Lecture 4 Decision Making
Lecture 4 Decision Making
Making Decisions
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Decision :
Making a choice from two or more
alternatives.
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The Decision-Making Process
Identifying a problem and decision criteria
and allocating weights to the criteria.
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Identifying the Problem
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Problem
A discrepancy between an existing and
desired state of affairs.
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Characteristics of Problems
A problem becomes a problem when a
manager becomes aware of it.
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Identifying the Decision Criteria
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Decision criteria are factors that are
important (relevant) to resolving the
problem such as:
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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Allocating Weights to the Criteria
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Decision criteria are not of equal
importance:
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Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3
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Selecting an Alternative
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Choosing the best alternative
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Implementing the Alternative
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Putting the chosen alternative
into action.
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Evaluating the Decision’s Effectiveness
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The soundness of the decision is
judged by its outcomes.
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Approaches to decision making
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Making Decision
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Rationality
Managers make consistent, value-
maximizing choices with specified
constraints.
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Assumptions are that decision
makers:
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Bounded Rationality
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Assumptions are that decision
makers:
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Influence on decision making
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Intuition
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Intuitive decision making
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Types of Problem & Decision Making
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Structured Problems
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Types of Programmed Decisions
Procedure
A series of interrelated steps that a manager can
use to respond (applying a policy) to a structured
problem.
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Types of Programmed Decisions
Rule
An explicit statement that limits what a manager
or employee can or cannot do.
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Types of Programmed Decisions
Policy
A general guideline for making a decision about
a structured problem.
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Policy, Procedure, and Rule
Examples
Policy
Accept all customer-returned merchandise.
Procedure
Follow all steps for completing merchandise
return documentation.
Rules
Managers must approve all refunds over
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$50.00.
No credit purchases are refunded for cash.
Unstructured Problems
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Nonprogrammed Decisions
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Decision Making Conditions
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Certainty
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Risk
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Expected
Expected × Probability = Value of Each
Event Revenues Alternative
Heavy snowfall $850,000 0.3 = $255,000
Normal snowfall 725,000 0.5 = 362,500
Light snowfall 350,000 0.2 = 70,000
$687,500
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Uncertainty
Limited information prevents estimation
of outcome probabilities for alternatives
associated with the problem and may
force managers to rely on intuition,
hunches, and “gut feelings.”
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Uncertainty
Maximax: the optimistic manager’s choice
to maximize the maximum payoff
Maximin: the pessimistic manager’s choice
to maximize the minimum payoff
Minimax: the manager’s choice to
minimize maximum regret.
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Common Decision Making Errors &
Biases
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Heuristics
Using “rules of thumb” to simplify decision
making.
Overconfidence Bias
Holding unrealistically positive views of
oneself and one’s performance.
Immediate Gratification Bias
Choosing alternatives that offer
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immediate rewards and that to avoid
immediate costs.
Anchoring Effect
Fixating on initial information and ignoring
subsequent information.
Selective Perception Bias
Selecting organizing and interpreting
events based on the decision maker’s
biased perceptions.
Confirmation Bias
Seeking out information that reaffirms past
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information.
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.
Hindsight Bias
Mistakenly believing that an event could
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outcome is known (after-the-fact).
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