Decision Making Chapter 14

1. Decision MakingChapter 14 MGMT 3140 Prof. T. A. Sgritta

2. Decision Making • Types of decisions • Classical decisions • Behavioral decision theory • Image theory • Heuristics & creativity • Decision management • Current issues in decision making

3. Decision Making The process by which members of an organization choose a specific course of action to respond to both problems and opportunities.

4. Steps in Decision Making • Recognize and define the problem or opportunity • Identify and analyze alternatives • Choose a course of action • Implement the action • Evaluate the results and follow-up as appropriate

5. Decision Environments • Certainty • Risk • Uncertainty • Organized anarchy

6. Types of Decisions • Non-programmed Decisions: Decisions made in response to novel problems and opportunities. • Programmed Decisions: Decisions made in response to recurring problems and opportunities. • Often evolve from nonprogrammed decisions

7. Decision Responsibilities • Where in an organization should the decisions be made? • Non-Programmed decisions? • Programmed decisions?

8. Steps in the Classical Model • List all alternatives • List consequences of each alternative • Rank sets from most preferred to least preferred based on personal preference • Select alternative that results in most preferred set of consequences

9. Problems with the Classical Model • All necessary information for optimal decision • Unable to use some information • Cognitive abilities • Information overload

10. Some Classical Problems • Expected Value • Breakeven • Marginal analysis

11. Garbage Can Model • The decision process is not clearly defined • Problems • Solutions • Participants • Choices Are all mixed up. Implementers are frequently not the decision makers. “What kind of garbage is this???”

12. Intuition • Aid in decision making. • “Sixth sense” • QBs “feeling” the rush

13. Behavioral Decision Making • Bounded rationality • Problem not clearly defined • Problem is not clearly understood • Knowledge is limited on alternatives and possible results • Time is limited

14. Behavioral Decision-Making Model • Descriptive • Assumptions • Approximations of situation used • Not all information considered • Satisficing

15. Bounded Rationality • Ability to reason that is limited by the limitations of the human mind itself • Lack of cognitive abilities • Subjective definitions of situation • Satisfice rather than optimize

16. Image Theory Why don’t decision makers always try to reach the optimal solution?

17. Image Theory • Step 1: Images - put the situation into a box (frame) that is compared to one’s principles, goals or plans, reflecting on one’s experience • Step 2: Compatibility test - determine if a potential decision is compatible. If so, make it. • Step 3: Profitability test - If more than one compatible alternative is available, compare profitability.

18. Image Theory Framing Tainting objectively – present the situation is the best possible light or comparing to one’s past.

19. Traps • Confirmation (dissonance reduction) • Hindsight

20. Heuristics and Resulting Biases Availability Heuristic Representative Heuristic Anchoring & Adjustment Heuristic

21. Availability Heuristic • Reflects tendency to determine the frequency of an event and its causes by how easy these events and causes are to remember • Biases • Overestimation of frequency of • vivid events • recent events

22. Representative Heuristic • Reflects the tendency to predict the likelihood of an event occurring from the extent to which the event is typical of similar kinds of past events • Biases • Failure to consider base rate • Overestimating likelihood of rare event

23. Anchoring and Adjustment Heuristic • Reflects tendency to make decisions based on adjustments from some initial amount • Biases • Inappropriate decisions when initial amounts are too high or too low

24. Escalation of Commitment • Tendency of decision makers to invest additional time, money, or effort into poor decisions • Reconfirm correctness of original decision • Desire to recoup losses • Sunk costs • Risky behaviors increased by negative situation

25. Advice to Managers • Do not give vivid or extreme instances of an event too much weight in decision making. If a vivid or extreme instance comes to mind, think about the extent to which less extreme or vivid events and causes have occurred. • When making decisions, be sure to consider events and causes beyond the most recent ones. • When trying to estimate the likelihood of an event or cause occurring, take into account the number of times this event or cause has actually occurred. Remember, rare events are unlikely to be repeated. • Whenever you are making a decision based on adjusting some initial amount, stop and determine whether the initial amount was originally too high or too low.

26. Advice to Managers • Realize that a sign of good decision making is the ability to recognize when a decision needs to be reversed. • When deciding whether to commit resources to a course of action, take into account the costs only of the resources you are about to commit. Do not take into account costs that have already been incurred. • If you are deciding whether to commit more resources to a course of action that has already resulted in some losses of money, time, or effort, ask yourself whether you would commit the resources if you had not already experienced the losses but had your current knowledge.

27. Creativity • The best solutions! • Also a key to a good career…

28. Creativity Framework • Preparation • Concentration • Incubation • Illumination • Certification

29. Creativity Guidelines • Diversity • Idea building (analogical reasoning) • Reflection • Record all ideas! • Have high expectations • Physical space

30. Decision Involvement • Authority decisions • Consultative decisions • Group decisions

31. Advantages and Disadvantages of Group Decision Making

32. Group Decision Making Techniques • Brainstorming • Nominal Group Technique • Delphi Technique

33. Use Individual Decision Making When… • An individual has all capabilities necessary to make a good decision • An individual can gather and assess all necessary information • Acceptance of decision is unnecessary or likely to occur anyway • Time prevents involvement of others

34. Other Consequences of Group Decision Making Diffusion of Responsibility Group Polarization Potential for Conflict

35. Group Shift • If the group makes a decision that is not in the norm of risk taking, the decision will most likely be riskier than what the individual members would make on their own.

36. Advice to Managers • Use groups to make decisions when the decision requires a wide range of skills, knowledge, and expertise, or more information than a single individual could be expected to consider and remember, or when acceptance by others is necessary to implement the decision. But keep in mind that group decision making is time-consuming. • Use individuals to make decisions when an individual has all the skills and knowledge necessary to make a good decision, when an individual can gather and accurately take into account all necessary information, and when acceptance by others for successful implementation is either unnecessary or likely to occur without their participation. (TIME) • Whenever a decision-making group is cohesive, follow the five steps to prevent groupthink. • Impress on group members that each of them is responsible for helping the group make a good decision.

37. Current Issues in Decision Making • Lateral coordination • Importance of technical knowledge and team skills • Artificial Intelligence • Neural networks • High tech – high touch • Ethical decision making • Cross-cultural decision making