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This article explores the central task of managers - making decisions. It discusses the different types of problems and decisions, rational decision making, as well as the limitations of the rational decision making model. It also covers the concepts of bounded rationality, decision biases, limited information, and the role of groups in decision making.
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Objective Central task of managers: making decisions Objective:understand how we make decisions
Types of Problems and Decisions Poorly-Structured Problems: New, unusual problems for whichinformation is ambiguousor incomplete. Well-Structured Problems:Easilydefined, familiarand straightforward. Non-Programmed Decisions: A unique decision to address (poorly-structured) problemsneeding customizedsolutions. Programmed Decisions: A “routine” (rate, procedure or policy) used to address repetitive (structured) problems
Rational Decision Making • Definition: Decisions that are optimal • Value-maximizing • Select by analyzing alternatives and picking best solution
Rational Decision Making 3. Search for alternative solutions 4. Compare and evaluate alternative solutions 1. Define theissue 2. Set goals External and Internal environment forces 6. Implement the solution selected 5. Choose among alternative solutions 7. Follow up and control
The Feasibility of Rational Decisions • It’s desirable, but lets look closer… • Assumptions of the model are very demanding • Managerial decisions seldom meet all the tests • Do we always want to make the best decision?
Single, well- defined goal Problem is clear and unambiguous Alternatives & consequences are known Rational Decision Making Preferences are clear Final choice will maximize payoff Preferences are constant and stable No time or cost constraints exist Assumptions of Rational Decisions
Bound Rationality • Bounded rationality = behaving rationally within limitations imposed by cognitive abilities and complexity of environment. • Satisficing - Searching for and choosing an acceptable, or satisfactory response • Choosing “good enough” rather than trying to make the optimal decision • Intelligent satisficing means working on the decision only until the costs of further analysis outweigh the benefits from improving the decision.
Why Satisficing? Satisficing decision Uncertainty, Risk, Ambiguity Information processing biases Limited Information Perceived problem
BRD: Key concepts • Certainty: • Outcome of every alternative is known • Risk: • Able to estimate the probability of outcomesstemming from each alternative • Uncertainty: • Not certain about outcomes and unable to estimate probabilities • Ambiguity: • Not certain about what the meaning of the data is in the first place • Limited Information: • Search costs & time constraints prevents gathering information on all alternatives & outcomes
BRD and Heuristics • Heuristics: Rules of thumb to deal with complex situations. • Saves effortif the heuristic is right • If heuristic is wrong, can have cognitive bias – systematically repeated errors that arise from the decision-making process in use.
Availability Bias Availability Bias: The frequency of an event is often assessed with how easily it is brought to mind.
Representativeness Bias Incorrectly generalizing from a small sample or a single incident.
Additional Key Cognitive Biases • Escalating Commitment: • Committing considerable resources to a project and then committing more even if evidence shows the project is failing. • Illusion of Control: • The tendency to overestimate one’s own ability to control activities and events.
Groups and Decision-Making 1 2 3 4 • Advantages of group decision-making (assuming the group is working well): • Better decision: • More complete information • More creative decision: • More and better alternatives • Especially when expertise is diverse • The decision is more likely to be perceived as legitimate • Members are more likely to be committed to the decision
Groups and Decision-Making • Disadvantages of group decision-making • Even if the group is working well: • Group decision-making is time consuming • And if the group is not working particularly well: • Members may feel railroaded by a minority • Who is responsible may be ambiguous • Members may feel pressure to conform even though they disagree “Groupthink:” conformity marked by withholding different or unpopular views in order to give the appearance of agreement
So when do groups make better decisions than individuals? Criteria of EffectivenessGroupsIndividuals Accuracy x Speed x Creativity x Degree of acceptance x Efficiency x
Summary Different types of problems and decisions Rational and boundedly rational decision making models Biases and heuristics Groups and decision making