Foundations

of Decision Making

©Prentice Hall, 2001 Chapter 4 1

 Learning Outcomes
• Describe the decision-making process
• Analyze the rational decision-making model
• Explain the limits of rationality
• Learn how certainty, risk, and uncertainty
relate to decision making
• Discuss the bounded-rational decision maker
©Prentice Hall, 2001 Chapter 4 2
 Learning Outcomes
• Identify the two types of decision problems
and the two decisions that solve them
• Learn how heuristics affect decision making
• Identify four decision-making styles
• Weigh the pros and cons of group decisions
• Learn three ways to improve group decision
making
©Prentice Hall, 2001 Chapter 4 3
 The Decision-Making Process
Identification
of a I need to buy
Problem a new car.

Identification •Price
of Decision •Interior Comfort
Criteria •Durability
•Repair Record
•Performance
Allocation •Price 10
of Weights •Interior Comfort 8
to Criteria •Durability 6
•Repair Record 4
•Performance 2
©Prentice Hall, 2001 Chapter 4 4
Development
Dodge Audi Isuzu Chevy
of
Alternatives
Toyota Ford Jeep Mazda

Toyota •Price Dodge

Analysis
Ford •Comfort Audi
of
•Durability
Alternatives Jeep Isuzu
•Repair Record
Mazda •Performance Chevy

Selection
of an
The Toyota
Alternative
is the best.

Implementation
of the Appraisal of
Alternative
Decision Results

©Prentice Hall, 2001 Chapter 4 5

 Problem
Clarity
Constant
Preferences

Single
Goal
Assumptions
No of Rational
Constraints Decision
Known Making
Options

Maximum
Payoff
Clear
Preferences

©Prentice Hall, 2001 Chapter 4 6

 A Model of Bounded Rationality
Ascertain Set Identify a
the Need “Satisficing” Limited Set
for a Decision Criteria of Alternatives

Compare Select the

Alternatives First “Good
Against Criteria Enough” Choice

Yes
Expand No A “Satisficing”
Simplify
Search for Alternative
the Problem
Alternatives Exists
©Prentice Hall, 2001 Chapter 4 7
 Common Errors
in Decision Making

Availability Representative
Heuristic Heuristic
Escalation of
Commitment

©Prentice Hall, 2001 Chapter 4 8

 How Do Problems Differ?

Well- Poorly
Structured Structured

Programmed Nonprogrammed
Decisions Decisions
©Prentice Hall, 2001 Chapter 4 9
 Sequential Making
Procedures Programmed
Decisions
Specific
Rules

Guiding
Policies
©Prentice Hall, 2001 Chapter 4 10
 Integrating Decision Making
Poorly Structured Top

Level in Organization
Type of Problem

Nonprogrammed
Decisions

Programmed
Decisions

Well-Structured Lower
©Prentice Hall, 2001 Chapter 4 11
 Decision-Making Styles
High
Tolerance for Ambiguity

Analytic Conceptual

Directive Behavioral

Low

Rational Way of Thinking Intuitive

©Prentice Hall, 2001 Chapter 4 12
 Group Decision Making
Advantages Disadvantages

• More information • Time-consuming

• More alternatives • Minority domination

• Increased acceptance • Pressures to conform

• Legitimacy • Unclear responsibility

©Prentice Hall, 2001 Chapter 4 13

 Individual Versus Group
Decision Making
Strengths of Strengths of
Individuals Groups

Speed Input and Diversity

Clear Accountability Higher Quality Decisions

Consistent Values Increased Acceptance

©Prentice Hall, 2001 Chapter 4 14

Brainstorming Group Decision
Making

Nominal Group
Technique

Electronic
Meetings
©Prentice Hall, 2001 Chapter 4 15
 National
Decision
Culture and Style
Decision Making

Degree
of Risk

©Prentice Hall, 2001 Chapter 4 16