1. Fundamentals of Decision Making
Chapter 08

2. Fundamentals of Decision Making
Learning Goals
Explain certainty, risk, and uncertainty and how they affect decision making
Describe the characteristics of routine, adaptive, and innovative decisions
Discuss the rational and bounded rationality models of managerial decision making
Explain the features of political managerial decision making

3. Decision making includes:
defining problems,
gathering information,
generating alternatives, and
choosing a course of action
We’ve got lots of challenges ahead of us. I spend about 75% of my time solving problems of one sort or another. The other 25% is really wonderful, though. Watching people grow, develop, achieve, and do good things and seeing the company succeed is very rewarding and lots of fun.
David Hoover
Chairman, CEO and President
Ball Corporation

4. Summary of Decision-Making Conditions
Certainty
Uncertainty
Objective probabilities
Subjective probabilities
Risk
Clear
Intuition and judgment

5. Decision-Making Conditions: What
is Certainty?
The condition under which individuals are:
fully informed about a problem,
alternative solutions are known, and
the results of each solution are known
Both the problem and alternative solutions are totally known and well defined
Exception for most managers

6. What is Risk?
The condition under which individuals can:
define a problem,
specify the probability of certain events,
identify alternative solutions, and
state the probability of each solution leading to a result
Probability: the percentage of times that a specific result would occur if an individual were to make the same decision a large number of times

7. What is Risk? (cont’d)
Objective probability: the likelihood that a specific result will occur, based on hard facts and numbers
Subjective probability: the likelihood that a specific result will occur, based on personal judgment

8. What is Uncertainty?
Condition under which individuals do not have the necessary information to assign probabilities to the outcomes of alternative solutions
May not even be able to define the problem, much less identify alternative solutions and possible outcomes

9. Examples of Possible Crises as Sources of Uncertainty and High Risk
Economic Crises
Physical Crises
Recessions
Stock market crashes
Hostile takeovers
Industrial accidents
Supply breakdowns
Product failures
Other crises
Natural Disasters
Information Crises
Fires
Floods
Earthquakes
Theft of proprietary information
Tampering with company records
Cyberattacks

10. Integrating Framework
Unusual and
ambiguous
Innovative
Decisions
Uncertainty
Adaptive
Decisions
Conditions under which decisions are made
Risk
Routine
Decisions
Problem Types
Certainty
Known and
well defined
Untried and ambiguous
Solution Types
(Alternative Solutions)

11. Basic Types of Decisions:
Types of Problems
Relatively common and well defined
Unusual and ambiguous
Firefighting
Solutions are incomplete
Problems recur and cascade
Urgency supersedes importance
Some problems become crises

12. Routine Decisions
Standard choices made in response to relatively well-defined and common problems and alternative solutions
Typically made under certainty and objective probability
Standards often used to set the framework for making routine decisions

13. Examples of decision rules at Four Seasons hotels and resorts
Routine Decisions
Reservations
Hotel Arrival
Phone service will be highly efficient, including: answered before the fourth ring; no hold longer than 15 seconds; or, in case of longer holds, call- backs offered, then provided in less than three minutes
The doorman (or first-contact employee) will actively greet guests, smile, make eye contact, and speak clearly in a friendly manner
Examples of decision rules at Four Seasons hotels and resorts
Messages and Paging
Hotel Departure
Phone service will be highly efficient, including: answered before the fourth ring; no longer than 15 seconds
No guest will wait longer than five minutes for baggage assistance, once the bellman is called (eight minutes in resorts)

14. Adaptive Decisions
Choices made in response to a combination of moderately unusual problems and alternative solutions
Convergence—a business shift in which two connections with the customer that were previously viewed as competing or separate (e.g., brick-and-mortar bookstores and Internet bookstores) come to be seen as complementary
Continuous improvement—a management philosophy that approaches the challenge of product and process enhancements as an ongoing effort to increase the levels of quality and excellence

15. Innovative Decisions
Choices based on the discovery, identification, and diagnosis of unusual and ambiguous problems and/or the development of unique or creative alternative solutions
Three forms of innovation for economic progress:
Institutional innovation: includes the legal and institutional framework for business, such as deregulation
Technological innovation: creates the possibility of new products, services, and production methods
Management innovation: major changes in the way organizations are structured and how managers perform their functions

16. Process of Rational Decision Making:
Rational Model
Prescribes a set of phases that individuals or teams should follow to increase the likelihood that their decisions will be logical and optimal
Rational decision: results in the maximum achievement of a goal in a situation
Usually focuses on means—how best to achieve one or more goals

17. Rational Decision-Making Model (adapted from Figure 8.3)
Environmental forces 1
Define and
diagnose
problem 2
Set
goals 3
Search for
alternative
solutions 7
Follow-up
and control
results 4
Compare and
evaluate
alternative solutions 5
Choose among
alternative
solutions 6
Implement
the solution
selected
Environmental forces

18. Rational Model: Define and Diagnose the Problem
Noticing skill: identifying and monitoring numerous external and internal environmental factors and deciding which ones are contributing to the problem(s)
Interpreting skill: assessing the factors noticed and determining which are causes, not merely symptoms, of the real problem(s)
Incorporating skill: relating those interpretations to the current or desired goals
Need to ask probing questions

19. Rational Model: Set Goals
Goals: results to be attained and indicate the direction toward which decisions and actions should be aimed
General goals: provide broad direction for decision making in qualitative terms
Operational goals: state what is to be achieved in quantitative terms, for whom, and within what time period
Hierarchy of goals: represents the formal linking of goals between organizational levels

20. Rational Model: Search for Alternative Solutions
…I think many people in a rush to make a decision do not have enough of the alternatives out in the open. So, they have two of the alternatives and say, “Okay, I’m going this way” but they didn’t think through it enough when there were possibly three or four alternatives. One of the hidden ones might have been the best, and so the issue is making sure that either all or enough of the alternatives are out in the open to allow you to make the best decision.
Gary Tooker
Former CEO & Chairman of Board of Directors
Motorola

21. Bounded Rationality Model
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing

22. Bounded Rationality Model (adapted from Figure 8.5)
Contends that the capacity of the human mind for formulating and solving complex problems is small compared with what is needed for objectively rational behavior
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing

23. Bounded Rationality Model: Decision Biases
Selective perception bias
Concrete information bias
Availability
bias
Gambler’s fallacy bias
Law of small numbers bias

24. Bounded Rationality Model: Decision Biases
…When someone comes to you, you often have a bias about what they are talking about. If you have been in business for 20 to 30 years, chances are you’ve been there and done that. Their idea is generally not so new or innovative as they think. You have a strong prejudice about outcomes. That is a dangerous thing. One of the things you have to do very cognitively to be a good leader is not let your biases or your filters totally cloud the message someone’s trying to deliver.
Jeffrey McKeever
Chairman and CEO
MicroAge

25. Bounded Rationality Model
Inadequate problem definition
New problems often are viewed as being like old problems
Too much focus on symptoms as problems
Laziness
Limited search for alternatives
Options considered until one that seems adequate
Limited information
Ignorance: the lack of relevant information or the incorrect interpretation of the information that is available

26. Bounded Rationality Model: Satisficing
Satisficing is intended to be used in contrast to the classical economist’s idea that in making decisions in business or anywhere in real life, you somehow pick, or somebody gives you, a set of alternatives from which you select the best one—maximize. The satisficing idea is that first of all, you don’t have the alternatives, you’ve got to go out and scratch for them—and that you have mighty shaky ways of evaluating them when you do find them. So you look for alternatives until you get one from which, in terms of your experience and in terms of what you have reason to expect, you will get a reasonable result.
Herbert Simon
Recipient of Nobel Prize in Economics

27. Bounded Rationality Model
Level of Satisficing Can be Raised By:
Personal determination
Setting higher individual or organization standards (goals)
Use of management science and computer-based decision-making and problem-solving techniques
Following the seven steps in the rational model

28. Political Model of Decision Making (adapted from Figure 8.6)
Multiple Stakeholders with power such as:
Customers
Investors
Employees
Divergence in problem definition
Divergence in goals
Divergence in solutions
Political decision
making
Competitors
Unions
Suppliers
Regulatory Agencies
Legislative Bodies