, multiplied by its probability of producing that income (P). In formula form, EV = I×P.
◉ Decision makers generally choose and implement the alternative with the highest expected value

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 Decision Tree
◉ A decision tree is a graphic decision-making tool typically used
to evaluate decisions involving a series of steps.
◉ These steps are interdependent; that is, each step is influenced by
the step that precedes it.
Example
A decision tree for a pizza restaurant deciding between two options:
■ Option 1: to open a second restaurant
■ Option 2: to add a takeaway and delivery service to their existing restaurant

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 Decision Tree

◉ Study estimates of investment amount

◉ Weigh the probabilities
◉ Consider the projected income yields
◉ Net expected gain =Expected value of alternative – investment
cost

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Why Do Managers Make Bad Decisions?

◉ Justifying past decisions

◉ Seeing what you want to see
◉ Perpetuating the status quo
◉ Being influenced by emotions
◉ Overconfidence

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