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

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

Exhibit 5-2 Assumptions of Rationality 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

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.

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

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

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.

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.

Exhibit 5-4 Decision-Making High Low Ration Intuitive Analytic Conceptual Directive Behavioral Way of Thinking Tolerance for Ambiguity

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

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.

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.

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

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

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

Exhibit Payoff Matrix for Discover Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 S2 9 15 18 S3 24 21 15 S4 18 14 28

Exhibit 6-2 Maximax Choice Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 14 S2 9 15 18 18 S3 24 21 15 24 S4 18 14 28 28 Max S4 28

Exhibit 6-3 Maximin Choice Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 11 S2 9 15 18 9 S3 24 21 15 15 S4 18 14 28 14 Min S3 15

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

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

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

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

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

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