General Analytical Model of Decision Making

1. General Analytical Model of Decision Making • Conception of decision making as a series of analytical steps • The model focuses on two aspects: • identifying the problem • implementing the solution

2. Steps ion the Analytical Model Problem Identification Evaluate choice Define Objectives Implement choice Predecision Make a choice Generate Alternatives Evaluate Alternatives

3. Programmed vs Non-Programmed Decisions • Programmed decisions are highly routine decisions usually made by lower level workers alone. (Time to re-order toner for the copy machine) • Non-programmed decisions -- Decisions about a novel problem. There is no set course of action. (Identifying the cause of some rare disease)

4. Certain vs Uncertain Decisions • The degree of risk involved in making the decision. The means the continuum ranges from • complete uncertainty (no risk) to • complete uncertainty (high risk) • The point is to minimize risk by obtaining information

5. Rational-Economic Model • A model in which decision makers consider all possible solutions before selecting the optimal one. Presumes • We are entirely rational and logical • We have complete and perfect information • We can process all this information

6. Bounded Rationality Model • A model that realizes that humans have a limited view of the problem, do not have perfect information or all the alternatives • We accept a solution that is good enough • This is called satisficing or settling for the decision that meets the criteria but may not meet them optimally

7. Image Theory • Following your gut instinct. This model says we make decisions intuitively, by going through a two-step process. Step one is the compatibility test. Does the alternative feel right? • Step 2: Profitability test - Which of the alternatives that feel right is best?

8. Framing Effects • (from Bazerman, 1983): A large car manufacturer has recently bee hit with a number of economic difficulties and it appears as if three plants need to be closed and 6,000 employees laid off. The vice-president of production has been exploring alternative plans to avoid this crisis. She has developed two plan • Plan A: This plan saves one of the three plants and 2,000 jobs • Plan B: This plan has a 1/3 probability of saving al l three plants and all 6,000 jobs but a 2/3 probability of saving no plants and no jobs.

9. Framing Effects • A large car manufacturer has recently bee hit with a number of economic difficulties and it appears as if three plants need to be closed and 6,000 employees laid off. The vice-president of production has been exploring alternative plans to avoid this crisis. She has developed two plan • Plan C: This plan will result in the loss of two of the three plants and 4,000 jobs. • Plan B: This plan has a 2/3 probability of resulting in the loss of all three plants and all 6,000 jobs but a 1/3 probability of losing no plants and no jobs

10. More Framing • A. A sure gain of $240. • B. A 25% chance to gain $1,000 and a 75% chance to gain nothing • C. A sure loss of $750 • D. A 75% chance to lose $1,000 and a 25% chance to lose nothing

11. Availability Heuristic • The tendency for people to base decisions on information that is easily accessed • Which is riskier? • A. Driving a car on a 400 mile trip • B. Flying on a 400 mile trip on a commercial flight

12. Availability Heuristic • You are traveling in the Middle East. Which is the greater worry? • A. Being hurt in an auto accident • B. Being hurt in a terrorist attack

13. Representativeness Heuristic • The tendency to perceive other in stereotypical ways if they appear to be typical of the category to which they belong • Mark is finishing his MBS at a prestigious university. He is very interested in the arts and at one time considered a career as a musician. Mark is most likely to take a job • A. In the management of the arts • B. With a management consulting firm

14. Other Cognitive Biases • Anchoring -- People develop estimates based on initial information. When that information turns out to be wrong, people make adjustments to their decisions but not enough to overcome the impact of the initial piece of information. • Confirmation bias -- We tend to focus only on evidence that supports our decisions. • Overconfidence -- Because of confirmation bias, we are more confident than we are correct.

15. Backwards and Forwards • Summing up -- We have looked at the general analytical model and various types of decisions. After looking at three models of decision making, we explored why we often make decisions that are inadequate and we never learn about the inadequacy. • Next time -- We examine how the decision process works in a group, the phenomenon of group think, and ways to improve decision making techniques in organizations.