Topic 7: Decision Making

Topic 7: Decision Making

1. The Decision Making Process

   • Decision making is the process of choosing between 2 or more alternatives
   • The 8 Steps in the Decision Making Process
     • 1. Identifying a problem
       • A problem is a discrepancy between an existing and desired state of affairs
       • What constitutes a problem? You're awae of it, under pressure to act and you have the resources needed to take action
       • 2. Identifying decision criteria
         • Criteria that define what is relevant in a decision e.g. costs, support, qualifications etc
         • 3. Allocating weights to the criteria
           • Weights give priority to the criteria in the decision
           • 4. Developing alternatives
             • Alternatives to resolve the problem
             • 5. Analysing the alternatives
               • Appraise against the criteria-- strengths and weaknesses will become apparent
               • 6. Selecting the alternative
                 • Choosing the bets alternative which has generated the highest score against those that have been weighted
                 • 7. Implementing the alternative
                   • Decision is put into action and managers will need to reassess the environment for any changes e.g. do the criteria/alternatives still seem to be the best ones?
                   • 8. Evaluating the decision effectiveness
                     • Has the problem been resolved and did the chosen alternatives accomplish the desired result

2. The Manager as a Decision Maker

   • Rationality
     • Managerial decision making is assumed to be rational, meaning managers make logical, objective and consistent choices to maximise value
   • Bounded Rationality
     • Managers cannot always operate in full rational decision making so they operate under assumptions of bounded rationality which is making decisions rationally but being limited/bounded by ability to process information
     • Managers SATISFICE: acceptance of solutions which are 'good enough'
     • Decisions may also be influenced by ESCALATION OF COMMITTMENT which is an increased commitment to a previous decisions despite evidence it may have been wrong
   • Intitution
     • Decision making on the basis of experience, feelings and accumulated judgment
     • 5 aspects of institution:
       • 1. Subconscious mental processing
         • 2. Values and Ethics based decisions
           • 3. Experience based decisions
             • 4. Affect-initiated decisions- decisions based on feelings/emotions
               • 5. Cognitive-based decisions-- decisions based on skills, knowledge and training

3. Types of Problems and Decisions

   • 1. Well-structured problems and programmed decisions
     • Structured problems are straightforward, familiar, easily defined and can result in programmed decision making
       • A programmed decision is a repetitive decision that can be handled by a routine approach
         • Three types of PD:
           • 1. A procedure: Series of sequential steps to respond to a structured problem
           • 2. A rule: An explicit statement that tells a manager what they can/can't do
           • A policy: A guideline that establishes parameters for making decisions and typically contain and ambiguous terms that leave interpretation up to the decision maker
   • 2. Unstructured problems and non-programmed decisions
     • Unstructured problems are new or unusual and for which information is ambiguous/incomplete
       • Non-propgrammed decisions are unique and non-reoccuring and require custom-made solutions to develop unique solutions to problems

4. Decision Making conditions

   • Certainty
     • A situation where managers make accurate decisions because the outcome of the alternative is already known
   • Risk
     • risk refers to those conditions in which the manager is able to estimate the likelihood of certain outcomes because of personal experience or secondary information
   • Uncertainty
     • Situations where a managers has neither certainty or reasonable probability to estimate available decision
       • Choices are influenced by limited information available and psychological orientation of the decision maker:
         • An optimistic manager follows a MAXIMIN CHOICE- maximising the maximum possible payoff
         • The manager who desires to minimise their maximum REGRET will opt for a MINIMAX CHOICE

5. Decision Making Styles

   • Linear-non-linear thinking style profiles:
     • Thinking style reflects:
       • 1. The source of information you tend to use e.g. external sources- data/facts or internal sources- feelings/intitution
       • 2. How you process that information (linear- rational, logical, analytical OR non-linear- intitutive, creative and insightful
         • LINEAR: Preference for using external data/facts to process information in a rational, logical or analytical way
         • NON-LINEAR: Preference for internal sources of information e.g. feelings/intitution to process information with internal insights, feelings and hunches

6. Decision making Biases and Errors

   • HEURISTICS: 'Rules of thumb' ways of thinking that simplify decision making but can lead to errors/biases in processing and evaluating information
   • Biases and Errors:
     • 1. Overconfidence Bias
       • 2. Immediate Gratification Bias
         • 3. The Anchoring Effect
           • 4. Selective Perception Bias
             • 5. Confirmation Bias
               • 6. Framing Bias
                 • 7. Availability Bias
                   • 8. Representation Bias
                     • 9. Randomness Bias
                       • 10. The Sunk Costs Bias
                         • 11. Self-Serving Bias
                           • 12. Hindsight Bias

7. Decision Making for Today's World

   • Managers need to understand cultural differences, know when it's time to call it quits (if a decision is not working) and use an effective decision making process which: 1. focuses on what is important 2. is logical/consistent 3. acknowledges subjective/objective thinking (blending analytical with intituitve thinking) 4. requires only as much information/analaysis as necessary to solve a problem 5. encourages the gathering of relevant information and informed opinion and 6 is straightforward, reliable, easy to use and flexible
   • Karl Weich (organisational psychologist) suggests the best way for managers to respond to unpredictability/uncertainty is to become a 'Highly Reliable Organisation' which has 5 habits:
     • 1. They are pre-occupied with failures, not tricked by successes
       • 2. They get the opinion of experts on the frontline for input to make decisions
         • 3. they let unexpected circumstances provide the solution meaning they are inventive and do things which may be contrary to what is normally done
           • 5. They anticipate their limits and think by acting to find out what works and doesn't work