Fundamentals of decision making

1. Fundamentals of Decision Making

2.  Learning Goals
1. State conditions under which individuals make
decisions.
2. Explain certainty, risk, and uncertainty and how they
affect decision making
3. Describe the characteristics of routine, adaptive, and
innovative decisions
4. Explain the three basic models of decision making

3. 1. defining problems,
2. gathering information,
3. Identifying & assessing alternatives, and
4. choosing a course of action
We’ve got lots of challenges ahead of us. I spend about 75%
of my ime solving problems of one sort or another. The other
25% is really wonderful, though. Watching people grow,
develop, achieve, and do good things and seeing the company
succeed is very rewarding and lots of fun.1. Decision must be made and a commitment to
that decision by every one is essential.
2. Decision making involves all managerial
competencies

4. Pre-requisites of Effective Decision Making
• Decision making process is loud, egalitarian,
open & decisive.
• It is to empower & push it down to the lowest
level.
• Anybody who engages their BRAIN before
they engage their TONGUE is allowed to
speak their mind

5. Decision-Making Conditions
1. Decisions are affected by many forces beyond the
control of managers;
– Domestic & global competitive, political and cultural
forces
– Stakeholders can impact decisions involving ethical and
social responsibility issues
2. Managers need to identify and measure the
strength of these forces and estimate their potential
impact
3. The amount & accuracy of information and the
depth of individual’s managerial competencies
are crucial to decision making

6. Decision-Making Conditions
4. Conditions under which decisions are made;
– Certainty
– Risk
– Uncertainty
5. When individuals can identify factors/variables &
their potential impact with total predictability: Decisions
are made under Conditions of Certainty
6. When information is sketchy & ambiguity creeps in,
conditions of risk enters into decision making
7. Decisions are based on either objective (clear) or
subjective (intuition and judgment) probabilities

7. Objective
probabilities
Subjective
probabilities
Risk
Certainty Uncertainty

8.  The condition under which individuals are:
1. fully informed about a problem,
2. alternative solutions are known, and
3. the results of each solution are known
 Both the problem and alternative solutions are totally
known and well defined.
 Exception for most managers

9. What is Risk?
 The condition under which individuals can:
 Probability: the %age of times that a specific result
would occur if an individual were to make the same
decision a large number of times. Most common example:
tosses of coin – 50% tails & 50% heads
1. define a problem,
2. specify the probability of certain events,
3. identify alternative solutions, and
4. state the probability of each solution leading to a
result

10. What is Risk? (cont’d)
 Objective probability: the likelihood that a
specific result will occur, based on hard facts
and numbers e.g. examining past records
 Subjective probability:the likelihood that a
specific result will occur, based on personal
judgment e.g. intuition, personality traits – risk
taking or risk avoidance

11.  What is Uncertainty?
 Condition under which individuals do not have
the necessary information to assign probabilities
to the outcomes of alternative solutions
 May not even be able to define the problem,
much less identify alternative solutions and
possible outcomes
 Managers use creativity, intuition & available
info to make a judgment ( course of action)

12. Examples of Possible Crises as
Sources of Uncertainty and High Risk
Other
crises
Economic Crises
Recessions
Stock market crashes
Hostile takeovers
Physical Crises
Industrial accidents
Supply breakdowns
Product failures
Information Crises
Theft of proprietary information
Tampering with company records
Cyberattacks/Hacking
Natural Disasters
Fires
Floods
Earthquakes

13. Basic Types of Decisions
• No “ Fit All Situation” decision making model
available
• Decision maker needs to;
1. Define precisely problem at hand
2. Move on to generating & evaluating alternative
solutions and
3. Make a decision
Doing so, is not this simple in reality
• Consideration of Certainty, Risk and Uncertainty
reflect the types of problems encountered and types
of solutions considered (Figure on Next slide)

14. Unusual and
ambiguous
Known and
well defined
ProblemTypes
Untried and
ambiguous
Innovative
Decisions
Adaptive
Decisions
Routine
Decisions
Uncertainty
Certainty
Risk
Solution Types
(Alternative Solutions)

15.  Relatively common and well defined
 Unusual and ambiguous
 Firefighting: when no. of problems escalate,
creating unsatisfactory results:
1. Solutions are incomplete
2. Problems recur and cascade
3. Urgency supersedes importance
4. Some problems become crises

16. • Solutions range from the known & well
defined to the untried & ambiguous;
– Example of out of cash ATM – specific, well
defined procedure
– Example of provider of power & automation
technologies – to improve performance while
reducing negative environmental impacts – untried
& ambiguous solutions

17.  Typically made under certainty and objective probability
 Standard choices made in response to relatively well-
defined and common problems and alternative solutions
 Standards often used to set the framework for making routine
decisions.
 Need to guard against tendency to make routine decisions,
when actually need for adaptive or innovative decisions.
 When competition changes, once winning formulas bring
stagnation, declining profits or even failure.

18. Reservations
Phone service will be highly
efficient, including: answered
before the fourth ring; no hold
longer than 15 seconds; or, in case
of longer holds, call-
backs offered, then provided
in less than three minutes
Hotel Arrival
The doorman (or first-contact
employee) will actively greet
guests, smile, make eye contact,
and speak clearly in a friendly
manner
Messages and Paging
Phone service will be highly
efficient, including: answered
before the fourth ring; no
longer than 15 seconds
Hotel Departure
No guest will wait longer
than five minutes for baggage
assistance, once the bellman
is called (eight minutes in
resorts)
Examples of
decision rules
at Four
Seasons hotels
and resorts

19.  Adaptive Decisions
 Choices made in response to a combination of moderately
unusual problems and alternative solutions
 Convergence—a business shift in which two
connections with the customer that were previously
viewed as competing or separate
(e.g., Mobile Connection & Internet Connection/Wi-
fi) come to be seen as complementary
 Continuous improvement—a management
philosophy that approaches the challenge of
product and process enhancements as an ongoing
effort to increase the levels of quality and excellence
 Driven by goals like better quality, efficiency, & being
responsive to customers

20.  Choices based on the discovery, identification, and diagnosis of
unusual and ambiguous problems and/or the development of
unique or creative alternative solutions (represent a sharp break
with the past)
 Made under conditions which vary from risk with subjective
probabilities to uncertainty
 Solutions may involve a series of small, interrelated decisions
made over months or even years
 Usually represent sharp break with the past
 Three forms of innovation for economic progress:
1. Institutional innovation: includes the legal and institutional framework
for business, such as deregulation
2. Technological innovation: creates the possibility of new products,
services, and production methods (Robots)
3. Management innovation: major changes in the way organizations are
structured and how managers perform their functions (ERP)

21. Models of Decision Making
• These models represent different decision
making processes
• Each model provides valuable insights into
those processes.
• 3 decision making models;
1. Rational
2. Bounded rationality
3. Political

22.  Prescribes a set of phases that individuals or teams
should follow to increase the likelihood that their
decisions will be logical and optimal
 Rational decision: results in the maximum
achievement of a goal in a situation
 Usually focuses on means—how best to achieve one
or more goals

23. Environmental influences
1
Define and
diagnose the
problem
2
Set
goals
3
Search for
alternative
solutions
7
Follow-up
and control
the results
6
Implement
the solution
selected
5
Choose among
alternative
solutions
4
Compare and
evaluate
alternative solutions
Environmental influences

24. Rational Model: Define and
1. Diagnose the Problem
 Noticing skill: identifying and monitoring numerous
external and internal environmental factors and deciding
which ones are contributing to the problem(s)
 Interpreting skill: assessing the factors noticed and
determining which are causes, not merely symptoms, of the
real problem(s)
 Incorporating skill: relating those interpretations to the
current or desired goals
 Need to ask probing questions

25.  Goals: results to be attained and indicate the direction
toward which decisions and actions should be aimed
 General goals: provide broad direction for decision
making in qualitative terms
 Operational goals: state what is to be achieved
in quantitative terms, for whom, and within what time
period
 Hierarchy of goals: represents the formal
linking of goals between organizational
levels: Organizational goals, divisional goals,
departmental goals, sectional goals, individuals goals

26. Exhibit 6–5 Decisions in the Management Functions

27. Bounded Rationality Model
• Propounded by Herbert Simon, a management
scholar in mid 1950s. He was awarded Nobel
Prize in 1978 in economics for his “pioneering
research” into the decision –making process
within economic organizations
• This model emphasizes limitations of rationality
& provides a better picture of the day to day
decision making processes
• Partially explains why different individuals make
different decisions when they have exactly the
same information

28. Bounded rationality Model
• Managers make decisions rationally, but are
limited (bounded) by their ability to process
information.
• Assumptions are that decision makers:
Will not seek out or have knowledge of all alternatives
Will satisfice—choose the first alternative encountered
that satisfactorily solves the problem—rather than
maximize the outcome of their decision by considering all
alternatives and choosing the best.
• Influence on decision making
Escalation of commitment: an increased commitment to a
previous decision despite evidence that it may have been
wrong.

29.  Inadequate problem definition
 New problems often are viewed as being like old
problems
 Too much focus on symptoms as problems
 Laziness
 Limited search for alternatives
 Options considered until one that seems adequate
 Limited information
 Ignorance: the lack of relevant information or the
incorrect interpretation of the information that is
available

30. Bounded Rationality Model
Level of Satisficing Can be Raised By:
1. Personal determination
2. Setting higher individual or organization standards
(goals)
3. Use of management science and computer-based
decision-making and problem-solving techniques
4. Following the seven steps in the rational model

31. The Role of Intuition
• Intuitive decision making
– Making decisions on the basis of experience,
feelings, and accumulated judgment.
• Decisions based solely on intuition ‘Not the
Right way”, Decisions have to be based on
hard facts/information/logic/rationale
combined with the Intuition.

32. Exhibit 6–6 What Is Intuition?
Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive Decision Making,” Academy of Management Executive, October 1999, pp. 91–99.

33. Political Model
• It represents the decision-making process in
terms of the self-interests & goals of powerful
stakeholders.
• Before getting into this model, we need to
define ‘Power’;
“Power is the ability to influence or control
individual, team, departmental, or organizational
decisions and goals”

34. Political Model
• Political processes are mostly used when
decisions involve powerful stakeholders and
decision makers disagree over alternative
solutions when conflicts arise
• The factors in this model are highly
interrelated

35. Divergence in problem definition
Divergence in goals
Divergence in solutions
Political decision
making
Multiple stakeholders with power such as:
InvestorsCustomers Employees
Unions
Suppliers
Competitors
Legislative BodiesRegulatory Agencies

36. Political Model
• Divergence in Problem Definition: external and
internal stakeholders attempt to define problems to
their own advantage;
– Conflicts occur when different stakeholders have
different perceptions about nature & sources of problems
– When things go wrong, one or more individuals may be
singled out as a cause of problem – process of Scape-
goating
– Other people who may be responsible for the problem are
considered to be free from blame;
Scape-goating is used to preserve a position of power or maintain
a positive image

37. Political Model
• Divergence in Goals: it recognizes the likelihood of
conflicting goals among stakeholders
– A balance of power among stakeholders may lead to
negotiations & compromise in the decision making (e.g.
union management negotiations)
• Divergence in Solutions: some goals or means used
to achieve them may be perceived as win-lose
situations;
– In such situation, stakeholders often distort & selectively
withhold information to further their own interests –
severely limit ability to make innovative/adaptive decisions
on a/c of absence of all information

38. Political Model
• Cooption: refers to bringing new stakeholder
representatives into the strategic decision
making process as a way to avert threats to an
organization’s stability & existence;
– Example: placing a banker on the firm's board of
directors when the firm needs to borrow money
– Creating junior executive committee for strategic
issues & involve middle managers for their support

39. Decision-Making Styles
• Linear thinking style
– A person’s preference for using external data and
facts and processing this information through rational,
logical thinking
• Nonlinear thinking style
– A person’s preference for internal sources of
information (feelings & intuition) and processing this
information with internal insights, feelings, and
hunches to guide decisions and actions

40. Exhibit 6–11 Common Decision-Making Errors and Biases

41. Decision-Making Biases and Errors
• 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 immediate rewards
and that to avoid immediate costs.

42. Decision-Making Biases and Errors
• 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 choices
and discounting contradictory information.

43. Decision-Making Biases and Errors
(cont’d)
• Framing Bias
– Selecting and highlighting certain aspects of a
situation while ignoring other aspects.
• Availability Bias
– Losing decision making objectivity by focusing on
the most recent events.
• Representation Bias
– Drawing analogies and seeing identical situations
when none exist.
• Randomness Bias
– Creating unfounded meaning out of random events.

44. Decision-Making Biases and Errors
• 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 have been
predicted once the actual outcome is known (after-
the-fact).

45. Overview of Managerial Decision Making

46. Decision Making for Today’s World
• Guidelines for making effective decisions:
– Understand cultural differences.
– Know when it’s time to call it quits.
– Use an effective decision making process.
• Habits of highly reliable organizations (HROs)
– Are not tricked by their success.
– Defer to the experts on the front line.
– Let unexpected circumstances provide the solution.
– Embrace complexity.
– Anticipate, but also anticipate their limits.

47. Characteristics of an Effective Decision-
Making Process
1. It focuses on what is important.
2. It is logical and consistent.
3. It acknowledges both subjective and objective thinking and
blends analytical with intuitive thinking.
4. It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
5. It encourages and guides the gathering of relevant
information and informed opinion.
6. It is straightforward, reliable, easy to use, and flexible.

48. Assignment for Students (Group)
1. Using Planning & Decision Aids – Part I (Group VII,
VIII & IX)
– Learning Goals:
Understanding Knowledge Management & how it is used for
creating value for organizations
Using forecasting aids – Delphi Techniques, Simulation & Scenarios
2. Using Planning & Decision Aids – Part II (Group X.
XI & XII)
– Learning Goals:
Understanding creative process, & use of Osborn’s Creativity Model
Understanding & applying 3 Quality improvement aids:
Benchmarking, Deming Cycle & Baldrige Quality Program

49. Thanks……