Foundations of Decision Making ©Prentice Hall, 2001 Chapter 4

Learning Outcomes Describe the decision-making process Analyze the rational decision-making model Explain the limits of rationality Learn how certainty, risk, and uncertainty relate to decision making Discuss the bounded-rational decision maker ©Prentice Hall, 2001 Chapter 4

Learning Outcomes Identify the two types of decision problems and the two decisions that solve them Learn how heuristics affect decision making Identify four decision-making styles Weigh the pros and cons of group decisions Learn three ways to improve group decision making ©Prentice Hall, 2001 Chapter 4

The Decision-Making Process Identification of a Problem I need to buy a new car. Price Interior Comfort Durability Repair Record Performance Identification of Decision Criteria Decision making is a process rather than a simple act of choosing among alternatives. The decision-making process consists of eight steps which starts with identifying the problem, moves through selecting an alternative that can alleviate the problem, and concludes with evaluating the decision’s effectiveness. The decision-making process begins when a problem is identified (step 1). Problem identification can be challenging. Most problems do not come with neon identification signs. Furthermore, the manager who identifies and solves the wrong problem is no better than the manager who identifies a problem and does nothing. Making a comparison between their current state of affairs and some standard, such as past performance or previously set goals, helps managers identify problems in the workplace. After identifying a problem, the manager should select appropriate decision criteria (step 2). These criteria reflect the factors which the manager thinks are relevant in a decision. Because all criteria are not equally important, the manager must prioritize each one by allocating weights to the decision criteria (step 3): that is, indicating the relative importance of the relevant criteria by assigning a weight to each. Allocation of Weights to Criteria Price Interior Comfort Durability Repair Record Performance 10 8 6 4 2 ©Prentice Hall, 2001 Chapter 4

Development of Alternatives Price Comfort Durability Repair Record Chevy Isuzu Audi Dodge Mazda Jeep Ford Toyota Price Comfort Durability Repair Record Performance Toyota Analysis of Alternatives Dodge Ford Audi Jeep Isuzu Mazda Chevy Selection of an Alternative The Toyota is the best. Next, the manager must list, but not evaluate, feasible problem-solving alternatives (step 4). Then, he or she must analyze each one (step 5). As each alternative is evaluated against the criteria, the strengths and weakness of each alternative will become evident. Obviously, most decisions contain judgments which are reflected in the criteria chosen, the weights assigned to them, and the evaluation of the alternatives. Then, the manager should select the alternative that scored the highest in the fifth step (step 6). The decision-making process can fail if the chosen alternative is not implemented properly. Successful decision implementation (step 7) includes identifying those who will be affected by the decision and gaining their commitment to the decision. The last step in the decision-making process (step 8) answers this question: Did the alternative that was chosen and implemented accomplish the desired result? Implementation of the Alternative Appraisal of Decision Results ©Prentice Hall, 2001 Chapter 4

Problem Clarity Constant Preferences Single Goal Assumptions of Rational Decision Making No Constraints Known Options The model contains seven assumptions. Problem clarity means the problem is clear and unambiguous. Single goal means that a single, well-defined goal is to be achieved. Known options mean that all relevant criteria and viable alternatives can be identified. Clear preferences show that criteria and alternatives have been ranked and weighted. Constant preferences reflect constant criteria and stable weights over time. No time or cost constraints allow for full information about criteria and alternatives. Maximum payoff means a decision maker will pick the alternative with the highest yield. Maximum Payoff Clear Preferences ©Prentice Hall, 2001 Chapter 4

A Model of Bounded Rationality Ascertain the Need for a Decision Set “Satisficing” Criteria Identify a Limited Set of Alternatives Compare Alternatives Against Criteria Select the First “Good Enough” Choice When confronted by a complex problem, most people will reduce the problem to its simplest level and satisfice by seeking solutions that are satisfactory and sufficient. Eschewing full rationality, they operate within bounded rationality and construct simplified models to extract the essential features of the problem and then behave rationally within the limits of the simple model. Here is how the bounded rationality typically operates. Once a problem is identified, the search for criteria and alternatives begins. But the list of criteria is likely to be far from exhaustive. The decision maker will identify a limited list made up of choices that are easy to find or highly visible. In most cases, they will represent familiar criteria and tried-and-true solutions. One this limited set of alternatives is identified, the decision maker will begin reviewing them. But the review will not be comprehensive--not all alternatives will be evaluated carefully. Instead, the decision maker will begin with alternatives that differ only to a small degree from the choice currently in effect. Following along familiar and well-worn paths, the decision maker will review alternatives only until one that is “good enough” (that meets acceptable levels of performance) can be found. The first alternative that meets the “good enough” criterion ends the search. So the final solution represents a satisficing choice rather than an optimizing one. Yes Simplify the Problem Expand Search for Alternatives A “Satisficing” Alternative Exists No ©Prentice Hall, 2001 Chapter 4

Common Errors in Decision Making Availability Heuristic Representative Heuristic Escalation of Commitment To cope with information overload, we rely on two heuristics, or judgmental shortcuts, when we make decisions: availability and representativeness. Both types create biases in a decision maker’s judgment. Another bias is the tendency to escalate commitment to a failing course of action. Availability Heuristic. Using the availability heuristic, people tend to base their judgments on information that is readily available. Representative Heuristic. People often assess the likelihood of an occurrence by drawing analogies and seeing identical situations where they do not exist. Escalation of Commitment. In spite of negative feedback, some managers escalate commitment to a failing enterprise, “throw good money after bad,” if they believe that they are responsible for the failure. They do so to avoid admitting they made a poor decision and to appear behaviorally consistent. In contrast, effective managers differentiate between situations where persistence will or will not pay off. ©Prentice Hall, 2001 Chapter 4

How Do Problems Differ? Well- Structured Poorly Structured Programmed Well-structured problems are straightforward, familiar, and easily defined. In contrast, ill-structured (poorly structured) problems are so new that pertinent information is either ambiguous or incomplete. Repetitive, programmed decisions that can be handled routinely are the most efficient way to handle well-structured problems. Programmed decisions rely heavily on previous solutions. In many cases, such decisions are made according to some systematic procedure, rule, or policy. When problems are ill-structured, however, managers must develop unique solutions by using nonprogrammed decision making techniques. Such decisions are unique and nonrecurring. When a manager confronts an ill-structured problem, there is no cut-and-dried solution. A custom-made, nonprogrammed response is needed. Programmed Decisions Nonprogrammed Decisions ©Prentice Hall, 2001 Chapter 4

Making Programmed Decisions Sequential Procedures Making Programmed Decisions Specific Rules A procedure is a series of interrelated sequential steps that a manager can use for responding to a well-structured problem. The only real challenge is to identify the problem. Once the problem is clear, so is the procedure. A rule is an explicit statement that tells a manager what he or she ought or ought not to do. Rules are simple to follow and promote consistency. A third guide for making programmed decisions is policy. In contrast to rules, policies establish parameters for the decision maker rather than specifically stating what should or should not be done. Guiding Policies ©Prentice Hall, 2001 Chapter 4

Integrating Decision Making Poorly Structured Top Nonprogrammed Decisions Type of Problem Level in Organization Programmed Decisions The four organizational levels are top, middle, and first-line managers and operative employees. At which of these levels should decisions be made? Recurring or routine decisions, programmed decisions, should be made by lower levels of management: for instance, middle-level managers make coordinating decisions with short-term implications and first-line managers make routine departmental decisions to determine what needs to be done. Nonrecurring or unique decisions, nonprogrammed decisions, should be made by top management. Operative employees make job-related decisions to determine how a job should be done. Few decisions are either fully programmed or fully nonprogrammed. These are extremes, and most decisions fall somewhere in between. Few programmed decisions can eliminate individual judgment completely, and even the most unusual decision-making situation can be helped by considering programmed routines. Whenever possible, management decisions are likely to be programmed. At the top of the organization, the programmed approach is not realistic, since most of the problems that top management confront are nonrecurring. There are strong economic incentives for top management to create policies, standard operating procedures, and rules to guide other managers, because discretion costs money. The more nonprogrammed the decision, the greater the judgment required to make it. So, programmed decisions cut costs by minimizing the need for managers to exercise discretion. Well-Structured Lower ©Prentice Hall, 2001 Chapter 4

Decision-Making Styles Tolerance for Ambiguity High Analytic Conceptual Tolerance for Ambiguity Directive Behavioral Personality and individual differences affect our decisions. Two of these variables are particularly relevant to organizational decisions: the individual’s decision-making style and level of moral development. The decision-styles model above identifies four approaches to decision making. The model illustrates that people differ along two dimensions: in their thinking styles (some are logical and rational, others intuitive and creative); in their tolerance for ambiguity. People using the directive style dislike ambiguity and prefer rationality. Those using the analytic style confront ambiguity by demanding more alternatives. Individuals using the conceptual style consider the “big picture” and seek multiple alternative. Those using a behavioral style work well with others and are receptive to suggestions. Low Rational Way of Thinking Intuitive ©Prentice Hall, 2001 Chapter 4

Group Decision Making Advantages Disadvantages More information More alternatives Increased acceptance Legitimacy Time-consuming Minority domination Pressures to conform Unclear responsibility There are several advantages to group decision making. Group decisions provide more complete information than do individual ones. A group will bring a diversity of experience and perspectives to the decision process that an individual, acting alone, cannot. Groups also generate more alternatives, because of a greater quantity and diversity of information. Group decision making increases acceptance of a solution. If those who will be affected by a solution and who must implement it can participate in making it, they will be more likely to accept the solution. Since group decision-making is consistent with democratic ideals, decisions made by groups are perceived as being more legitimate than decisions made by a single person. There are several disadvantages to group decision making. Group decisions are time consuming, and groups almost always take more time to make a decision than an individual would take. There may also be minority group domination, because group members will differ in many ways: for example, status in the organization, experience, verbal skills, or assertiveness. A minority group that dominates the group decision-making process will have an undue influence on the final decision. Another problem focuses on the pressures to conform in groups. This pressure can result in groupthink—group members withhold deviant, minority, or unpopular views in order to give the appearance of agreement . Finally, there is ambiguous responsibility. Since group members share responsibility, who is actually responsible for the final outcome? ©Prentice Hall, 2001 Chapter 4

Individual Versus Group Higher Quality Decisions Strengths of Individuals Groups Consistent Values Clear Accountability Speed Individual Versus Group Decision Making Increased Acceptance Higher Quality Decisions Input and Diversity Group decisions are not always superior to those made by individuals. The following reviews the strengths of each one. Strengths of Individual Decision Making. Because an individual does not have to conduct a meeting to discuss alternatives, a major advantage of an individual decision is speed. Individual decisions also provide clear accountability and tend to convey consistent values. Strengths of Group Decision Making. Groups can generate more complete information and knowledge and offer an increased diversity of views. A group will almost always outperform an individual, so groups generate higher-quality decisions. And since group members participate in decision making, groups lead to increased acceptance of a solution. Balancing Pros and Cons. Effectiveness and efficiency can determine whether groups or individuals should make decisions. Groups are more effective because they generate more alternatives and produce higher-quality decisions. But, individuals are more efficient and consume less time and resources to make a decision. ©Prentice Hall, 2001 Chapter 4

Group Decision Making Brainstorming Nominal Group Technique Electronic Group decision making can be improved by using the following techniques: brainstorming, nominal groups, and electronic meetings. To overcome conformity pressures that can stifle creative problem solving, managers can use brainstorming: an idea-generating process that specifically encourages all alternatives by withholding any criticism of those alternatives. The nominal group technique requires that group members must be present during the meeting, but they must operate independently. This technique obtains input from all group members but it does not restrict independent thinking. An electronic meeting is a type of nominal group technique in which participants are linked by computer. Electronic meetings have several advantages: anonymity, honesty, and speed. But, several drawbacks also exist: those who type well outshine those who are eloquent but lack keyboarding skills; those with the best ideas do not get credit for them; and the process lacks the informational richness of face-to-face communication. But, this technology is in its infancy. For example, real-time video conferencing is reinventing electronic meetings. Electronic Meetings ©Prentice Hall, 2001 Chapter 4

National Culture and Decision Making Style Degree of Risk Research shows that, to some extent, decision making practices differ from country to country. Therefore, the cultural background of a manager will influence his or her decision making preferences: for example, group versus individual decisions, participative or autocratic decisions, and degree of acceptable risk. Decision making in Japan, for example, is much more group oriented than in the United States. The Japanese value conformity and cooperation. Before making decisions, Japanese CEOs gather large amounts of information, which is then used in consensus-forming group decisions called ringisei. Because employees in Japanese organizations have a high degree of job security, managerial decisions take a long-term perspective rather than focus on short-term profits as is often the practice in the United States. As managers deal with employees from diverse cultures, they must recognize what is common and accepted behavior when asking them to make decisions. Managers who accommodate the diversity in decision-making practices and philosophies can expect a high payoff as they capture the perspectives and strengths that a diverse workforce offers. ©Prentice Hall, 2001 Chapter 4