Management

Fifteenth Edition, Global Edition

Chapter 2
Making Decisions

Copyright © 2021 Pearson Education Ltd.

Learning Objectives
2.1 Describe the eight steps in the decision-making process.
2.2 Explain the five approaches managers can use when
making decisions.
2.3 Classify decisions and decision-making styles.
2.4 Describe how biases affect decision making.
2.5 Identify cutting-edge approaches for improving decision
making.

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Be A Better Decision Maker
A key to success in management and in your career is
knowing how to be an effective decision maker.

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What is a Decision?
Decision—a choice among two or more alternatives

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 Decision making

Step 1: Identify a Problem

• Problem: an obstacle that makes it difficult to achieve a desired goal or purpose.
• Every decision starts with a problem, a discrepancy between an existing and a
desired condition.
• Characteristics of Problems
– A problem becomes a problem when a manager becomes aware of it.
– There is pressure to solve the problem.
– The manager must have the authority, information, or resources needed to
solve the problem.

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Step 2: Identify the Decision Criteria

• Decision criteria are factors that are important to

resolving the problem.
– Costs that will be incurred (investments required)
– Risks likely to be encountered (chance of failure)
– Outcomes that are desired (growth of the firm)

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Step 3: Allocate Weights to the Criteria
• If the relevant criteria aren’t equally important, the
decision maker must weight the items in order to give
them the correct priority in the decision.
• Decision criteria are not of equal importance:
 Assigning a weight to each item places the items in the
correct priority order of their importance in the decision
making process.

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 Criteria and Weight in
Car-Buying Decision
(Scale of 1 to 10)

CRITERION WEIGHT
Price 10
Interior comfort 8
Durability 5
Repair record 5
Performance 3
Handling 1

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Step 4: Develop Alternatives
• List viable alternatives that could solve the problem.
• Alternatives are listed (without evaluation) that can
resolve the problem.

Step 5: Analyzing
Alternatives
• Appraising each alternative’s strengths and
weaknesses
• An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.

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Assessment of Car Alternatives

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Step 6: Selecting an Alternative
• Choosing the best alternative
– The alternative with the highest total weight is chosen.

Step 7: Implementing the Alternative

• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.

11
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 Weighting of Vehicles
(Assessment Criteria X Criteria Weight)

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 Step 8: Evaluating the Decision’s all
(Effectiveness( > pick the best option from

• The soundness of the decision is judged by its

outcomes.
– How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
– If the problem was not resolved, what went wrong?

13
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Exhibit 2.5 Decisions Managers May Make:
Planning and Organizing

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Exhibit 2.5 Decisions Managers May Make:
Leading and Controlling

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*A
Rationality E
• Rational Decision Making: choices that are logical and
consistent and maximize value
• Assumptions of rationality:
– Rational decision maker is logical and objective
– Problem faced is clear and unambiguous
– Decision maker would have clear, specific goal and be
aware of all alternatives and consequences
– The alternative that maximizes achieving this goal will
be selected
– Decisions are made in the best interest of the
organization
rational decision

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*A
Bounded Rationality
limited by education Lv., info mobility
>
• Bounded rationality: decision making that’s rational, but
limited by an individual’s ability to process information
• Satisfice: choose the first alternative encountered that
satisfactorily solves the problem—rather than maximize
the outcome of their decision by considering all
alternatives and choosing the best.
• accepting solutions that are “good enough”

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AA
Intuition
• Intuitive Decision Making: making decisions on
the basis of experience, feelings, and
accumulated judgment

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Exhibit 2.6 What is Intuition?

Exhibit 2.6 shows the five different aspects of intuition identified by researchers studying
managers’ use of intuitive decision making.

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Evidence-Based Management base on facts
• Evidence-based management (E B Mgt): the systematic
use of the best available evidence to improve
management practice.

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Crowdsourcing
• Crowdsourcing: a decision-making approach where you
solicit ideas and input from a network of people C)
outside of
the traditional set of decision makers.
• By tapping into the collective wisdom and diverse
perspectives of the crowd, the manager gains access to a
wide range of potential solutions and benefits from the
collective intelligence of the participants.
• This approach also fosters engagement and collaboration
with the stakeholders, building a sense of involvement and
ownership in the decision-making process.

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 *A
Types of Decisions: Structured Problems
and Programmed Decisions
• Structured problems: straightforward, familiar, and easily
defined problems

S• Programmed decisions: repetitive decisions that can be

handled by a routine approach

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Types of Programmed Decisions
• Procedure: a series of sequential steps used to respond
to a well-structured problem
• Rule: an explicit statement that tells managers what can or
cannot be done
• Policy: a guideline for making decisions

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Types of Decisions: Unstructured Problems
and Nonprogrammed Decisions *A

• Unstructured problems: problems that are new or

unusual and for which information is ambiguous or
incomplete
•J Nonprogrammed decisions: unique and nonrecurring
and involve custom-made solutions

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Exhibit 2.7 Programmed vs. Nonprogrammed
Decisions

Characteristic Programmed Decisions Nonprogrammed

Decisions
Type of problem Structured Unstructured
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or incomplete

Goals Clear, specific Vague

Time frame for solution Short Relatively long

Solution relies on… Procedures, rules, Judgment and creativity

policies

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Decision-Making Styles
• Research has identified four different individual decision-
making styles based on two dimensions:
1. An individual’s way of thinking
2. An individual’s tolerance for ambiguity
• The four styles are directive, analytic, conceptual and
behavioral.

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Four Decision-Making Styles
F
• Directive style: low tolerance for ambiguity and seek
rationality (short-term decisions)
• Analytic style: seek rationality but have a higher tolerance
for ambiguity (long-term decisions with incomplete
information)
• Conceptual style: intuitive decision makers with a high
tolerance for ambiguity (big-picture thinking, long-term
implications, creative solutions)
• Behavioral style: intuitive decision makers with a low
tolerance for ambiguity (focus on relationships and
collaboration, consensus-building)

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Exhibit 2.8 Decision-Style Model

Exhibit 2.8 shows the decision-style model from A. J. Rowe and J. D. Boulgarides,
Managerial Decision Making (Upper Saddler River, NJ: Prentice Hall, 1992), p. 29.

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Heuristics
• Heuristics or “rules of thumb” can help make sense of
complex, uncertain, or ambiguous information.
• However, they can also lead to errors and biases in
processing and evaluating information.

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Exhibit 2.9 Common Decision-Making Biases

Historic

Exhibit 2.9 identifies 12 common decision errors of managers and biases they may have.

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 Decision-Making Biases and Errors (1 of 4)
• Overconfidence Bias:
holding unrealistically positive
views of oneself and one’s
performance
https://www.professionalplanner.com.au/2015/08/how-advisers-can-tap-into-overconfidence-bias-for-new-client-opportunities/

• Immediate Gratification
Bias: choosing alternatives
that offer immediate rewards
and avoid immediate costs
https://www.nirandfar.com/hyperbolic-discounting-why-you-make-terrible-life-choices/

• Anchoring Effect: fixating on

initial information and ignoring
subsequent information
https://www.nirandfar.com/hyperbolic-discounting-why-you-make-terrible-life-choices/

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↑ Decision-Making Biases and Errors (2 of 4)
• Selective Perception Bias:
selecting, organizing and
interpreting events based on
the decision maker’s biased
perceptions
• Confirmation Bias: seeking
https://www.professionalplanner.com.au/2015/08/how-advisers-can-tap-into-overconfidence-bias-for-new-client-opportunities/

out information that reaffirms

past choices while
discounting contradictory
information
• Framing Bias: selecting and https://uxmag.com/articles/6-ways-psychology-affects-your-design-work

highlighting certain aspects of

a situation while ignoring
other aspects

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https://uxmag.com/articles/6-ways-psychology-affects-your-design-work
Decision-Making Biases and Errors (3 of 4)
• Availability Bias: losing decision-
making objectivity by focusing on the
most recent events

https://www.intelligentspeculation.com/blog/the-availability-heuristic

• Representation Bias: drawing

analogies and seeing identical
situations when none exist

• Randomness Bias: creating

unfounded meaning out of random https://uxmag.com/articles/6-ways-psychology-affects-your-design-work

events

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https://uxmag.com/articles/6-ways-psychology-affects-your-design-work
 Decision-Making Biases and Errors (4 of 4)
• Sunk Costs Errors: forgetting that
current actions cannot influence past
events and relate only to future
consequences

• Self-serving Bias: taking quick credit for

successes and blaming outside factors for
failures https://uxmag.com/articles/6-ways-psychology-affects-your-design-work

• Hindsight Bias: mistakenly believing that

an event could have been predicted once
the actual outcome is known (after-the-
fact)

https://uxmag.com/articles/6-ways-psychology-affects-your-design-work

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https://www.gustavodefelice.com/p/what-is-hindsight-bias
Cutting-Edge Decision Making
• Technology has changed the ability of managers to access
information. Two technology driven cutting-edge aides to
decision making are: > design task
– Design thinking: approaching management problems
as designers approach design problems
– Big data and Artificial Intelligence: big data refers to
huge and complex data sets now available. Big data
has opened the door to widespread use of artificial
intelligence (AI) > knowledge
N

-
information
> Data
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Big Data and Artificial Intelligence
• Big data: the vast amount of quantifiable data that can be
analyzed by highly sophisticated data processing
E
• Can be a powerful tool in decision making, but collecting
and analyzing data for data’s sake is wasted effort

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Artificial Intelligence and Machine
Learning Tools
• Artificial Intelligence (AI) – uses computing power to solve
complex problems
– AI systems have the ability to learn and have facilitated
the use of new tools such as:
▪ Machine learning
▪ Deep learning
▪ Analytics

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Machine Learning, Deep Learning, and Analytics
• Machine Learning: A method of data analysis that
automates analytical model building.
• Deep Learning: A subset of machine learning that use
algorithms to create a hierarchical level of artificial neural
networks that simulate the function of the human brain.
• Analytics: The use of mathematics, statistics, predictive
modeling, and machine learning to find meaningful
patterns in a data set.

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Review Learning Objective 2.1
• Describe the eight steps in the decision-making
process.
1. Identify problem
2. Identify decision criteria
3. Weight the criteria
4. Develop alternatives
5. Analyze alternatives
6. Select alternative
7. Implement alternative
8. Evaluate decision effectiveness

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Review Learning Objective 2.2 (1 of 2)
• Explain the five approaches managers use when
making decisions.
– Assumptions of rationality
▪ The problem is clear and unambiguous
▪ A single, well-defined goal is to be achieved
▪ All alternatives and consequences are known
▪ The final choice will maximize goal achievement

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Review Learning Objective 2.2 (2 of 2)
• Rationality: making decisions when the goal is well-
defined and everything is clear and unambiguous
• Satisficing: when decision makers accept solutions that
are good enough
• Intuitive decision making: making decisions on the basis
of experience, feelings, and accumulated judgment
• Evidence-based management: a manager makes
decisions based on the best available evidence
• Crowdsourcing: a manager solicits ideas via the internet
from people outside of the organization

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Review Learning Objective 2.3 (1 of 2)
• Classify decisions and decision-making styles.
– Programmed decisions are repetitive decisions that
can be handled by a routine approach and are used
when the problem being resolved is straightforward,
familiar, and easily defined (structured).
– Nonprogrammed decisions are unique decisions that
require a custom-made solution and are used when the
problems are new or unusual (unstructured) and for
which information is ambiguous or incomplete.

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Review Learning Objective 2.3 (2 of 2)
• Classify decisions and decision-making styles.
– Individual decision-making styles differ on two
dimensions; way of thinking and tolerance for
ambiguity.
– These dimensions result in four different decision-
making styles which are:
▪ Directive
▪ Analytical
▪ Conceptual
▪ Behavioral

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Review Learning Objective 2.4
• Describe how biases affect decision making.
– The 12 common decision-making errors and biases:
▪ Overconfidence
▪ Immediate gratification
▪ Anchoring effect
▪ Selective perception
▪ Confirmation
▪ Framing
▪ Availability
▪ Representation
▪ Randomness
▪ Sunk costs
▪ Self-serving
▪ Hindsight

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Review Learning Objective 2.5 (1 of 2)
• Identify cutting-edge approaches for improving decision
making.
– Design thinking, big data, artificial intelligence, machine
learning, deep learning, and analytics are all relatively
new tools that harness the power of technology to help
managers make better decisions.

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Review Learning Objective 2.5 (2 of 2)
• Design thinking: approaching management problems as
designers approach design problems
• Big Data: when tempered with good judgment, it can be a
powerful tool in decision making
• Artificial Intelligence: AI and the tools that use AI are
now possible due to big data and computing power.
Machine learning, deep learning, and analytics can all help
managers make better decisions.

Copyright © 2021 Pearson Education Ltd.

Review Learning Objective 2.5 (2 of 2)
• Design thinking: approaching management problems as
designers approach design problems
• Big Data: when tempered with good judgment, it can be a
powerful tool in decision making
• Artificial Intelligence: AI and the tools that use AI are
now possible due to big data and computing power.
Machine learning, deep learning, and analytics can all help
managers make better decisions.

Copyright © 2021 Pearson Education Ltd.