1. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 1 CHAPTER SIX CHAPTER SIX Management 3rd Edition Chuck Williams Decision Making Prepared by Deborah Baker Texas Christian University

2. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2 CHAPTER SIX What Would You Do? You are the new CEO of Baxter Healthcare Corporation…  You want to expand the hemodialysis business  But, worldwide deaths require you to recall the Althin filters, even though no link to your product is discovered Should Baxter take a loss and write off the product? What would you do?

3. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 3 CHAPTER SIX What Is Rational Decision Making? After reading the next two sections, you should be able to: 1.explain the steps to rational decision making 2.discuss the limits to rational decision making.

4. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 4 CHAPTER SIX Blast From The Past Benjamin Franklin and Frederick W. Taylor  Rational decision making can be traced back to Benjamin Franklin’s “moral algebra”  Frederick W. Taylor  “father of scientific management”  scientifically select, train, and develop workers  cooperate with employees  partnership between employees and management

5. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 5 CHAPTER SIX Steps to Rational Decision Making 1 Define the problem Identify decision criteria Weight the criteria Generate alternative courses of action Evaluate each alternative Compute the optimal decision 1 1 2 2 3 3 4 4 5 5 6 6 More

6. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 6 CHAPTER SIX Steps to Rational Decision Making 1.1 Define the problem 1 1  Problem exists when there is a gap between a desired state and an existing state  To make decisions about problems, managers must:  be aware of the gap  be motivated to reduce the gap  have the knowledge, skills, abilities, and resources to fix the problem

7. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 7 CHAPTER SIX Steps to Rational Decision Making 1.2 Identify decision criteria 2 2 More  Standards used to guide judgments and decisions  The more criteria a potential solution meets, the better that solution should be

8. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 8 CHAPTER SIX Steps to Rational Decision Making 1 Weight the criteria 3 3  Absolute comparisons  each criterion is compared to a standard or ranked on its own merits  Relative comparisons  each criterion is compared directly to every other criterion

9. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 9 CHAPTER SIX Absolute Weighting of Decision Criteria 1.3 Adapted from Exhibit 6.1 5 critically important 4 important 3 somewhat important 2 not very important 1 completely unimportant PERFORMANCE CHARACTERISTICS 1.starting and acceleration1 2345 2.fuel economy12345 3. handling and steering12345 4.shifting/transmission12345 5.ride quality12345 6. braking12345 DESIGN CHARACTERISTICS 1. overall design12345 2. interior ergonomics12345 3. seating12345 4. accessories and amenities12345 5. cargo space12345 6. fit and finish 12345

10. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 10 CHAPTER SIX Relative Weighting of Decision Criteria 1.3 Adapted from Exhibit 6.2 Car Performance Characteristics s/af.e.h&ss/tr.q.br. starting/acceleration (s/a) +1 0 fuel economy (f.e.) handling & steering (h&s) +1 0 0 shifting/transmission (s/t) +1 0 00 ride quality (r.q.)+1 000 Braking (br.) 0+10 0 Total Weight +2+5-3-2 0

11. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 11 CHAPTER SIX 1 Evaluate each alternative 5 5 Steps to Rational Decision Making Generate alternative courses of action 4 4

12. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 12 CHAPTER SIX 1.5 Evaluate Each Alternative Adapted from Exhibit 6.4

13. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 13 CHAPTER SIX 1.6 Compute the optimal decision 6 6 Steps to Rational Decision Making  Multiply the rating for each criterion by the weight for that criterion  Sum the scores for each alternative course of action Example from Exhibit 6.4: Amsterdam: (.59 x.32) + (.57 x.44) + (.51 x.64) + (.46 x.31) + (.34 x.56) + (.32 x.25) + (.30 x.37) + (.27 x.34) + (.21 x.35) + (.20 x.98) + (.18 x.31) + (.12 x.38) =1.75

14. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 14 CHAPTER SIX 2 Limits to Rational Decision Making Bounded Rationality Risk and Risky Decisions Common Decision-Making Mistakes

15. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 15 CHAPTER SIX 2.1 Bounded Rationality  Managers try to be rational  restricted by real-world constraints  cannot be completely rational  Four constraints on rational decision making  Limited resources  Information overload  Memory problems  Expertise problems More

16. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 16 CHAPTER SIX 2.1 Bounded Rationality

17. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 17 CHAPTER SIX 2.1 Choosing the Optimal Solution  Maximizing decisions  choosing the optimal solution  requires fully rational decision conditions  Satisficing decisions  choosing the “good enough” solution  maximization is not possible due to constraints  fits with bounded rationality

18. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 18 CHAPTER SIX 2.2 Risk and Decision Making Under Risky Conditions Conditions of Certainty Decision makers have complete information and knowledge of all possible outcomes Conditions of Risk Decision makers face a very real possibility of making the wrong decision

19. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 19 CHAPTER SIX 2.2 Risk and Decision Making A large car manufacturer has been hit with a number of economic difficulties, and it appears as if three plants need to be closed and 6,000 employees laid off. The vice-president of production has been exploring alternative ways to avoid this crisis. She has developed two plans: A large car manufacturer has been hit with a number of economic difficulties, and it appears as if three plants need to be closed and 6,000 employees laid off. The vice-president of production has been exploring alternative ways to avoid this crisis. She has developed two plans: Plan A: This plan will save one of three plants and 2,000 jobs. Plan B: This plan has a 1/3 probability of saving all three plants and 6,000 jobs, but has a 2/3 probability of saving no plants and no jobs. More

20. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 20 CHAPTER SIX 2.2 Risk and Decision Making Did you choose Plan A? What would you have done if you were faced with the following choices to the same problem? Plan C: This plan will result in the loss of two of the three plants and 4,000 jobs. Plan D: This plan has a 2/3 probability of resulting in the loss of all three plants and all 6,000 jobs, but has a 1/3 probability of losing no plants and no jobs.

21. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 21 CHAPTER SIX Framing Effects on Decision Making 2.2  Positive Frame  a problem presented as a gain  become more risk-averse  Negative Frame  a problem presented as a loss  become more risk-seeking

22. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 22 CHAPTER SIX Conditions of Uncertainty 2.2 Conditions of Uncertainty Decision makers don’t know the odds of winning or losing Decision makers don’t know the odds of winning or losing Risk Propensity The person’s tendency to take or avoid risks.

23. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 23 CHAPTER SIX Common Decision-Making Mistakes 2.3 Overreliance on Intuition Availability Bias Represen- tative Bias Anchoring & Adjustment Bias More

24. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 24 CHAPTER SIX Overreliance on Intuition 2.3  Intuition plays a part in many managerial decisions  Intuition works best for experienced managers  Overreliance can lead to careless and inconsistent decision making

25. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 25 CHAPTER SIX Availability Bias 2.3  The tendency of decision makers to give preference to recent information, vivid images that evoke emotions, and specific acts and behaviors that they personally observed  May overlook “rational data”

26. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 26 CHAPTER SIX Representative Bias 2.3  When decision makers judge the likelihood of an event’s occurrence based on its similarity to previous events and their likelihood of occurrence

27. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 27 CHAPTER SIX Anchoring and Adjusting Bias 2.3  The tendency of decision makers to use an initial value or experience as a basis of comparison  Judgment (good-bad, large-small, yes-no, etc.) is “anchored” by an initial value  Once the anchor is “dropped,” two things happen:  all subsequent experiences are judged by their similarity to the anchor  all possible decision alternatives tend to cluster around the anchor

28. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 28 CHAPTER SIX Improving Decision Making After reading the next two sections, you should be able to: 3.describe how individual decision making can be improved. 4.explain how group decisions and group decision- making techniques can improve decision making.

29. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 29 CHAPTER SIX Improving Decision Making 3 Decision Rules Multivariable Testing Decision Software Escalation of Commitment

30. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 30 CHAPTER SIX Decision Rules 3.1 Decision Rules A set of criteria that alternative solutions must meet to be acceptable to the decision maker A set of criteria that alternative solutions must meet to be acceptable to the decision maker Minimum Threshold Rule Minimum Threshold Rule Dictionary Rule

31. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 31 CHAPTER SIX Multivariable Testing 3.2  A systematic approach of experimentation to analyze and evaluate potential solutions  Improves decision making by:  conducting experiments and letting the data decide  saving time and money by using a mathematical shortcut to test variables

32. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 32 CHAPTER SIX Multivariable Testing 3.2 Adapted from Exhibit 6.7 Multivariable Testing to Increase Amusement Park Attendance on Tuesdays

33. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 33 CHAPTER SIX Decision Software 3.3  Most decision makers accept the first “good enough” solution  Unstructured decision making is the norm  PC software can help “walk” decision makers through decision process http://www.performancesolutionstech.com

34. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 34 CHAPTER SIX Avoid Escalation of Commitment 3.4  The tendency to stick with a “wrong” decision  Often leads to a greater commitment of resources  Protecting against escalation  Progress reports  Outside auditors  Change managers  Label the decision as an “Experiment”

35. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 35 CHAPTER SIX Using Groups to Improve Decision Making 4 Delphi Technique Stepladder Technique Electronic Brainstorming Structured Conflict Nominal Group Technique

36. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 36 CHAPTER SIX Group Decision Making 4.1 1.View problems from multiple perspectives 2.Find and access more information 3.Generate more alternative solutions 4.More committed to making chosen solutions work 1.View problems from multiple perspectives 2.Find and access more information 3.Generate more alternative solutions 4.More committed to making chosen solutions work Advantages Adapted from Exhibit 6.8

37. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 37 CHAPTER SIX Group Decision Making 4.1 1.Susceptible to groupthink and to considering a limited number of solutions 2.Takes considerable time 3.One or two people can dominate group discussion 4.Members don’t feel personally accountable for decisions and actions 1.Susceptible to groupthink and to considering a limited number of solutions 2.Takes considerable time 3.One or two people can dominate group discussion 4.Members don’t feel personally accountable for decisions and actions Disadvantages Adapted from Exhibit 6.8

38. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 38 CHAPTER SIX Groupthink 4.1  The group is insulated from others with different perspectives  The group leader expresses a strong preference for a particular decision  There is no established procedure for defining problems and exploring alternatives  Group members have similar backgrounds  The group is insulated from others with different perspectives  The group leader expresses a strong preference for a particular decision  There is no established procedure for defining problems and exploring alternatives  Group members have similar backgrounds Groupthink is likely to occur when…

39. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 39 CHAPTER SIX Structured Conflict 4.2 C-Type Conflict Cognitive conflict. Disagreement that focuses on problem- and issue-related differences of opinion A-Type Conflict Affective conflict. Disagreement that focuses on individuals or personal issues Affective conflict. Disagreement that focuses on individuals or personal issues

40. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 40 CHAPTER SIX Devil’s Advocacy 4.2 Steps to Establish a Devil’s Advocacy Program 1.Generate a potential solution 2.Assign a devil’s advocate to criticize and question 3.Present the critique of the solution to key decision makers 4.Gather additional information 5.Decide whether to use, change, or not use the originally proposed solution 1.Generate a potential solution 2.Assign a devil’s advocate to criticize and question 3.Present the critique of the solution to key decision makers 4.Gather additional information 5.Decide whether to use, change, or not use the originally proposed solution

41. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 41 CHAPTER SIX Dialectical Inquiry 4.2 Steps to Establish a Dialectical Inquiry Process 1.Generate a potential solution 2.Identify the assumptions underlying the potential solution 3.Generate a conflicting counterproposal based on opposite assumptions 4.Have advocates of each position present their arguments and engage in a debate in front of decision makers 5.Decide whether to use, change, or not use the originally proposed solution 1.Generate a potential solution 2.Identify the assumptions underlying the potential solution 3.Generate a conflicting counterproposal based on opposite assumptions 4.Have advocates of each position present their arguments and engage in a debate in front of decision makers 5.Decide whether to use, change, or not use the originally proposed solution

42. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 42 CHAPTER SIX Nominal Group Technique 4.3 Steps to Establish Nominal Group Technique 1.During a “quiet time,” group members write down as many problems and solutions as possible 2.Each member shares one idea at a time 3.Ideas are posted on flipcharts until all ideas are shared 4.Group discusses advantages/disadvantages 5.Ideas are ranked during a second “quiet time” 6.Members read rankings aloud, and the idea with the highest average rank is selected 1.During a “quiet time,” group members write down as many problems and solutions as possible 2.Each member shares one idea at a time 3.Ideas are posted on flipcharts until all ideas are shared 4.Group discusses advantages/disadvantages 5.Ideas are ranked during a second “quiet time” 6.Members read rankings aloud, and the idea with the highest average rank is selected

43. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 43 CHAPTER SIX Delphi Technique 4.3 Steps to Establish Delphi Technique 1.Assemble a panel of experts. 2.Create a questionnaire of open-ended questions. 3.Summarize the responses and feed back to the panel until the members reach agreement. 4.Create a brief report and send to the panel members for agreement/disagreement. 5.Continue the feedback process until panel reaches agreement. 1.Assemble a panel of experts. 2.Create a questionnaire of open-ended questions. 3.Summarize the responses and feed back to the panel until the members reach agreement. 4.Create a brief report and send to the panel members for agreement/disagreement. 5.Continue the feedback process until panel reaches agreement.

44. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 44 CHAPTER SIX What Really Works: Devil’s Advocacy, Dialectical Inquiry, Negative Consequences 4.3 Devil’s Advocacy 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success58% Dialectical Inquiry 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success55% Considering Negative Consequences 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success86%

45. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 45 CHAPTER SIX Stepladder Technique 4.5 Member 1 Shares thoughts, ideas, recommendations Member 2 Shares thoughts, ideas, recommendations Discussion is Held and Tentative Group Decision is Made Member 3 Joins Group Shares thoughts, ideas, recommendations Members 1 & 2 Share previous thoughts, ideas, recommendations Discussion is Held and Tentative Group Decision is Made Member 4 Joins Group Shares thoughts, ideas, recommendations Members 1, 2, & 3 Share previous thoughts, ideas, recommendations Discussion is Held and Tentative Group Decision is Made Adapted From Exhibit 6.9 Step 1 Step 2 Step 3

46. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 46 CHAPTER SIX Electronic Brainstorming 4.6 Four Rules of Brainstorming 1.The more ideas, the better. 2.All ideas are acceptable, no matter how wild or crazy. 3.Other group members’ ideas should be used to come up with even more ideas. 4.Criticism or evaluation of ideas is not allowed. 1.The more ideas, the better. 2.All ideas are acceptable, no matter how wild or crazy. 3.Other group members’ ideas should be used to come up with even more ideas. 4.Criticism or evaluation of ideas is not allowed.

47. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 47 CHAPTER SIX Electronic Brainstorming 4.6 Advantages of Electronic Brainstorming  Overcomes production blocking  technology allows everyone to record their ideas as they are created  no ideas lost “waiting your turn” to speak  Overcomes evaluation apprehension  anonymity creates free expression

48. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 48 CHAPTER SIX Electronic Brainstorming 4.6 Disadvantages of Electronic Brainstorming  Greater expense  No automatic acceptance of ideas because of one’s position  Some find it difficult to express themselves in writing  Lack of typing skills can frustrate participants