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Chapter 8

Chapter 8. Fundamentals of Decision Making. Learning Objectives. State the conditions under which individuals make decisions. Describe the characteristics of routine, adaptive, and innovative decisions. Explain the three basic models of decision making.

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Chapter 8

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  1. Chapter 8 Fundamentals of Decision Making

  2. Learning Objectives • State the conditions under which individuals make decisions. • Describe the characteristics of routine, adaptive, and innovative decisions. • Explain the three basic models of decision making.

  3. Decision making includes defining problems, gathering information, generating alternatives, and choosing a course of action.

  4. Risk Objective probabilities Subjective probabilities Certainty Uncertainty Conditions Under Which Decisions are Made(adapted from Figure 8.1)

  5. Framework for Decision Making(adapted from Figure 8.2) Unusual and ambiguous Innovative Decisions Uncertainty Adaptive Decisions Conditions under which decisions are made Risk Routine Decisions Problem Types Certainty Known and well defined Untried and ambiguous Solution Types (Alternative Solutions)

  6. Models of Decision Making • The rational model prescribes a set of phases that individuals or teams should follow to increase the likelihood that their decisions will be logical and optimal.

  7. 3 Search for alternative solutions 2 Set goals 4 Compare and evaluate alternative solutions 7 Follow-up and control results 6 Implement the solution selected 5 Choose among alternative solutions Rational Decision-Making Model(adapted from Figure 8.3) Environmental forces 1 Define and diagnose problem Environmental forces

  8. Increase profits per share of common stock [based on millions shares by 8% in 2006. Organizational goals Corporation Manufacturing Division Reduce manufacturing costs by average $0.50 per unit on volume of 1 million units in 2006. Total savings targeted at $500,000. Divisional goals Plant Engineering Department Reduce internal and contract maintenance by $75,000 in 2006 without more that 3% equipment downtime Departmental goals Maintenance Section Reduce overtime for preventive maintenance inspections by 200 labor hours during 2006 without decreasing frequency of inspections. Total overtime savings estimated at $6,000. Sectional goals Purchase and install microcomputer software system for monitoring bearing wear in 10 machines, reducing overtime by 600 hours for production employees. 2006 overtime of $15,000. Purchase price estimated at $6,000. Mechanical Engineer Individual goals A Simple Hierarchy of Goals(adapted from Figure 8.4)

  9. Models of Decision Making (cont.) • The bounded rationality model contends that the capacity of the human mind for formulating and solving complex problems is small, compared with what is needed for objectively rational behavior.

  10. Bounded Rationality Model(adapted from Figure 8.5) Decision Biases Inadequate Problem Description Limited Search for Alternatives Limited Information Satisficing

  11. Political Model of Decision Making(adapted from Figure 8.6) Multiple Stakeholders with power such as: Investors Employees Customers Divergence in problem definition Divergence in goals Divergence in solutions Political decision making Competitors Unions Legislative Bodies Regulatory Agencies Suppliers

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