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Decision-Making

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Decision-Making

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    1. 2004 by Nelson, a division of Thomson Canada Limited 1 Chapter 6 Decision-Making

    2. 2004 by Nelson, a division of Thomson Canada Limited 2 What Would You Do? Low gas prices lead to lower profits Lower profits lead to employee layoffs Exploration needs continue How will you convince top management to approve the risky deepwater drilling?

    3. 2004 by Nelson, a division of Thomson Canada Limited 3 Learning Objectives: What is Rational Decision-Making? After reading these next two sections, you should be able to: 1. explain the steps to rational decision- making 2. discuss the limits to rational decision- making

    4. 2004 by Nelson, a division of Thomson Canada Limited 4 Steps to Rational Decision-Making 1. Define the problem 2. Identify the decision criteria 3. Weight the criteria 4. Generate alternative courses of action 5. Evaluate each alternative 6. Compute the optimal decision

    5. 2004 by Nelson, a division of Thomson Canada Limited 5 Define the Problem A problem is a gap between a desired state and an existing state To make decision to solve problems, managers must: be aware of the gap be motivated to reduce the gap have the knowledge, skills, abilities, and resources to fix the problem

    6. 2004 by Nelson, a division of Thomson Canada Limited 6 Identify Decision Criteria Decision criteria are standards used to guide judgments and decisions generally, the more criteria a solution meets, the better that solution will be

    7. 2004 by Nelson, a division of Thomson Canada Limited 7 Weight the Criteria Which criteria are more or less important? Absolute comparisons each criterion is compared to a standard or ranked on its own merits Relative Comparisons each criterion is compared directly to every other criterion

    8. 2004 by Nelson, a division of Thomson Canada Limited 8 Absolute Weighting of Decision Criteria for a Car Purchase Performance Criteria Starting/acceleration Fuel efficiency Handling/steering Transmission Ride quality braking

    9. 2004 by Nelson, a division of Thomson Canada Limited 9 Criteria Used to Evaluate Best Company Locations Commuting distance Operating costs Tax rates Education level Labour costs Housing costs

    10. 2004 by Nelson, a division of Thomson Canada Limited 10 Rankings of Cities by Selection Criteria Values Regina 6.10 Saskatoon 5.40 Saint John 5.35 Halifax 5.05 Winnipeg 4.25 Edmonton 3.75 Calgary 3.40 Ottawa 2.75

    11. 2004 by Nelson, a division of Thomson Canada Limited 11 Limits to Rational Decision-Making

    12. 2004 by Nelson, a division of Thomson Canada Limited 12 Bounded Rationality Managers try to take a rational approach to decision-making. Constrained by: limited resources attention problems memory problems expertise problems

    13. 2004 by Nelson, a division of Thomson Canada Limited 13 Choosing Solutions Maximizing decisions choosing the best solution this is impossible to do Satisficing decisions choosing the good enough solution fits with bounded rationality

    14. 2004 by Nelson, a division of Thomson Canada Limited 14 Risk and Decision-Making under Risky Conditions Rationality assumes decision making under a condition of certainty complete information and knowledge of all possible outcomes Most decisions are made under a condition of risk there exists a real possibility of losing

    15. 2004 by Nelson, a division of Thomson Canada Limited 15 Effects of Framing on Decision Making Positive frame a problem presented as a gain become more risk-averse Negative frame a problem presented as a loss become more risk-seeking

    16. 2004 by Nelson, a division of Thomson Canada Limited 16 Conditions of Uncertainty The odds or winning or losing are unknown. Risk propensity: a persons tendency to take or avoid risks a high risk propensity needed to take risks under conditions of uncertainty

    17. 2004 by Nelson, a division of Thomson Canada Limited 17 Common Decision- Making Mistakes Over-reliance on intuition Availability bias Representative bias Anchoring and adjustment bias

    18. 2004 by Nelson, a division of Thomson Canada Limited 18 Over-Reliance on Intuition Intuition plays a part in many managerial decisions Intuition works bets for experienced managers Over-reliance can cause people to become over confident, careless, and inconsistent

    19. 2004 by Nelson, a division of Thomson Canada Limited 19 Availability Bias Tendency of decision makers to give preference to recent information, vivid images that evoke emotions, and specific acts and behaviours that they personally observe May overlook data

    20. 2004 by Nelson, a division of Thomson Canada Limited 20 Representative Bias Unrecognized tendency of decision makers to judge the likelihood of an events occurrence based on its similarity to previous events

    21. 2004 by Nelson, a division of Thomson Canada Limited 21 Anchoring and Adjustment Bias Judgment (good-bad, large-small, yes-no) is anchored by an initial value Once the anchor is dropped, two things happen all subsequent experiences are judged by their similarity to the anchor all possible decision alternatives tend to cluster around the anchor

    22. 2004 by Nelson, a division of Thomson Canada Limited 22 Learning Objectives: Improving Decision-Making After reading these next two sections, you should be able to: 3. describe how individual decision- making can be improved 4. explain how group decisions and group decision-making techniques can improve decision-making

    23. 2004 by Nelson, a division of Thomson Canada Limited 23 Improving Individual Decision Making Decision rules Multivariable testing Decision software Escalation of commitment

    24. 2004 by Nelson, a division of Thomson Canada Limited 24 Decision Rules A set of criteria that alternative solutions must meet to be acceptable to the decision maker Two types: dictionary rule minimum threshold rule

    25. 2004 by Nelson, a division of Thomson Canada Limited 25 Multivariable Testing A systematic approach of experimentation used to analyze and evaluate potential solutions Improves decision making by: relying on data encouraging simultaneous evaluation of several potential solutions

    26. 2004 by Nelson, a division of Thomson Canada Limited 26 Multivariable Testing to Increase Amusement Park Attendance on Tuesdays

    27. 2004 by Nelson, a division of Thomson Canada Limited 27 Decision Software Most decision makers satisfice Most decisions are intuitive and done in an unstructured manner

    28. 2004 by Nelson, a division of Thomson Canada Limited 28 Avoiding Escalation of Commitment The tendency to stick with a wrong decision Usually involves an increased commitment of resources To avoid escalation: require progress reports use outside auditors change managers label decisions as experimental projects

    29. 2004 by Nelson, a division of Thomson Canada Limited 29 Using Groups to Improve Decision-Making Advantages and pitfalls Structured conflict Nominal group technique Delphi technique Stepladder technique Electronic brainstorming

    30. 2004 by Nelson, a division of Thomson Canada Limited 30 Advantages of Group Decision-Making Improved problem definition and increased alternative generation groups view problems form several perspectives groups can find and access more information than individuals greater information and knowledge allows for more alternative solutions to be generated

    31. 2004 by Nelson, a division of Thomson Canada Limited 31 Pitfalls of Group Decision-Making Groupthink It takes considerable time One or two people dominate discussions

    32. 2004 by Nelson, a division of Thomson Canada Limited 32 Groupthink A barrier to good decision-making caused by pressure within the group for members to agree with each other. Occurs when: group is insulated from different perspectives leader expresses a strong preference for one solution no established procedure for defining and exploring alternatives group members are similar in background

    33. 2004 by Nelson, a division of Thomson Canada Limited 33 Structured Conflict C-type conflict cognitive conflict focuses on problem- and issue-related differences of opinion A-type conflict affective conflict emotional reactions to disagreements

    34. 2004 by Nelson, a division of Thomson Canada Limited 34 Devils Advocacy 1. Generate a potential solution 2. Assign a devils advocate to criticize and question the solution 3. Present the critique of the potential solution to decision makers 4. Gather additional relevant information 5. Decide whether to use, change, or not use the originally proposed solution

    35. 2004 by Nelson, a division of Thomson Canada Limited 35 Dialectical Inquiry 1. Generate a potential solution 2. Identify the assumptions underlying the potential solution 3. Generate a conflicting counterproposal based on the opposite assumptions 4. Have advocates of each position present their arguments and debate them 5. Decide whether to use, change, or not use the originally proposed solution

    36. 2004 by Nelson, a division of Thomson Canada Limited 36 What Really Works

    37. 2004 by Nelson, a division of Thomson Canada Limited 37 Nominal Group Technique Group members independently write down as many problem definitions and alternative solutions as possible Ideas are then shared one at a time Advantages and disadvantages are discussed Ideas independently ranked Idea with the highest average rank is selected

    38. 2004 by Nelson, a division of Thomson Canada Limited 38 Delphi Technique Assemble a panel of experts Create a questionnaire of open-ended questions Analyze, summarize and feedback members responses in a report Experts list reasons for agreeing or disagreeing with the report Repeat steps 3 and 4 until consensus is reached

    39. 2004 by Nelson, a division of Thomson Canada Limited 39 Stepladder Technique Group members are added to a group discussion one at a time, existing group members listen to each new members ideas, and then the group shares ideas it had already discussed, discusses the old and new ideas and then makes a decision requires time to consider the problem and present ideas new members must be unaware of previous group discussion

    40. 2004 by Nelson, a division of Thomson Canada Limited 40 Electronic Brainstorming Four brainstorming rules: 1. the more ideas, the better 2. all ideas are acceptable 3. use others ideas to create more ideas 4. criticism or evaluation of ideas is not allowed Use computers to manage the process

    41. 2004 by Nelson, a division of Thomson Canada Limited 41 Advantages of Electronic Brainstorming Overcomes production blocking technology allows everyone to record their ideas as they are created Overcomes evaluation apprehension anonymous process creates free expression

    42. 2004 by Nelson, a division of Thomson Canada Limited 42 Disadvantages of Electronic Brainstorming Greater expense Anonymity may bother people who are used to having their ideas by virtue of their position Some find it difficult to express themselves in writing Lack of typing skills can frustrate participants

    43. 2004 by Nelson, a division of Thomson Canada Limited 43 What Really Happened? Deepwater drilling was a risky unproven method at the time Managements high risk propensity led them to begin deepwater drilling The decision was a profitable one

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