03_1DecisionMaking

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Decision Making

Decision making is an integral function of management. Decision making involves selecting or choosing a

particular course of action from among the various alternatives available in the decision making

situation.The process decision making involves 3 phases.1. Intelligence activity phase - identification of the problem.

2. Design activity phase - developing & analysing various course of actions.

3. Choice activity phase - choosing the best course of action.

Types of Problems & Decisions

Structured problems- straight forward, familiar & easy defined problems.

Unstructured problems- problems that are new or unusual for which information is ambiguous and

incomplete.

Programmed Decisions - handling customer complaints.

Non Programmed Decisions- mergers, acquisitions, takeovers, new facilities, new products, labor

contracts, legal issues.

Decision Making Conditions or Env

When making decisions, manage face three different conditions - certainty, risk and uncertainty.

A condition of certainty exists when the decision maker knows with reasonable certainty what alternatives

are, what conditions are associated with each alternative and outcome of each alternative. Under

conditions of certainty, accurate, measurable & reliable information on which to base decisions is

available.

When a manager lacks perfect information or whenever an information asymmetry exists, risk arises.Under a state of risk, the decision maker has incomplete information about available alternatives but has a

good idea of the probability of outcomes for each alternative. While making decisions, managers must

determine the probability associated with each alternative on the basis of the available information and his

experience.

Most significant decisions made in todays complex env are formulated under a state of uncertainty. The

decision maker is not aware of all available alternatives, the risks associated with each, the consequences

of each alternatives or their probabilities. In the face of such uncertainty, managers need to make certain

assumptions about the situation in order to provide a reasonable framework for decision making. Modern

approaches to decision making under uncertainty are risk analysis, decision trees, utility theory etc.

Decision Making Approach/Models

Classical Decision Theory

Classical model views the decision maker acting in a world of complete certainty. The rational modelof

decision making has its root in the economic theory maximizing profit or utility. According to rational

model, managers engage in a decision making process which is totally rational. They have all the relevant

information needed to take decisions. They are also aware of different possible alternatives, outcomes and


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consequences and hence make rational decisions.

But it is very difficult for managers to be completely rational in their decision making, since decisions are

taken keeping the future in mind and the future is very uncertain. It is very difficult to determine all the

alternative course of action that might be followed to accomplish a goal.

Classical decision theory may not fit well in a chaotic world. It can be used towards the bottom of many

firms.

Behavioral Decision Theory

Behavioral decision theory recognizes that human beings operate with cognitive limitations and bounded

rationality. A behavioral decision maker faces a problem that is not clearly defined & he has only limited

knowledge of possible alternatives and their consequences. These limitations force him to choose a

satisfactory alternative.

Behavioral decision theory fit with a chaotic world of uncertain conditions and limited information. And thismodel encourages satisficing decision making. However, keep in mind that their decision making is also

likely influenced by the organizations culture, internal politics, power considerations, and by a phenomenon

called escalation of commitment, which is an increased commitment to a previous decision despite

evidence that it may have been wrong.

Garbage Can Model

A model of decision making that views problems, solutions, participants and choice situations as mixed

together in the garbage can of the organization. Garbage model of decision theory is more appropriate in

dynamic settings.

Incremental Model

Another approach to decision making is the incremental model. The incremental model states that the

managers put in the least possible effort - only enough to reduce the problem to a tolerance level.

Managers are more concerned about a short term solution. This model does not require managers to

process a great deal of information in order to take a decision.

Decision Makers Styles

Linear Thinking Style- Preference for using external data and facts and processing this information

through rational logical thinking to guide decisions and actions.

Nonlinear Thinking Style- Preference for internal source of information like feelings & intuition and

processing this information with internal insights, feelings and hunches to guide decisions and actions.

Decision Making Process

1. Identifying a problem- A problem is an obstacle that makes it difficult to achieve a desired goal or

purpose. Prior to identifying the problem, it is essential to first recognize that a problem exists.

Identification of a problem involves 3 stages - scanning, categorization & diagnosis.


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2. Identifying the decision criteria.

3. Allocating weights to decision criteria - If the relevant criteria are not equally important, the

decision maker must weigh the items in order to give them the correct priority in the decision.

4. Developing alternatives - Brainstorming

5. Analyzing alternatives- Feasibility, quality, acceptability, cost & ethics

6. Selecting an alternative- Experience, Experimentation & Research & Analysis7. Implement the alternative.

8. Evaluating decision effectiveness.

Scanning involves monitoring the work env for changes that may indicate the emergence of a problem.

Heuristics

A heuristic is a mental shortcut that allows people to solve problems and make judgments quickly and

efficiently. These rule-of-thumb strategies shorten decision-making time and allow people to function

without constantly stopping to think about their next course of action. While heuristics are helpful in manysituations, they can also lead to biases.

While heuristics can speed up our problem and decision-making process, they can introduce errors. Just

because something has worked in the past does not mean that it will work again, and relying on an existing

heuristic can make it difficult to see alternative solutions or come up with new ideas.

Availability heuristic- tendency for the people to base their judgments on information that is

readily available to them rather than complete data..


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Representativeness heuristic- tendency for people to assess the likelihood of an occurrence by

trying to match it with a pre existing category.

Anchoring and adjustment heuristic bases a decision on incremental adjustments to an initial

value determined by historical precedent or some reference point.

General judgment biases in decision making are Confirmation trap- The tendency to seek confirmation for what is already thought to be true and

to not search for disconfirming information.

Hindsight trap- The tendency to overestimate the degree to which an event that has already taken

place could have been predicted.

Creativity in Decision Making

Creativity in decision making involves the development of unique and novel responses to problems and

opportunities. Creativity is especially important in a dynamic environment full of nonroutine problems.

Stages in the creative thinking process.

1. Preparation.

2. Concentration.

3. Incubation.

4. Illumination

5. Verification.

Ethics in Decision Making

Ethics is the study of moral values or principles that guide our behaviour, and inform us whether actions

are right or wrong. Ethical principles help us do the right thing.

Ethical dilemma is a situation in which a person must decide whether or not to do something that, althoughpersonally or organizationally beneficial, may be considered unethical and perhaps illegal. Ethical dilemma

are often associated with

Risk & uncertainty

Nonroutine problem situations.

An individual can use four different criteria in making ethical choices.

Is my action legal?

Is it right?

Is it beneficial?

How would I feel if my family found out about this?

How would I feel if my decision were printed in the local newspaper?


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Suggestions for integrating ethical decision making into the firm.

Develop a code of ethics and follow it.

Establish procedures for reporting violations.

Involve employees in identifying ethical issues.

Monitor ethical performance.

Reward ethical behavior. Publicize ethical efforts.

Implications of ethics for decision making.

Morality is involved in:

Choosing problems.

Deciding who should be involved in making decisions.

Estimating the impacts of decision alternatives.

Selecting an alternative for implementation.

Moral conduct does not arise from after-the-fact embarrassment.

Decision making realities Managers face complex choice processes.

Decision making information may not be available.

Bounded rationality and cognitive limitations affect the way people define problems, identify

alternatives, and choose preferred solutions.

Most decision making in organizations goes beyond step-by-step rational choice.

Most decision making in organizations falls somewhere between the highly rational and the highly

chaotic.

Decisions must be made under risk and uncertainty.

Decisions must be made to solve nonroutine problems.

Decisions must must be made under time pressures and information limitations. Decisions should be ethical.

Group Decision Making

In many organizations, decisions are often made by groups rather than by individuals. Group decision

making is practiced in many large and complex organizations. Many studies have shown that groups

makes better decisions than individuals, since more information is available in a group setting. Main

advantages of group decision making are


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Greater pool of knowledge

Different perspective

Increased acceptance

Training ground.

The most common forms of group decision making are interacting group, delphi groups and nominal

groups.

Interactive groupsis a decision making group in which the members openly discuss, argue and agree on

the best alternative. In this form of group decision making, an existing groups like a standing committee or

a newly designated group such as an ad hoc committee or task force is entrusted with the task of taking a

decision. The discussion is open and interactive and group arrives at a decision after discussing the pros

and cons of various alternatives. An advantage of this method is that the interaction between people brings

forth many new ideas and improves understanding between the members of the group. However, a major

disadvantage of this form of group decision making is that political factors can influence it to a great

extent.

Some of the disadvantages of group decision making are

Social pressure

Domination by a vocal few.

Logrolling - pet project or vested interest is at stake.

Goal displacement - secondary considerations take preference.

Groupthink - compromise

Delphi Group

This is technique is similar to the nominal group technique, but differs from it in that the decision makers do

not actually meet at a common place. The various stages in delphi technique are A small group is formed comprising of individuals with reasonable expertise in the decision making

situation. However, they do not have face to face interaction with each other.

Each expert is sent a questionnaire consisting of questions relevant to the decision making

situation. The expert advice of each individual decision maker is sought.

The summarised result or feedback of the survey is then sent back to the experts seeking their

response to the results.

The process is repeated several times until a consensus among the experts is obtained.

This method has the benefit of overcoming personal biases of decision makers. Research shows that org

implementing this technique have been successful in generating innovative ideas to the problem situation.

This method is not used for everyday routine decisions because it is time consuming and expensive.

Nominal Groups- In a nominal group technique, the group of members are actually brought together, but

they dont interact as freely as the members of interactive group. This technique is generally used when

creative or innovative ideas are required.


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Brainstorming - A idea generation process that specifically encourages any and all alternatives while

withholding any criticism of those alternatives.

Factors Affecting Decision Making

Types of Problems- structured / unstructured

Decision Making Env- certainty / risk / uncertainty

Decision Makers Style - Linear / Nonlinear

Information Inputs

It is very important to have adequate and accurate information about the situation for decision making,

otherwise the quality of the decision will suffer. It must be recognized, however, that on individual has

certain mental constraints, which limit the amount of information that he can adequately handle. Less

information is as dangerous as too much information. Some highly authoritative individuals do make

decisions on the basis of comparatively less information when compared to more conservative decision

makers.

Prejudice & Bias

Prejudice and bias is introduced in our decisions by our perceptual processes and may cause us to make

ineffective decisions. First, perception is highly selective, which means that we only accept what we want

to accept and hence only such type of information filters down to our senses.

Second, perception is highly subjective, meaning that information gets distorted in order to be consistent

with our pre-established beliefs, attitudes and values.

Cognitive Constraints

A human brain, which is the source of thinking, creativity and decision making, is limited in capacity in a

number of ways. For example, except for some unique circumstances, our memory is short term, having

the capacity of only a few ideas, words and symbols. Also, we cannot perform more than a limited number

of calculations in our heads and it is tough to compare all the possible alternatives and make a choice.

Finally, psychologically, we are always uncomfortable with making decisions. We are never really sure if

our choice of the alternative was correct and optimal until the impact of the implication of the decision has

been felt. This makes us feel insecure.

Social & Cultural Influences

Social norm is the standard and accepted way of making judgements. Cultural upbringing and various

cultural dimensions have a profound impact on the decision-making style of an individual. For example, in


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the Japanese organizational system, a decision maker arrives at a decision in consensus with others. This

style is culturally oriented and makes implementation of the decision much easier since everybody

participates in the decision-making process. In America, on the contrary, the decision-making style is

generally individualistic with the help of decision models and quantitative techniques.

Escalation of Commitment

An increased commitment to a previous decision despite negative information. Individuals escalate

commitment to a failing course of action when they view themselves as responsible for the failure. That is,

they throw good money after bad to demonstrate that their initial decision was not wrong and to avoid

having to admit they made a mistake. Many organizations have suffered large losses because a manager

was determined to prove his or her original decision was right by continuing to commit resources to what

was a lost cause from the beginning.

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03_1DecisionMaking