1. Decision Making
(Part 2)
QSB2413 Management Science

2. Recap
• Seven steps of decision-making process
• Two types of decision-making

3. Models of Decision Making
• Two commonly used decision-making
models:-
(1) Rational- economic model
(2) Behavioral model
Note: Refer to the Two Contrasting Decision
Models (uploaded in FB group).

4. (1) Rational-Economic Decision Model
• It focuses on how decisions should be made.
• The model makes the following important
assumptions about the decision maker and the
decision-making process:
The decision maker has “perfect” (completely
accurate) information and has relevant
information for the decision situation.
The decision maker operates to accomplish
objectives that are known and agreed on.
The decision maker has an extensive list of
alternative choices.

5. (1) Rational-Economic Decision Model
The decision maker will be rational, systematic
and logical in assessing each alternative and its
associated probabilities.
The decision maker will work in the organization’s
best interest.
Ethical dilemmas do not arise in the decision-
making process.
• Ethical dilemma is a situation in which a person
must decide whether or not to do something that
may be unethical and illegal.

6. (1) Rational-Economic Decision Model
• Assumptions above provide guidelines to help
the organization or group reach an ideal outcome
(objectives / goals).
• In reality, there are several reasons why making a
decision is not likely to be that simple.
• First, people rarely have access to complete and
perfect information. Example, collecting data
using questionnaire in order to survey how many
percent of fresh graduates are willing to invest in
Green building. (clear goal but hardly to obtain
perfect information – study area is too wide)

7. (1) Rational-Economic Decision Model
• Second, even if information about all possible
alternatives were available, individuals are limited in
their ability to comprehend and process vast amounts
of it.
• Third, decision makers seldom have adequate
knowledge about the future consequences of
alternatives. (Risk)
• Fourth, in most decision-making situations, personal
factors (emotions, attitudes) are likely to prevent a
manager from always acting completely rationally.
• Lastly, an individual culture and ethical values may
influence the decision process.

8. (1) Rational-Economic Decision Model
• Individuals from different backgrounds and
cultures have different experiences, values and
behaviors, which in turn influence the way they
process information and make decisions.
• For example, Japanese managers follow a unique
consensual decision-making process in which
subordinates are involved in considering the
future direction of their companies.
• What about Chinaman companies?

9. (1) Rational-Economic Decision Model
• How ethical dilemmas influence managers in
decision-making?
• For example, managers have to decide to improve
the below quality construction process / material
detected or settle this case by using unethical
way (paying an agreed amount to cover the
default found).
• Is it right to cancel a contract with a loyal
distributor when a cheaper supplier becomes
available? What are the future consequences?

10. (2) Behavioral Decision Model
• Unlike rational-economic model, the behavioral
decision model acknowledges human limitations
that make rational decisions difficult to achieve.
(Refer to the first point, people rarely have access
to complete and perfect information)
• The behavioral decision model is descriptive and
provides a framework for understanding the
process that managers actually use when
selecting from among alternatives.

11. (2) Behavioral Decision Model
• The behavioral decision model operates on
the premise that a person’s cognitive ability
to process information is limited.
• A human being can handle only limited
information (before overload occurs), even if
complete information were available to
decision makers.
• Cognitive limitations would impede them from
making completely rational decisions.

12. (2) Behavioral Decision Model
• For examples, a developer wish to analyze the
future property trend. But there are various
factors affecting the future property trend,
human needs technology advancement to do the
analysis. (to process the complete information
rationally)
• Managers usually attempt to behave rationally
within their limited perception of a situation.
But most organizational situations are complex
that managers are forced to view problems
within sharply restricted bounds.

13. (2) Behavioral Decision Model
• This model introduces several concepts that
are important to understand how we make
decisions.
Bounded Rationality
Intuition
Satisficing
Escalation of commitment

14. (2) Behavioral Decision Model
Bounded Rationality
• People cannot know everything
• People are limited by organizational
constraints (time, information, resources,
mental capacities)
• Useful concept in explaining why different
individuals with exact the same information
may take different decisions. (unable to search
out all possible alternatives – limitations)

15. (2) Behavioral Decision Model
Intuition
• “sixth sense” – unconscious analysis based on
past experience to a paranormal ability
• Managers use intuition to obtain a quick
understanding of a situation and to identify
solutions without extensive analysis.

16. (2) Behavioral Decision Model
Satisficing
• Searching for and accepting something that is
satisfactory rather than insisting on the perfect or
optimal.
• Managers tend to satisfice rather than optimize in
considering and selecting alternatives. (do not access
to all possible contingencies in making decisions)
• Example, Hewlett-Package decided to enter the home
computer business and becoming one of the top 3
competitors in PC market. This could be viewed as a
satisficing decision. (level of performance is
satisfactory but certainly not perfect)

17. (2) Behavioral Decision Model
Escalation of Commitment
• When managers see that an initial decision is
failing, they frequently react by committing
more resources, even when feedback
indicates the action is wrong.
• One reason for escalation of commitment is
that individuals feel responsible for negative
consequences and try to justify their previous
decisions.

18. How can managers tell whether
they have made the best possible
decision?

19. One way is to wait until the results but
that can take long time (step 7 –
monitoring and evaluating feedback).
In the meantime, managers can focus
on the decision-making process.

20. Group Considerations
• We have examined how managers make
decisions individually.
• In practice, managers often work with their
employees and peers and may need to solicit
input from them.
• Decision making is frequently entrusted to a
group, which may be a board, a standing
committee and ad-hoc committee or a task force.
• This process is referred to as participative
decision making.

21. Participative Decision Making
• Organizations push decision making to lower
organizational levels to increase focus on
improving customer service through quality
management.
• The effectiveness of a group decision is governed
by both its quality and its acceptance (the degree
to which group members are committed to their
decision).
• Refer to Table 6.1 Vroom-Jago Decision-Making
Styles (uploaded in FB group)

22. Participative Decision Making
Advantages:-
• Experience and expertise of several individuals
available
• More information, data and facts accumulated
• Problems viewed from several perspectives
• Higher member satisfaction
• Greater acceptance and commitment to
decisions

23. Participative Decision Making
Disadvantages:-
• Greater time requirement
• Minority domination
• Compromise
• Concern for individual rather than group goals
• Social pressure to conform
• Groupthink

24. Groupthink
• Groupthink is an agreement-at-any-cost
mentality that results in ineffective group
decision making.
• It occurs when groups are highly cohesive,
have highly directive leaders, are too insulated
to get objective information. Because of lack
of outside information, resulted having little
hope of finding better solution than that
proposed by the leader.

25. Participative Decision Making
Techniques for enhancing the quality of
participative decision making:-
• Brainstorming is a technique that encourages
group members to generate as many novel ideas
as possible on a given topic without evaluating
them.
• Brainstorming can enhance creativity and
reduces the tendency of groups to satisfice in
considering alternatives.
• Brainstorming focuses on generating ideas rather
than on choosing an alternatives.

26. Conclusion
• Decision making has always been one of the
primary activities of business leaders.
• If leaders are to make high-quality decisions,
they will have to become thoroughly familiar
with the tools and techniques that can aid in
the decision-making process.