Chapter 8: Managerial Decision Making

Chapter 8: Managerial Decision Making

1. Types of Decisions and Problems

   • Decision: is a choice made from alternatives.
   • Decision making:is the process of identifying problems and opportunities and then resolving them.
   • Programmed Decisions: involve situations that have occurred often enough to enable decision rules to be developed and applied in the future.5 Programmed decisions are made in response to recurring organizational problems.
   • Nonprogrammed decisions: are made in response to situations that are unique, are poorly defi ned and largely unstructured, and have important consequences for the organization. Many nonprogrammed decisions involve strategic planning because uncertainty is great and decisions are complex.

2. Facing Certainty and Uncertainty

   • Certainty means that all the information the decision maker needs is fully available.6 Managers have information on operating conditions, resource costs or constraints, and each course of action and possible outcome.
   • Risk means that a decision has clear-cut goals and that good information is available, but the future outcomes associated with each alternative are subject to chance. However, enough information is available to allow the probability of a successful outcome for each alternative to be estimated.7
   • Uncertainty means that managers know which goals they wish to achieve, but information about alternatives and future events is incomplete. Factors that may affect a decision, such as price, production costs, volume, or future interest rates, are diffi cult to analyze and predict.
   • Ambiguity is by far the most diffi cult decision situation. Ambiguity means that the goals to be achieved or the problem to be solved is unclear, alternatives are diffi cult to defi ne, and information about outcomes is unavailable.

3. Decision Making Models

   • Rational model: The classical model of decision making is based on rational economic assumptions and manager beliefs about what ideal decision making should be. This model has arisen within the management literature because managers are expected to make decisions that are economically sensible and in the organization’s best economic interests.: The classical model of decision making is considered to be normative, which means it defi nes how a decision maker should make decisions.
     • The decision maker operates to accomplish goals that are known and agreed on. Problems are precisely formulated and defi ned.
     • The decision maker strives for conditions of certainty, gathering complete information. All alternatives and the potential results of each are calculated.
     • Criteria for evaluating alternatives are known. The decision maker selects the alternative that will maximize the economic return to the organization.
     • The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives, and make the decision that will maximize the attainment of organizational goals
   • Administrative Model: The administrative model of decision making is based on the work of Herbert A. Simon. Simon proposed two concepts that were instrumental in shaping the administrative model: bounded rationality and satisfi cing. Bounded rationality means that people have limits, or boundaries, on how rational they can be. The organization is incredibly complex, and managers have the time and ability to process only a limited amount of information with which to make decisions.18 Because managers do not have the time or cognitive ability to process complete information about complex decisions, they must satisfi ce. Satisfi cing means that decision makers choose the fi rst solution alternative that satisfi es minimal decision criteria. Rather than pursuing all alternatives to identify the single solution that will maximize economic returns, managers will opt for the fi rst solution that appears to solve the problem, even if better solutions are presumed to exist. The decision maker c
     • Decision goals often are vague, confl icting, and lack consensus among managers. Managers often are unaware of problems or opportunities that exist in the organization.
     • Rational procedures are not always used, and, when they are, they are confi ned to a simplistic view of the problem that does not capture the complexity of real organizational events.
     • Managers’ searches for alternatives are limited because of human, information, and resource constraints.
     • Most managers settle for a satisfi cing rather than a maximizing solution, partly because they have limited information and partly because they have only vague criteria for what constitutes a maximizing solution.
   • Political model: is useful for making nonprogrammed decisions when conditions are uncertain, information is limited, and there are manager confl icts about what goals to pursue or what course of action to take. Most organizational decisions involve many managers who are pursuing different goals, and they have to talk with one another to share information and reach an agreement.
     • Organizations are made up of groups with diverse interests, goals, and values. Managers disagree about problem priorities and may not understand or share the goals and interests of other managers
     • Information is ambiguous and incomplete. The attempt to be rational is limited by the complexity of many problems as well as personal and organizational constraints.
     • Managers do not have the time, resources, or mental capacity to identify all dimensions of the problem and process all relevant information. Managers talk to each other and exchange viewpoints to gather information and reduce ambiguity.
     • Managers engage in the push and pull of debate to decide goals and discuss alternatives. Decisions are the result of bargaining and discussion among coalition members.

4. Decision Making Steps

5. Personal Decision Framework

6. Why do managers make bad decisions:

   • Being influenced by initial impressions, justifying past decisions, seeing what you want to see, perpetuating the status quo, being influenced by problem framing, overconfidence

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