1. Chapter 4 Foundations of Decision Making1

2. Learning Outcomes Describe the steps in the decision-making process
Identify the assumptions of the rational decision-making model
Explain the limits to rationality
Define certainty, risk, and uncertainty as they relate to decision making
Describe the actions of the bounded-rational decision maker (continued) 2

3. Learning Outcomes (continued)
Identify the two types of decision problems and the two types of decisions that are used to solve them
Define heuristics and explain how they affect the decision-making process
Identify four decision-making styles
Describe the advantages and disadvantages of group decisions
Explain three techniques for improving group decision making 3

4. The Decision-Making Process
Identify
Problem
The Decision-Making
Process
Select
Alternative
Implement
Evaluate
Results 1
Develop
Alternatives
Analyze
Decision
Criteria
Allocate
Weights to 2 3 4 5 6 7 8
The decision-making process is a set of 8 steps that allows a manager (or any other person) to “choose among alternatives.”
The example in the text deals with a sales manager at Weyerhaeuser Canada who has spent nearly $5000 on auto repairs in the past few years and now has a blown engine in his car. Repair estimates indicate that it is not economical to repair the car and public transportation is not realistic. 4

5. Step 1: Identify a Problem
The difference between what is and what it ought to be
The first step in the decision-making process is identifying a problem. This can be a difference between past and present performance, or it can be the current performance compared to the planned performance, or it can be the difference against goals set.
In this case, the sales manager has decided that he needs a new car. 5

6. Step 2: Decision Criteria
Factors that are relevant in making the decision
Price
Interior comfort
Durability
Repair record
Performance
Handling
The next step is to determine the factors that might be relevant in making the decision.
In our example, John decides that price, interior comfort, durability, repair record, performance, and handling are the criteria he’ll use to make his decision. Interesting to note that the repair record is the 4th criterion even though he has had problems with excessive repairs on his current car. 6

7. Step 3: Allocating Weights
Determining the relative priority of each of the criteria
It is important to determine the relative ranking or priority of each of the criterion.
Going back to our example, price has been determined to be the most important factor, then interior comfort with handling being the least important. 7

8. Problem: To purchase a new car
Criterion
Weight
Price 10
Interior comfort 8
Durability 5
Repair record
Performance 3
Handling 1
This slide illustrates the type of decision-making matrix being generated using the relevant factors for the decision and the weights you have assigned.
Again, note that price is the most important on a scale of 1-10 with handling being the least important at a 1. 8

9. Generate a list of possible vehicle manufacturers
Step 4: Alternatives
Generate a list of possible vehicle manufacturers
Step 4 is to identify the possible car manufacturers that John might be interested in. He has identified 12 vehicles that are viable choices: Jeep Cherokee, Ford Mustang, Mercedes E500, Chevrolet Camaro, Mazda Protégé, Chrysler PT Cruiser, Acura TSX, Hyundai Tiburon, BMW 320, Audi A6, Toyota Camry, and Volkswagen Passat. 9

10. Step 5: Analyzing Alternatives
Assessing the value of each alternative by making a value judgment of the feature
Step 5 now requires us to to assess the value of each alternative. We will use the criteria and weights established in steps 2 and 3. Each alternative is evaluated by appraising it against the criteria.
Exhibits 4-4 and 4-5 take you through the decision-makers assessment of the value of each criterion and the weighting of each factor--which is the assessment times the criteria weight. 10

11. Concluding Steps in Making a Decision
Step 6: Select the “best”
Step 7: Implement decision
The final steps in the decision making process is selecting the best choice, implementing the decision and evaluating the decision. Did the alternative chosen in Step 6 accomplish the desired result.
You will note on Exhibit 4-5 (page91) in the text that the car with the highest total value is the Toyota Camry. On the basis of the criteria identified, the weights given given to the criteria, the decision maker’s assessment of each vehicle’s achievement on the criteria, the Toyota scored 224 which makes it the best alternative.
Step 8: Evaluate decision 12

12. Assumptions Of Rationality
Single, well-
defined goal
is to be achieved
All alternatives
and consequences
are known
Problem is
clear and
unambiguous
Rational
Decision
Making
Preferences
are clear
Final choice
will maximize
payoff
When a manager makes a decision, it is assumed that the manager is able to do so with knowing all the information. But this is a perfect world that rarely exists for managers today.
Remember that the assumptions of rationality often do not hold true because the level of certainty that the rational model demands rarely exists. Most managers then try to determine the amount of risk and make their decisions under a condition of uncertainty.
Preferences
are constant
and stable
No time or cost
constraints exist
© Prentice Hall, 2002
Robbins et al., Fundamentals of Management, 4th Canadian Edition
©2005 Pearson Education Canada, Inc.
FOM 4.12

13. Creativity and Decision Making
Creativity is the ability to produce novel and useful ideas
Important to decision making as it allows the decision-maker to “see” problems that others can’t
It helps identify more viable alternatives
Most people have creative potential that they can use when confronted with a decision-making problem. But to unleash that potential they need to get out of the thinking ruts and learn how to think about a problem in different ways.

14. Unleashing Creative Potential
“Thinking out of the box”
Using the right side of your brain
Three-component model of creativity
Expertise
Creative-thinking skills
Intrinsic task motivation
There are ways that we can unleash our creativity. What we need to be able to look at problems and situations differently.
For example, take a few minutes and sit on the floor and look around you. Describe what you see. Now stand up and do the same thing. Is there something different that you see standing up that you didn’t see sitting down?
There is a three-component model of creativity which enable people to make use of their potential.
Expertise is the foundation of all creative work. Therefore, the more abilities, knowledge, etc. that a person has, the more creative potential there is to unleash.
Creative-thinking skills encompass personality characteristics associated with creativity, the ability to use analogies as well as the talent to see the familiar in a different light. For instance, intelligence and risk-taking plus an internal locus of control have been found to be associated with the development of creative ideas. This is a learned skill that people can practice with. The exercises at the end of this chapter help people become more creative in their thinking.
Intrinsic task motivation is the desire to work on something because it’s interesting and involving. This motivational component turns creative potential into actual creative ideas.

15. Bounded Rationality Uncertainty Risk Satisfying
Focusing on highly visible choices
Because most managers deal with incomplete or uncertain information and because there is an element of risk in making any decision, most managers operate under the bounded rationality decision-making model. Here, managers make decisions recognizing the various constraints that are “good enough” or satisficing. In addition, they tend to focus on alternatives that are highly-visible. 14

16. Errors in Decision-Making Process
Heuristics
Availability
Representative
Escalation of commitment
Heuristics are judgmental shortcuts that we take to avoid information overload.
One type of heuristic is availability--which is our tendency to base our judgment on information that is readily available to us. For example, you may do a quick search on the Internet for some information about traffic statistics and make a judgment based on the number of newspaper articles you find that deal with the subject.
Representative heuristics is the tendency of individuals to match the likelihood of an occurrence with something that they are familiar with. For example, you might watch a bike race and because you enjoy riding a bike and are fairly good at it, that you could complete in the race.
The last area of errors in decision-making is escalation of commitment where a decision-maker stays on the same path even though there is negative data that suggests otherwise. For example, a manager might continue with decision to keep the operation open longer to service customers even though few if any customers come in after the original closing time.

17. Well-Structured vs. Ill-Structured Problems
Straightforward
Familiar
Easily-defined
New or unusual
Ambiguous information
Incomplete information
In today’s business environment, the nature of the problem in many situations determines how the problem will be approached.
Those problems that are simple and straightforward such as a customer wanting a refund for a defective product are described as “well-structured.” They are familiar and easily-defined.
However, in many cases a manager may be facing a new or unusual problem where information may be incomplete. An example would be the desire to have a capability on the company’s web site to purchase products and have them delivered more quickly and cheaply. 16

18. Categories of Decisions
Programmed
Non-programmed
Just as there are two types of problems, there are also two types of decisions: programmed and non-programmed.
A programmed decision is one where it is repetitive and easily handled through a routine. On the other hand, a non-programmed decision is one where a unique solution is required. 17

19. Procedure Rule Policy Programmed Decision
Every manager will need to deal with and understand a procedure, rule and policy.
Basically, a procedure is a series of related and sequential steps. For example, if a student wishes to appeal a grade on a course.
A rule is an explicit statement that tells managers what they can and cannot do. An example would be a store rule that requires a manager to approve any refund of more than $25.
A policy is a general guideline that establishes the parameters in which to make a decision. An organization may have a policy to “take appropriate steps to satisfy any customer complaint.” This gives the manager a great deal of freedom in which to make a decision.
Policy 18

20. Relationship of Problems, Decisions, and Level
Non-programmed
Decisions
Ill-Structured
Programmed
Decisions
Top
Type of
Problem
Level
As you can see from this slide, the more senior managers tend to handle ill-structured problems with non-programmed decisions. This means that the problem may be new and therefore requires a unique solution. Likewise, lower level managers tend to handle more routine problems with solutions that were used in the past.
Few managerial decisions in the real world are either fully programmed or fully non-programmed--no matter what level in the organization. Few programmed decisions are designed to eliminate individual judgment completely. At the other extreme, even the most unusual situation requiring a non-programmed decision can be helped by programmed routines.
Lower
Well-Structured 19

21. Decision-making and Technology
Information technology can help support decision-making
Types of software include
Expert systems
Neural networks
Groupware
Information technology is providing managers with a wealth of decision-making support. Among these are expert systems, neural networks, and groupware.
Expert systems use software programs to encode the relevant experience of an expert and allow a system to act like that expert in analyzing and solving ill-structured problems.
Neural networks are the next step beyond expert systems and use computer software to imitate the structure of brain cells and connections among them. For example, sophisticated robotics use neural networks for their intelligence. Another example is the use of neural networks tracking credit card transactions.

22. Decision-Making Styles
Analytical
Conceptual
High
Tolerance for
Ambiguity
Directive
Behavioural
Because managers are unique, each manager will bring personal characteristics into the decision-making process. The styles that we will examine look at the way in which managers think and their tolerance for ambiguity.
The directive style tends to be logical and focus on the short-term.
The analytical style is characterized by high tolerance for ambiguity and a rational way of thinking. These people want to have complete information before making a decision.
The behavioural style reflects someone who thinks intuitively but have a low tolerance for ambiguity. These managers work well with others and are open to suggestions.
The conceptual style represents someone who can live with lots of ambiguity. These individuals will look at the big picture and look for creative solutions.
As you can see on this slide, the more a person can handle ambiguity and thinks more intuitively, the more likely the decisions will be broad in outlook.
Managers today need to be able to use each of these styles depending on the situation. However, each manager will tend to have a dominant style.
Low
Rational
Intuitive
Way of Thinking
Source: S. P. Robbins, Supervision Today (Upper Saddle River, NJ: Prentice Hall, 1995), page 111. 21

23. Advantages of Group Decision-Making
More complete information
Diversity of experience
Generation of more alternatives
Solutions more likely to be accepted by those concerned
Part of today’s work environment is the increase in teams and groups. As a consequence, many organizations will have different groups working on different issues and therefore will encourage group decision making. The reasons an organization will use group decision-making is that more complete information can be generated;the people involved have a variety of experiences to bring to the problem; more people can generate more alternatives--”two heads are better than one”; and people who are involved in a decision that will affect them tend to accept the decision more readily. 22

24. Disadvantages of Group Decision-Making
Time-consuming
Domination by a few
Pressure to conform
Even with so many organizations using groups to make decisions, there are some problems that can surface.
One of the more visible problems is that group decision-making is very time-consuming. It takes time for groups to learn to work with each other as well as to generate the outcomes.
And a group can have one or several people attempt to dominate the discussion and to push their own view.
Lastly, there is a tendency for pressures of group conformity. This phenomenon is called groupthink--the withholding by group members of different views in order to appear to be in agreement. 23

25. When are Groups More Effective
When accuracy is important
When creativity is important
When buy-in is important
When size of group is 5-7 people
It is important to recognize that group decision-making is not always the best. However, if accuracy, creativity and buy-in to the solution is important, than groups are more effective than individuals.
For a group to function well, the optimum size is 5-7 people involved. 24

26. Ways to Improve Group Decision-Making
Brainstorming
Nominal group technique
Electronic meetings
There are several ways in which a group can become more effective in their decision-making.
One of the ways is brainstorming--a technique where everyone states their ideas--a “freewheeling” session. The power of brainstorming is to ensure that people do not begin to evaluate. What you want to do is generate a big list of ideas--no matter how strange or unusual. You’ll evaluate the ideas later in the process.
Nominal group technique helps groups arrive at a preferred solution. This is done by group members being present at a meeting and secretly writing a lists of preferred solutions to a problem. In this way there is no restriction of an individual’s thinking.
Lastly, electronic meetings blend nominal group techniques with technology. People do not have to be in the same room and yet they can put their views and comments forward in a discussion without having to disclose who is saying what. 25

27. Decision-Making and National Culture
Differs from one country to another
Need to recognize what is acceptable
Managers can expect high payoff if they can accommodate the diversity
Just as we saw in Chapter 2, managers who are able to recognize the cultural differences when making decisions will enable the manager to be more effective.
For example, Japanese use consensus-forming group decisions
Called ringisei after collecting large amount of information and data.
In Germany, the culture is one of structure and order--therefore the decision-making needs to be more directive. 26