Decision-making

in Management
 Example: San Francisco Bay Bridge

• Beginning 2005 – Decision to stop construction

• Later 2005 – Decision of continue construction based on original
project
• Result: $81M cost overrun. Will be paid by California taxpayers
and toll payers
 Burden of Poor Decisions

• Cost of poor decisions in pharmaceutical

industry is passed to consumers
• Dry hole cost in oil and gas industry is
passed to motorists
• Wrong policy decisions by government will
be passed to taxpayers
• You paint your deck without properly
removing old paint. You have to do it again
next year.
What is Decision-making?
• What is Decision-making?
• Formal Definition
• “The process of identifying problems and opportunities
for the Organization”
• Requires 1), design a choice, 2), form expectations, 3),
evaluate the consequences
• Informal Definition of a Decision
• Deliberate, Conscious (e.g., material choice)
• Automated, Saccadic (e.g., eye movement)
• Short sequences (e.g., driving a car)
• Long sequences (e.g., life-time investment)
 Management
Decision-making

• Which side is (i.e., questions managers must ask)…

• More Systematic or More Intuitive?
• Does the problem require a Rational/Analytical Approach or does it require a Flexible/Spontaneous
Approach?

• More Structured or More Unstructured?

• Is the information required familiar/straight-forward/clear or new/unusual/ambiguous/deficient?

• More Operationally-oriented or More Crisis-oriented?

• Is the problem ongoing/long-term/managed/expected or one-time/short-term/extraordinary/unique?

• More Classical Model or More Behavioral Model?

• Can we act rationally (optimize within constraints) or do we act with cognitive limitations (satisficing
—choose the first good solution).

• More Analysis needed or more Creativity needed?

• Will the existing paradigm work (broader and deeper analysis) or will we need a new paradigm
(think completely differently)?
 Human Judgment Is Always to Blame
• A study by Swiss Federal
Institute of Technology in
Zurich analyzed 800 cases of
structural failures where
engineers were at fault.
• In these incidents 504 people
were killed, 592 injured and
millions of dollars of damage
incurred.
• Insufficient Knowledge – 36%
• Underestimation of influence – 16%
• Ignorance, carelessness, neglect – 14%
• Forgetfulness – 13%
• Relying upon others without sufficient control – 9%
• Objectively unknown situation – 7%
• Other factors related to human error – 5%
 Biases
• Cognitive – hard to detect, possible to mitigate by training
• Motivational – easy to detect, hard to mitigate negative effect

Reality

30% 35% 40% 45% 50% 55% 60% 70%

Bias
Bias is
is aa discrepancy
discrepancy
between
between somebody’s
somebody’s Your judgment
judgment
judgment and and reality
reality

What caused this error in judgment?

Decision Analysis Process
Steps of Decision Analysis Process Project Risk Management
Processes (PMBOK)

Identification Problems or Opportunities

Decision Assessing Business Situation Risk Management Planning
Determining Success Criteria Risk Identification
Framing
Identifying Uncertainties
Generation Alternatives

Modelling
Creating Models for Project Alternative Qualitative Risk Analysis
the Situation Quantifying Uncertainties

Determining What Is Most Important

Quantitative Quantitative Analysis
Quantifying Risks Associated with Project
Risk Response Planning
Analysis Determining the Value of New Information
Deciding on a Course of Actions

Implemetation Implementing the Best Alternative

Monitoring the Project Implementation Risk Monitoring and Control
Monitoring
Evaliation of the Decision Experience
Evaluation
 How do most managers make most decisions
most of the time?
• (adapted from Joseph Badaracco, HBR, 2016)

1. What are the net consequences of all my options?

2. What are my core obligations?

3. What will work in the world as it is?

4. Who are we?

5. What can I live with?