# Lecture 4 Decision Making

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Lecture 4 Decision Making
The Essence of the Manager’s Job

Outline of the Lecture The Decision-Making Process
The Manager as Decision Maker

Learning Outcomes The decision-making process
▲Define decision and decision-making process. ▲ Describe the eight steps in the decision-making process. The manager as decision maker ▲Discuss the assumptions of rational decision making ▲ Describe the concepts of bounded rationality, satisficing, and escalation of commitment

Learning outcomes ▲ Explain intuitive decision making
▲ Contrast programmed and nonprogrammed decisions ▲ Contrast the 3 decision-making conditions ▲ Explain maximax, maximin, and minimax decision choice approaches ▲ Discuss the 4 decision-making styles ▲ Explain the managerial decision-making model.

The Decision-Making Process
Decision (p156) A choice from two or more alternatives Decision-making process A set of 8 steps that include identifying a problem, selecting alternative, and evaluating the decision’s effectiveness.

Which one do you choose?

Significance of decision-making
＊Each use it frequently ,even some are unconsciously ＊Outcomes are different based on the different choices. Question: Why the choice make a difference? ▲As for managers and operatives ★Decision-making is a process, not just a choice among Alternatives---《老子》第六十四章：“慎终如始，则无败事。”

8 Steps of Decision-Making Process
Identifying a problem(界定问题） Identification of Decision Criteria（确定决策标准） Allocation of Weights to Criteria（确定标准的权重） Development of Alternatives（罗列待选项） Analysis of Alternatives(分析选项） Selection of an Alternative（选择） Implementation of the Alternative（实施所选） Evaluation of Decision Effectiveness（决策效果评估）

Step1 Identifying a problem(界定问题）
What is problem? A discrepancy between an existing state and a desired state of affairs.

A problem or a symptom of problem? Did all discrepancies be considered ? Is there any pressure on correcting it? Are there any resources be assigned to solve the problem? Is the problem subjective?

Step2 Identifying Decision Criteria
• decision criteria - what’s relevant in making a decision ★Costs that will be incurred (investments required) ★Risks likely to be encountered (chance of failure) ★Outcomes that are desired (growth of the firm): market share/time saving/customer satisfaction

Step 3 -Allocating Weights to the Criteria
Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process. To decide where the emphasis is

Question How do decision makers know what weight to assign to the decision criteria? 读大学应有效益的权重应该如何确定？

Step 4 - Developing Alternatives
list the viable alternatives that could resolve the problem without evaluating them As much as possible

Step 5 - Analyzing Alternatives
each alternative is evaluated against the criteria2 and 3. Comparing the weaknesses and strengths of each alternatives

Step 6 - Selecting an Alternative
Comparing with the results and select the best one from those considered

Step 7 - Implementing the Alternative
implementation - conveying the decision to those affected by it and getting their commitment to it participation in decision-making process inclines people to support the decision Reassess the environment for any changes

Step 8 - Evaluating Decision Effectiveness
The soundness of the decision is judged by its outcomes. How effectively was the problem resolved by outcomes resulting from the chosen alternatives? If the problem was not resolved, what went wrong? After evaluation, the whole decision process will start over.

Practice 请分别从小和尚、高和尚、和胖和尚的角度进行“不去挑水”的决策过程分析。
What if the problem isn’t solved by my decision? Did I make a bad decision?

Exhibit 6–5 Decisions in the Management Functions

The Manager as Decision Maker
How decisions are made: rationality, bounded rationality, and intuition The types of problems and decisions managers face Decision-making conditions Decision-making styles

Assumption of Rationality
Managers make consistent, value-maximizing choices with specified constraints. Assumptions are that decision makers: Are perfectly rational, fully objective, and logical. Have carefully defined the problem and identified all viable alternatives. Have a clear and specific goal Will select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests.

Exhibit 6–6 Assumptions of Rationality

Making Decisions (cont’d)
Bounded Rationality Managers make decisions rationally, but are limited (bounded) by their ability to process information. Assumptions are that decision makers: Will not seek out or have knowledge of all alternatives Will satisfice—choose the first alternative encountered that satisfactorily solves the problem—rather than maximize the outcome of their decision by considering all alternatives and choosing the best. Influence on decision making Escalation of commitment（承诺升级）: an increased commitment to a previous decision despite evidence that it may have been wrong.

Role of Intuition - making decisions on the basis of experience and accumulated judgment does not rely on a systematic or thorough analysis of the problem generally complements a rational analysis

Exhibit 6–7 What is Intuition?

Types of Problems and Decisions
-Structured Problems Straight forward, familiar, and easily defined problems -the goal of the decision maker is clear -the problem is familiar -and information about the problem is easily defined and complete – Programmed Decisions A repetitive decision that can be handled by a routine approach. -used to address structured problems -a repetitive decision

Three Possible Programmed Decisions
• procedure(程序） – a series of interrelated sequential steps used to respond to a structured problem • rule （规定）- An explicit statement of what to do or not to do • policy（政策） -A guidelines or parameters(范围） for decision making -a guide that establishes parameters for making decisions rather than specifically stating what should or should not be done

Question Policies seem kind of wishy-washy(理念不坚定的）. What purpose do they serve? This decision-making situation can be difficult because it involves a friend. A friend attend the interview which you lead and be a senior interviewer. Will it make a difference? Should it make a difference?

Unstructured problems and nonprogrammed decisions
-UnStructured Problems - new, unusual problems for which information is ambiguous or incomplete – Nonprogrammed Decisions –a unique decision that requires a custom-made response -used to address unstructured problems • produce a custom-made response • more frequent among higher-level managers

Exhibit 6–8 Programmed versus Nonprogrammed Decisions

Integration at the higher levels of the organization, managers are dealing with poorly structured problems and using non-programmed decisions at lower levels, managers are dealing with well-structured problems by using programmed decisions Keep in mind - few decisions in the real world are either fully programmed or non-programmed

Decision-Making Conditions
– Certainty: A situation in which a manager can make accurate decisions because all outcomes are known. • idealistic rather than realistic – Risk :A situation in which the decision maker is able to estimate the likelihood of certain outcomes • expected value - the conditional return from each possible outcome – multiply expected revenue from each outcome by the probability of each outcome expected value = expected revenues × probability Ei = ΣERij ㄨ Pij

Uncertainty – Uncertainty - a situation in which the decision maker has neither certainty nor reasonable probability estimates available • the limited amount of information available to the decision maker • psychological orientation of decision maker – maximax choice(大中取大） - optimistic – maximin choice （小中取大）- pessimistic – minimax （最小最大后悔值）- minimize the maximum “regret” P199 Exhibit6-11 Regret Matrix

Exhibit 6–10 Payoff Matrix

Visa Marketing Strategy
MasterCard’s Response CA1 CA2 CA3 S1 24-13=11 21-14=7 28-11=17 S2 24-9=15 21-15=6 S3 24-24=0 21-21=0 28-15=13 S4 24-18=6 28-28=0

Exhibit 6–11 Regret Matrix

Steps of Uncertainty Decision Making
1, To select the maximum payoffs from different conditions. 2, To get the regret 3, In contrast to the regret and get the maximum ones. 4, Compare them and choose the minimum one as the result.

3,Lateral Compare to select the maximum regret figure
4,Then choose the minimum one as the result---S4=7

Decision Making Styles
– two dimensions define the approach to decision making • way of thinking - differs from rational to intuitive Rational: Look at information in order and make sure it is logical Intuitive: Need not to process information in a certain order but look at it as a whole. • tolerance for ambiguity - differs from low to high Low tolerance: Try to get structured information to minimize the ambiguity High tolerance: Tolerate for ambiguity and process many thoughts – define four decision-making styles

Exhibit 6–12 Decision-Making Matrix

Decision-making Styles
• Directive （命令型）– characterized by low tolerance for ambiguity and a rational way of thinking -fast, efficient, logical, focus on short run. -making decisions with minimal information and assessing few alternatives. • Analytic（分析型） – characterized by a high tolerance for -careful and able to adapt or cope with new situations -want more information and consider more alternatives

Decision-Making Styles
• Conceptual –characterized by a high tolerance for ambiguity and an intuitive way of thinking -broad outlook, look at many alternatives -focus on long run and good at finding creative decisions. • Behavioral – characterized by a low tolerance for ambiguity and an intuitive way of thinking -seek acceptance of decisions from others －most managers realistically probably have a Dominant（统治的） style and alternate（交替变化的） styles

Exhibit 6–13 Common Decision-Making Errors and Biases

Decision-Making Biases and Errors
Heuristics (启发） Using “rules of thumb” to simplify decision making. Overconfidence Bias Holding unrealistically positive views of one’s self and one’s performance. Immediate Gratification Bias（即刻回报） Choosing alternatives that offer immediate rewards and that to avoid immediate costs.

Decision-Making Biases and Errors (cont’d)
Anchoring Effect（第一印象） Fixating on initial information and ignoring subsequent information. Selective Perception Bias（选择性感知） Selecting organizing and interpreting events based on the decision maker’s biased perceptions. Confirmation Bias（寻求认同） Seeking out information that reaffirms past choices and discounting contradictory information.

Decision-Making Biases and Errors (cont’d)
Framing Bias Selecting and highlighting certain aspects of a situation while ignoring other aspects. Availability Bias Losing decision-making objectivity by focusing on the most recent events. Representation Bias（类比型） Drawing analogies（类比） and seeing identical situations when none exist. Randomness Bias Creating unfounded meaning out of random events.

Decision-Making Biases and Errors (cont’d)
Sunk Costs Errors（沉没成本） Forgetting that current actions cannot influence past events and relate only to future consequences. Self-Serving Bias（自我为中心） Taking quick credit for successes and blaming outside factors for failures. Hindsight Bias（事后诸葛亮） Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact).

Exhibit 6–14 Overview of Managerial Decision Making