Principles of Management

Decision Making

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Rational Decision Making
8-step Process
 1. Identification of problem
 2. Identification of Decision Criteria
 3. Allocation of weights to criteria
 4. Development of alternatives
 5. Analysis of alternatives
 6. Decide on an alternative
 7. Implementation of decision
 8. Evaluation of decision
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 The Decision-Making Process
Allocation of
Problem Identification of Weights to Development of
Identification Decision Criteria Criteria Alternatives

“My salespeople Price Reliability 10 Acer

need new computers” Weight Screen size 8 Compaq
Warranty Warranty 5 Gateway
Screen type Weight 5 HP
Reliability Price 4 Micromedia
Screen size Screen type 3 NEC
Sony
Toshiba

Analysis of Selection of an Implementation

Alternatives Alternative of an Alternative

RSWWPS
Acer 4 3 4 3 2 6 Acer 125 Evaluation
Compaq 3 4 5 2 6 7 Compaq 142 Gateway
of Decision
Gateway 9 6 7 7 8 2 Gateway 246
Effectiveness
HP 3 5 6 7 6 5 HP 174
Micromedia 2 2 3 4 5 4 Micromedia 103
NEC 3 45 6 7 2 NEC 151
Sony 7 56 4 2 8 Sony 192
Toshiba 3 45 6 7 3 Toshiba 154
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Decisions in the Management Functions

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About Rational Decision
Making
 Is it always possible to
make rational decisions?

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 Single, well-
defined goal
is to be achieved
All alternatives Problem is
and clear and
consequences unambiguous
are known
Rational
Decision
Final choice
Preferences Making will maximize
are clear
payoff

Preferences
No time or cost
are constant
constraints exist
and stable
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 Bounded Rationality
behave rationally within the parameters
of a simplified decision-making process
that is limited by an individual’s ability
to process information
 satisfice - accept solutions that are “good
enough”

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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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 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 poorly- structured problems
 produce a custom-made response
 more frequent among higher-level managers
 Procedure, Rule, & Policy
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 Types of Problems & Level In
the Organization
Ill-structured Top

Nonprogrammed
Type of Decisions Level in
Problem Organization

Programmed
Decisions

Well-structured Lower

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Things to consider . . .

 Certainty – how certain is a particular

outcome?
 Risk – how much risk can you take?
 expected value - the conditional return from
each possible outcome
 Uncertainty – Limited information
prevents estimation of outcome
probabilities for alternatives.

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Expected Value for Revenues from the
Addition of One Ski Lift

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 What to do?
maximax choice – optimistic
maximizing the maximum possible payoff
taking the best of all possible cases
maximin choice – pessimistic
maximizing the minimum possible payoff
taking the best of the worst cases
minimax - minimize the maximum “regret”
(difference between what you get and the best
case)
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Decision-Making Styles
 Dimensions of Decision-Making Styles
 Value orientations
 Task and technical concerns
 People and social concerns
 Tolerance for ambiguity
 Low tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneously

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 Decision-Making Styles

Analytica
Directive Behavioral
• Prefer simple,
• Prefer lcomplex Conceptual
problems • Concern for their
clear solutions • Socially oriented
• Carefully analyze organization
• Make decisions • Humanistic and
alternatives • Interest in helping
rapidly artistic approach
• Enjoy solving others
• Do not consider • Solve problems
problems • Open to
many alternatives creatively
• Willing to use suggestions
• Rely on existing • Enjoy new ideas
innovative • Rely on meetings
rules
methods

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Decision Making Styles

High
Ambigu ity
uity

Analytical Conceptual
ce for Ambig

Directive Behavioral
nce

Low
Toleran
Tolera

Tasks and Technical People and Social

Concerns Concerns
Value Orientation

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Common Errors in Decision Making

 Over-confidence  Framing
 Hindsight  Confirmation
 Self-serving  Selective
 Sunk costs perception
 Randomness  Anchoring
 Representation  Immediate
 Availability gratification
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Advantages and Disadvantages of Group-
Aided Decision Making

Advantages Disadvantages
1. Greater pool of knowledge 1. Social pressure
2. Different perspectives 2. Minority
domination
3. Greater comprehension 3. Logrolling
4. Increased acceptance 4. Goal displacement
5. Training ground 5. “Groupthink”

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 Decision-Making Approach
• Rationality
• Bounded Rationality
• Intuition

Types of Problems and Decisions

• Well-structured
Decision
- programmed
• Choose best
• Poorly structured
Decision-Making alternative
- nonprogrammed
Process - maximizing
- satisficing
• Implementing
Decision-Making Conditions • Evaluating
• Certainty
Decision Maker Style
• Risk
• Directive
• Uncertainty
• Analytic
• Conceptual
• Behavioral 20