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Chapter 5 Decisions-making The decision-making process The rational model The common errors in the decision-making Types of problems, decisions and level.

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Presentation on theme: "Chapter 5 Decisions-making The decision-making process The rational model The common errors in the decision-making Types of problems, decisions and level."— Presentation transcript:

1 Chapter 5 Decisions-making The decision-making process The rational model The common errors in the decision-making Types of problems, decisions and level in the organization Decision-making styles Making-decision in groups

2 Exhibit 5-1 The Decision-Making Process Identification of a problem Identification of decision criteria Allocation of weights To criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

3 The problem A single, All alternatives Preferences Preferences No time Final choice is clear and well-defined and are clear are constant or cost will maximize unambiguous goal is to consequences and stable constraints economic be achieved are known exist payoff Lead to Rational Decision Making Exhibit 5-2 Assumptions of Rationality

4 Bounded Rationality This is the behavior that people construct simplified models that extract the essential features from problems without capturing all of their complexities in order to decide rationally.

5 Availability heuristic This is the tendency to base judgments on information that is readily available. Representative heuristic This is the tendency for people to base judgments of probability on things with which they are familiar. Escalation of commitment It refers to an increased commitment to a previous decision despite negative information

6 Exhibit 5-3 Types of Problems, Decisions and Level in the Organization Level in organization Ill-structured Type of problem Well-structured Top Lower Programmed decisions Nonprogrammed decisions

7 Types of Problems Well-structured problems are problems that are straightforward, familiar to the decision maker, and the goal is clear, the information about them are complete. Ill-structure problems are new, or unusual, and information about such problems is ambiguous or incomplete.

8 Types of Decisions Programmed decision is a repetitive decision that can be handle by a routine approach. (Procedure, rule, policy) Non-programmed decision is a decision that must be custom-made to solve unique and non-recurring problems.

9 Exhibit 5-4 Decision-Making High Low RationIntuitive AnalyticConceptual DirectiveBehavioral Way of Thinking Tolerance for Ambiguity

10 The Advantages and Disadvantages of Group Decision Making  More complete information  More alternatives  Increasing acceptance of a solution  Increasing legitimacy and democracy Advantages  Time-consuming  Minority domination  Pressures to conform (groupthink)  Ambiguous responsibility Disadvantages

11 Several Effective Ways of Group Decision-Making Brainstorming This is an idea-generating process that encourages alternatives while withholding criticism. Nominal group technique This is a decision-making technique in which group members are physically present but operate independently.

12 Delphic technique This is a decision-making technique in which participants are specialist in some field, they are not necessary to assemble together, and required to write solution alternatives anonymously. Electronic meeting This is a type of nominal group technique in which participants are linked by computers.

13 Study & Practice How to organize an effective meeting? What’s the actions of the bounded-rational decision maker? What’s the advantages and disadvantages of group decisions? Understand several important ways of group decision

14 Quantitative Decision-Making Techniques Payoff Matrices Decision Trees Break-Even Analysis

15 Payoff Matrices Maximax choice Optimistic decision, maximizing the maximum possible payoff Maximin choice Pessimistic decision, maximizing the minimum possible payoff Regret choice Minimizing the maximum regret

16 Exhibit Payoff Matrix for Discover Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S S S S

17 Exhibit 6-2 Maximax Choice Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S S S S Max S428

18 Exhibit 6-3 Maximin Choice Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S S S S Min S315

19 Exhibit 6-3 Regret Choice Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13(11) 14(7) 11(17) 17 S2 9(15) 15(6) 18(10) 15 S3 24(0) 21(0) 15(13) 13 S4 18(6) 14(7) 28 (0) 7 Max S4 7

20 Exhibit 6-4 Decision Trees =Decision point =Alternatives branch =Probability branch =Possible value =Outcome point

21 Exhibit 6-4 Decision Tree and Expected Values for Renting a Large or Small Retail Space $240,000 Rent 12,000sq.ft Rent 20,000sq.ft Strong.70 Strong.70 Weak.30 Weak.30 $320,000 $50,000 $130,000 Expected value(in 000s).70[320]+.30[50]=239 Expected value(in 000s).70[240]+.30[130]=207

22 Rent 12,000sq.ft Rent 20,000sq.ft Strong.70 Strong.70 Weak.30 Weak.30 $320,000 $50,000 $130,000 Add 4000 $10,000 No expansion 1.0 $300,000 $240,000 2 years 8 years

23 Break-Even Analysis This is a technique for identifying the point at which total revenue is just sufficient to cover total costs.

24 Exhibit 6-5 The Break-Even Analysis F(Total fixed cost) Revenues/cost Output S(Total revenue) O A C(Total cost) Variable cost Fixed cost E Break-even point B


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