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Chapter 5 Decisions-making

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1 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

2 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

3 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

4 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.

5 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

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

7 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.

8 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.

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

10 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

11 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.

12 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.

13 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

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

15 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

16 Exhibit Payoff Matrix for Discover
Discover Marketing strategy Visa’s Response(in millions of $) CA CA CA3 S S S S

17 Exhibit 6-2 Maximax Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA CA CA3 S S S S Max S4 28

18 Exhibit 6-3 Maximin Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA CA CA3 S S S S Min S3 15

19 Exhibit 6-3 Regret Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA CA CA3 S (11) (7) (17) S (15) (6) (10) S (0) (0) (13) S (6) (7) (0) Max S4 7

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

21 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

22 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

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

24 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)

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