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3 Chapter Foundations of Decision Making Copyright ©2011 Pearson Education
3-2 Learning Outcomes Describe the decision-making process Explain the three approaches managers can use to make decisions Describe the types of decisions and decision- making conditions managers face Discuss group decision making Discuss contemporary issues in managerial decision making Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-3 How Do Managers Make Decisions? Decision-Making Process A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution Problem A discrepancy between an existing and a desired state of affairs Decision Criteria Factors that are relevant in a decision Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-4 Copyright ©2011 Pearson Education
3-5 Decision Implementation Putting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it. Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-6 Common Errors in the Decision- Making Process Heuristics – “rules of thumb” to simplify decision making – May lead to errors and biases Overconfidence Bias – Unrealistically positive views of one’s self Copyright ©2011 Pearson Education
3-7 Copyright ©2011 Pearson Education
3-8 What is the Rational Model of Decision Making? Rational Model assumes – that managers’ decision making will be rational logical and consistent choices to maximize value – The problem faced would be clear and unambiguous – the decision maker would have a clear and specific goal – know all possible alternatives and consequences Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-9 What is Bounded Rationality? Managers are limited in their ability to process information Because managers can’t analyze information on all alternatives, they satisfice Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-10 Copyright ©2011 Pearson Education
3-11 What Role Does Intuition Play in Managerial Decision Making? Intuitive Decision Making – making decisions on the basis of experience, feelings and accumulated judgment – described as “unconscious reasoning.” Copyright ©2011 Pearson Education
3-12 How Do Problems Differ? Structured Problem – A straightforward, familiar, and easily defined problem Unstructured Problem – A problem that is new or unusual for which information is ambiguous or incomplete. Copyright ©2011 Pearson Education
3-13 What Are Programmed and Nonprogrammed Decisions? Programmed Decisions – A repetitive decision that can be handled using a routine approach Nonprogrammed Decisions – A unique and nonrecurring decision that requires a custom-made solution. Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-14 Programmed Decision-Making Aids Policy – A general guide that establishes parameters for making decisions about recurring problems. Procedure – A series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation). Rule – An explicit statement that tells managers what they ought or ought not to do (limits on procedural actions). Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-15 Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall
3-16 What Decision Making Conditions Do Managers Face? Certainty – A situation in which a decision maker can make accurate decisions because all outcomes are known Uncertainty – A situation in which a decision maker has neither certainty nor reasonable probability estimates available Risk – A situation in which a decision maker is able to estimate the likelihood of certain outcomes Copyright ©2011 Pearson Education
3-17 Group Decision Making Advantages – Group decisions provide more complete information – Diversity of experiences and perspectives are higher – Groups generate more alternatives – Group decisions increase acceptance of a solution Disadvantages – Group decisions are time consuming – May be subject to minority domination – Subject to pressure to conform – Responsibility is ambiguous – Subject to Groupthink which undermines critical thinking Copyright ©2011 Pearson Education
3-18 When Are Groups Most Effective? Groups are more effective for decisions requiring – Accuracy – Speed – Creativity – Acceptance Ideal Group Size – 5-15 Copyright ©2011 Pearson Education
3-19 How Can You Improve Group Decision Making? Brainstorming – An idea-generating process that encourages alternatives while withholding criticism Nominal Group Technique – A decision-making technique in which group members are physically present but operate independently Electronic Meeting – Participants are linked by computer Copyright ©2011 Pearson Education
3-20 What Contemporary Decision-Making Issues Do Managers Face? Ringisei – Japanese consensus- forming group decisions. Creativity – The ability to produce novel and useful ideas Copyright ©2011 Pearson Education
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