1. Foundations of Decision Making
Chapter 4
Foundations of Decision Making
PowerPoint Presentation by LiZhe
Management College
C.C.N.U

2. L E A R N I N G O U T C O M E S After reading this chapter, I will be able to:
Describe the steps in the decision-making process.
Identify the assumptions of the rational decision-making model.
Explain the limits to rationality.
Define certainty, risk, and uncertainty as they relate to decision making.
Describe the actions of the bounded-rational decision maker.

3. L E A R N I N G O U T C O M E S (cont’d) After reading this chapter, I will be able to:
Identify the two types of decision problems and the two types of decisions that are used to solve them.
Define heuristics and explain how they affect the decision-making process.
Identify four decision-making styles.
Describe the advantages and disadvantages of group decisions.
Explain three techniques for improving group decision making.

4. Decision-making Decision-making process Problem Decision criteria
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

5. Examples of Planning-Function Decisions
What are the organization’s long-term objectives?
What strategies will best achieve those objectives?
What should the organization’s short-term objectives be?
What is the most efficient means of completing tasks?
What might the competition be considering?
What budgets are needed to complete department tasks?
How difficult should individual goals be?
EXHIBIT 4.1

6. The Decision-Making Process
EXHIBIT 4.2

7. Criteria and Weight in Car-Buying Decision (Scale of 1 to 10)
CRITERION WEIGHT
Price 10
Interior comfort 8
Durability 5
Repair record 5
Performance 3
Handling 1
EXHIBIT 4.3

8. Assessment of Car Alternatives
INITIAL INTERIOR DURA- REPAIR ALTERNATIVES PRICE COMFORT BILITY RECORD PERFORMANCE HANDLING TOTAL
Jeep Cherokee
Ford Mustang
Mercedes C
Pontiac Grand Am
Mazda Tribute
Dodge Durango
Volvo S
Isuzu Axiom
BMW
Audi A
Toyota Camry
Volkswagen Passat
EXHIBIT 4.4

9. Weighting of Vehicles (Assessment Criteria X Criteria Weight)
EXHIBIT 4.5

10. Decision-making (cont’d)
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

11. Making Decisions: The Rational Model
Certainty
The implication that the outcome of every possible alternative is known
Uncertainty
A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined.
Risk
The probability that a particular outcome will result from a given decision

12. Assumptions of Rationality
EXHIBIT 4.6

13. Making Decisions: The Rational Model
Describes choices that are consistent and value-maximizing within specified constraints
Bounded rationality
Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem
Satisfice
Making a “good enough” decision

14. Three Elements of Creativity
Creativity The ability to produce novel and useful ideas
EXHIBIT 4.7
Source: T. M. Amabile, “Motivating Creativity in Organizations,” California Management Review (Fall 1997): 43.

15. Common Decision-making Errors
Heuristics: Using judgmental shortcuts
Availability heuristic
the tendency for people to base their judgments on information that is readily available to them
Representative heuristic
The tendency for people to base judgments of probability on things with which they are familiar
Escalation of commitment
An increased commitment to a previous decision despite negative information

16. How Do Problems Differ? Well-structured problems
Straightforward, familiar, easily defined problems
Ill-structured problems
New problems in which information is ambiguous or incomplete
Programmed decision
A repetitive decision that can be handled by a routine approach
Nonprogrammed decisions
Decisions that must be custom-made to solve unique and nonrecurring problems

17. 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)

18. Types of Problems, Types of Decisions, and Level in the Organization
EXHIBIT 4.8

19. Technology And Decision Making
Expert systems
Software that acts like an expert in analyzing and solving ill-structured problems
Use specialized knowledge about a particular problem area rather than general knowledge
Use qualitative reasoning rather than numerical calculations
Perform at a level of competence higher than that of nonexpert humans.
Neural networks
Software that is designed to imitate the structure of brain cells and connections among them

20. Decision Making: Styles
Directive style
Characterizes the low tolerance for ambiguity and a rational way of thinking of individuals who are logical and efficient and typically make fast decisions that focus on the short term.
Analytic style
Characterizes the high tolerance for ambiguity combined with a rational way of thinking of individuals who prefer to have complete information before making a decision.

21. Decision Making: Styles (cont’d)
Conceptual style
Individuals who tend to be very broad in outlook, to look at many alternatives, and to focus on the long run and often look for creative solutions.
Behavioral style
Individuals who think intuitively but have a low tolerance for uncertainty; they work well with others, are open to suggestions, and are concerned about the individuals who work for them.

22. Decision-Making Styles
EXHIBIT 4.9

23. Group Decision Making Advantages Disadvantages
Make more accurate decisions
Provides more complete information
Offers a greater diversity of experiences and perspectives
Generates more alternatives
Increases acceptance of a solution
Increases the legitimacy of a decision.
Disadvantages
Is more time-consuming and less efficient
Minority domination can influence decision process
Increased pressures to conform to the group’s mindset (groupthink)
Ambiguous responsibility for the outcomes of decisions

24. Improving 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
A type of nominal group technique in which participants are linked by computer

26. Payoff Matrix for VISA
VISA AMERICAN EXPRESS’ MARKETING RESPONSE STRATEGY (IN MILLIONS OF $)
CA1 CA2 CA3
S S S S
EXHIBIT QM–1

27. Regret Matrix for VISA
VISA AMERICAN EXPRESS’ MARKETING RESPONSE STRATEGY (IN MILLIONS OF $)
CA1 CA2 CA3
S S S S
EXHIBIT QM–2

28. Decision Tree and Expected Values for Renting a Large or Small Retail Space
EXHIBIT QM–3

29. The Breakeven Analysis
EXHIBIT QM–4

30. Popular Financial Controls
OBJECTIVE RATIO CALCULATION
Liquidity test Current ratio _Current assets_ Current liabilities
Acid test Current assets level inventories Current liabilities
Leverage test Debt-to-assets _Total debt_ Total assets
Times-interest-earned Profits before interest and taxes Total interest charges
Operations test Inventory turnover Cost of sales Inventory
Total-assets-turnover Revenues Total assets
Profitability Profit margin-on-revenues Net profit after taxes Total revenues
Return-on-investment Net profit after taxes Total assets
EXHIBIT QM–5

31. Production Data for Virus Software
Number of Hours Required per Unit
WINDOWS MAC MONTHLY PRODUCT DEPARTMENT VERSION VERSION CAPACITY (HOURS)
Design 4 6 2,400
Manufacture
Profit per unit $18 $24
EXHIBIT QM–6

32. Graphical Solution to Hernandez’s Linear Programming Problem
EXHIBIT QM–7

33. Queuing Theory Queuing theory
A technique that balances the cost of having a waiting line against the cost of service to maintain that line

34. Determining the Most Economic Order Quantity
EXHIBIT QM–8

35. Economic Order Quantity
Economic order quantity (EOQ)
A technique for balancing purchase, ordering, carrying, and stock-out costs to derive the optimum quantity for a purchase order