The Decision Maker’s Environment Higher-level = More flexibility Influences Patterns of authority Purpose of organization Formal and informal structure Superiors and subordinates Successful managers must develop an appreciation of different forces See Learning Objective 3: Explain the decision maker’s environment and the conditions for making a decision. See text pages: 87-88 The Decision Maker’s Environment A manager’s freedom to make decisions depends largely on the manager’s position within the organization and on its structure. In general, higher-level managers have more flexibility and freedom of choice. The patterns of authority outlined by the formal organization structure also influence the flexibility of the decision maker. Another important factor in decision-making style is the purpose and tradition of the organization. The organization’s formal and informal group structures also affect decision-making style. The final subset of the environment includes all of the decision maker’s superiors and subordinates. The personalities, backgrounds, and expectations of these people influence the decision maker. Successful managers must develop an appreciation of the different environmental forces that both influence them and are influence by their decisions.

Conditions for Making Decisions Depends on what happens later Certainty Situation of Certainty Risk Situation of risk Precise Probabilities Expected value analysis See Learning Objective 3: Explain the decision maker’s environment and the conditions for making a decision. See text pages: 88-89 Conditions for Making Decisions Decisions are not always made with the same amount of available information. The best decision often depends on what happens later. Certainty Knowing exactly what will happen places the decision maker in a situation of certainty. Rarely, however, are decisions made in today’s organizations under a condition of certainty. Risk A decision maker is in a situation of risk if certain reliable but incomplete information is available. Some ideas of the relative probabilities associated with each outcome are known. The precise probabilities of the various outcomes usually are not known. Under conditions of risk, the decision maker can use expected value analysis to help arrive at a decision. With this technique, the expected payoff of each known alternative is mathematically calculated based on its probability of occurrence.

Conditions for Making Decisions Uncertainty Situation of uncertainty No knowledge of probabilities One of several approaches can be taken Maximax approach Maximin approach Risk-averting approach See Learning Objective 3: Explain the decision maker’s environment and the conditions for making a decision. See text pages: 89-90 Uncertainty When a decision maker has very little or no reliable information on which to evaluate the different possible outcomes, he or she is operating in a situation of uncertainty. Under a situation of uncertainty, the decision maker has no knowledge concerning the probabilities associated with different possible outcomes. If the decision maker has little or no knowledge about which state of nature will occur, one of several approaches may be taken. An optimistic, or gambling, approach is called the maximax approach. A pessimistic approach is the maximin approach. A third approach is to choose the alternative with the least variation among its possible outcomes. This is the risk-averting approach.