DECISION MAKING

MANAGERIAL DECISION MAKING

Decision making: the process by which managers respond
to opportunities and threats by analyzing options, and
making decisions about goals and courses of action.
Decisions in response to opportunities: managers respond
to ways to improve organizational performance.
Decisions in response to threats: occurs when managers
are impacted by adverse events to the organization.

TYPES OF DECISION

Programmed Decisions: routine, almost automatic

process.

Managers have made decision many times before.

There are rules or guidelines to follow.
Example: Deciding to reorder office supplies.

Non-programmed Decisions: unusual situations that

have not been often addressed.

No rules to follow since the decision is new.

These decisions are made based on information, and a
mangers intuition, and judgment.
Example: Should the firm invest in a new technology?

MODELS
Rational
Non Rational

THE CLASSICAL MODEL

Classical model of decision making: a prescriptive model

that tells how the decision should be made.

Assumes managers have access to all the information needed

to reach a decision.
Managers can then make the optimum decision by easily
ranking their own preferences among alternatives.

Unfortunately, mangers often do not have all (or even

most) required information.

THE CLASSICAL MODEL(STEPS TO DECISION

MAKING)
1.

2.
3.
4.
5.
6.
7.

Identify the problem

Identify resources as well as constraints
Generate alternatives(solutions)
Evaluate Alternatives
Select Alternative
Implement Decision
Monitor

ABOUT RATIONAL DECISION MAKING

Is

it always possible to
make rational decisions?

Single, welldefined goal

is to be achieved
All alternatives
and
consequences
are known

Preferences
are clear

Preferences
are constant
and stable

Problem is
clear and
unambiguous

Rational
Decision
Making

Final choice
will maximize
payoff

No time or cost
constraints exist
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BOUNDED RATIONALITY
Herbert Simon in 1950s studied the actual
behaviours of managerial decision makers. On this
basis he suggested the theory of bounded
rationality. This suggests that the decision making
ability of the managers may not be always rational
as certain factors like time constraints, cognitive
ability as well as availability of information can
influence it.
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WHY INFORMATION IS INCOMPLETE

Uncertainty
& risk

Ambiguous
Information

Incomplete
Information

Time constraints &

information costs

INCOMPLETE INFORMATION FACTORS

Incomplete information exists due to many issues:

Risk: managers know a given outcome can fail or succeed and

probabilities can be assigned.
Uncertainty: probabilities cannot be given for outcomes and the
future is unknown.

Many decision outcomes are not known such as a new product

introduction.

Ambiguous information: information whose meaning is not clear.

Information can be interpreted in different ways.

INCOMPLETE INFORMATION FACTORS

Time constraints and Information costs: Managers do not

have the time or money to search for all alternatives.

This leads the manager to again decide based on incomplete

information.

Satisficing: Managers explore a limited number of options

and choose an acceptable decision rather than the
optimum decision.

This is the response of managers when dealing with incomplete

information.
Managers assume that the limited options they examine
represent all options.

NON RATIONAL MODELS OF DECISION MAKING

Satisficing Model
Incremental Model
Garbage can Model

SATISFICING MODEL
This model suggests that instead of searching for the
best solution usually managers accept the first
satisfactory decision.

INCREMENTAL MODEL

Incremental model states that the managers put in

the least possible effort only enough to reduce the
problem to a tolerable level.Here the manager is
concerned with a short term solution to the problem
than making a decision that will facilitate the
attainment of goals in the long term

GARBAGE CAN MODEL

This model suggests that manager behave

randomly while making non programmed decisions.
That means the decision outcomes are chance
occurrences which depend on factors such as the
participants involved, the problems that concern
them at that moment, the opportunities they happen
to identify as well as their favourite solutions that
they use to solve most problems.

COGNITIVE BIASES
Suggests

decision makers use heuristics to deal with

bounded rationality.

A heuristic is a rule of thumb to deal with complex situations.

If the heuristic is wrong, however, then poor decisions result
from its use.

Systematic

errors can result from use of an incorrect

heuristic.

These errors will appear over and over since the rule used to
make decision is flawed.

INTUITIVE DECISION MAKING

Based

on gut feeling

subconscious

process of making
decisions on the basis of experience,
values, and emotions
does not rely on a systematic or
thorough analysis of the problem
generally complements a rational
analysis

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GROUP DECISION MAKING

Many decisions are made in a group setting.

Groups tend to reduce cognitive biases and can call on

combined skills, and abilities.

There are some disadvantages with groups:

Group think: biased decision making resulting from group
members striving for agreement.

Usually occurs when group members rally around a central

mangers idea (CEO), and become blindly committed without
considering alternatives.
The group tends to convince each member that the idea must go
forward.

IMPROVED GROUP DECISION MAKING

Devils Advocacy: one member of the group acts as the

devils advocate and critiques the way the group identified
alternatives.

Dialectical inquiry: two different groups are assigned to the

problem and each group evaluates the other groups
alternatives.

Points out problems with the alternative selection.

Top managers then hear each group present their alternatives

and each group can critique the other.

Promote diversity: by increasing the diversity in a group, a

wider set of alternatives may be considered.

DECISIONS IN THE MANAGEMENT FUNCTIONS

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INDIVIDUAL CREATIVITY

Organizations can build an environment supportive of

creativity.

Many of these issues are the same as for the learning

organization.
Managers must provide employees with the ability to take risks.
If people take risks, they will occasionally fail.

Thus, to build creativity, periodic failures must be

rewarded.

This idea is hard to accept for some managers.

BUILDING GROUP CREATIVITY

Brainstorming: managers meet face-to-face to generate

and debate many alternatives.
Group members are not allowed to evaluate alternatives until all
alternatives are listed.
Be creative and radical in stating alternatives.
When all are listed, then the pros and cons of each are discussed and a
short list created.

Production blocking is a potential problem with

brainstorming.

Members cannot absorb all information being presented during the

session and can forget their own alternatives.

BUILDING GROUP CREATIVITY

Nominal Group Technique: Provides a more structured way

to generate alternatives in writing.
Avoids the production blocking problem.
Similar to brainstorming except that each member is given time to first
write down all alternatives he or she would suggest.
Alternatives are then read aloud without discussion until all have been
listed.
Then discussion occurs and alternatives are ranked.

BUILDING GROUP CREATIVITY

Delphi Technique: provides for a written format without

having all managers meet face-to-face.
Problem is distributed in written form to managers who then generate
written alternatives.
Responses are received and summarized by top managers.
These results are sent back to participants for feedback, and ranking.
The process continues until consensus is reached.

Delphi allows distant managers to participate.

TYPES OF PROBLEMS & DECISIONS

Well-Structured Problems - straightforward, familiar, and easily

defined

Programmed Decisions - used to address structured problems

minimize the need for managers to use discretion
facilitate organizational efficiency

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TYPES OF PROBLEMS AND DECISIONS

Poorly-Structured Problems - new, unusual problems for

which information is ambiguous or incomplete
Nonprogrammed Decisions - used to address poorlystructured problems

produce a custom-made response

more frequent among higher-level managers

Procedure, Rule, & Policy

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DECISION-MAKING BIASES AND ERRORS

Heuristics

Overconfidence Bias

Using rules of thumb to simplify decision making.

Holding unrealistically positive views of oneself and

ones performance.

Immediate Gratification Bias

Choosing alternatives that offer immediate rewards and

that to avoid immediate costs.

DECISION-MAKING BIASES AND ERRORS

Anchoring Effect

Selective Perception Bias

Fixating on initial information and ignoring subsequent

information.

Selecting, organizing and interpreting events based on

the decision makers biased perceptions.

Confirmation Bias

Seeking out information that reaffirms past choices and

discounting contradictory information.

DECISION-MAKING BIASES AND ERRORS (CONT.)

Framing Bias

Availability Bias

Losing decision making objectivity by focusing on the most

recent events.

Representation Bias

Selecting and highlighting certain aspects of a situation while

ignoring other aspects.

Drawing analogies and seeing identical situations when none

exist.

Randomness Bias

Creating unfounded meaning out of random events.

DECISION-MAKING BIASES AND ERRORS

Sunk Costs Errors

Self-Serving Bias

Forgetting that current actions cannot influence past

events and relate only to future consequences.
Taking quick credit for successes and blaming outside
factors for failures.

Hindsight Bias

Mistakenly believing that an event could have been

predicted once the actual outcome is known (after-thefact).

DECISION-MAKING STYLES

Analytical
Directive
Prefer simple,
clear solutions
Make decisions
rapidly
Do not consider
many alternatives
Rely on existing
rules

Prefer complex
problems
Carefully analyze
alternatives
Enjoy solving
problems
Willing to use
innovative
methods

Conceptual
Socially oriented
Humanistic and
artistic approach
Solve problems
creatively
Enjoy new ideas

Behavioral
Concern for their
organization
Interest in helping
others
Open to
suggestions
Rely on meetings

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ADVANTAGES AND DISADVANTAGES OF

GROUP-AIDED DECISION MAKING
Advantages
1. Greater pool of knowledge
2. Different perspectives
3. Greater comprehension
4. Increased acceptance
5.Greater involvement

Disadvantages
1. Social pressure
2. Minority domination
3. Lobbying
4. Goal displacement
5. Groupthink

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