Gao Junshan, UST Beijing

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Foundations of Decision Making
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Where We Are
Chapter 4 Foundations of Decision Making
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Chapter Guide

• Process of decision making
• Assumptions on rationality
• Rational model of decision making
• Modification of the rational model
• Decision making in real world
• Types and styles of decision making
• Common errors in decision making
• Cultural factors
• Decision making in groups
• Social responsibility and ethics

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Decision-making process Relevance to planning
Examples of Decisions in Planning

• What are the organizations long-term objectives?
• What strategies will best achieve those
  objectives?
• What should the organizations short-term
  objectives be?
• What is the most efficient means of completing
  tasks?
• What might the competition be considering?
• What budgets are needed to complete department
  tasks?
• How difficult should individual goals be?

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Decision-making process Car buying example
An example of the Decision-Making Process
Identifying a Problem
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Decision-making process Car buying example
Developing Alternatives
Analyzing Alternatives
Selecting an Alternative
Implementing the Choice
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Problem Identification
Decision-making process Some comments

• Solving the wrong problem perfectly is no better
  than do nothing for the right problem
• Problem is identified by comparing the current
  state with some standards that represent a
  desired state of affaires
• Past performance, previously set goals,
  performance of other units/organizations
• Problem identification is subjective in nature

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Decision Criteria
Decision-making process Some comments

• They reflect the factors that managers think
  important in making the choice
• They are not equally important
• A simple approach to deal with different criteria
  is to assign them different weights
• Judgments are involved in selecting criteria and
  assigning weighs

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Decision-making process
Developing and Analyzing Alternatives
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Decision-making process Some comments (see
Quantitative module p141)
Quantitative Tools to Decision Analysis

• Operations research models
• Linear programming
• Queuing theory
• Economic order quantity (EOQ)
• Financial techniques
• Ratio analysis
• Break-even analysis
• Decision analysis tools
• Decision tree
• Payoff matrix

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Implementation and Evaluation
Decision-making process Some comments

• Selecting the best choice based on the analysis
• Putting into the decision into action includes
• Communicating with those to be affected and
• Gaining their commitment of support
• Participation of decision making brings
  enthusiasms
• Evaluation of the decision result is an important
  phase of decision making process and part of the
  controlling function

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The Decision-Making Process
Decision-making process Summary
Identification of a problem
Identification of Decision criteria
Evaluation of decision effectiveness
Allocation of Weights to criteria
Development of alternatives
Analysis of alternatives
Selection of an alternative
Implementation of The alternative
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Rational Model of Decision Making
Rationality assumptions Rational model

• Decision choices are consistent, value maximizing
  within the specified constraints
• Decision makers remain logical and objective
• Outcomes of all alternatives are known and
  accurate comparison of them can be made

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Rationality assumptions Rational model
Problem Clarity
Constant Preferences
Single Goal
Assumptions of Rational Decision Making
No time/cost Constraints
Known Options
Maximum Payoff
Clear Preferences
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Rationality assumptions Modification of rational
model
Real World Decisional Conditions
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Rationality assumptions Modification of rational
model
Bounded Rationality
Uncertainty of environments
Incomplete information
Limited abilities to process massive information
Time and cost constrain
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A Search Process to Satisfice
Rationality assumptions Modification of rational
model
Ascertain the Need for a Decision
Set Satisficing Criteria
Identify a Limited Set of Alternatives
Compare Alternatives Against Criteria
Select the First Good Enough Choice
Yes
Simplify the Problem
Expand Search for Alternatives
A Satisficing Alternative Exists
No
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Decision making in reality Types and style
How Do Problems Differ?
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Decision making in reality Types and style
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Integrating Decision Making
Decision making in reality Types and style
Top
Poorly Structured
Nonprogrammed Decisions
Type of Problem
Level in Organization
Programmed Decisions
Well-Structured
Lower
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Decision making in reality Common errors
Common Errorsin Decision Making
Representative Heuristic
Availability Heuristic
Escalation of Commitment
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Decision making in reality Types and style
Decision-Making Styles
High
Analytic
Conceptual
Tolerance for Ambiguity
Behavioral
Directive
Low
Way of Thinking
Rational
Intuitive
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Decision making in reality Cultural factors
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Decision making in reality Cultural factors (see
Chap 2 p53)
Power Distance
Individualism
Hofstedes Dimensions of National Culture
Uncertainty Avoidance
Quantity Versus Quality of Life
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Cultural Differences in Decision Making Practices
Decision making in reality Cultural factors
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Group Decision Making
Decision making in reality Decision making in
groups
Advantages
Disadvantages

• More information
• More alternatives
• Increased acceptance
• Legitimacy

• Time-consuming
• Minority domination
• Pressures to conform
• Unclear responsibility

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Decision making in reality Decision making in
groups
Rationalize resistance
Apply direct pressure
Evidence of Groupthink
Illusion of unanimity
Avoid divating
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Decision making in reality Decision making in
groups
Techniques to Improve Group Decision
Making
Brainstorming
Nominal Group Technique
Electronic Meetings
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Management skills Effective meeting
Conducting Effective Meeting

• Prepare and distribute an agenda well in advance
  of the meeting
• Consult with participants before the meeting to
  ensure proper participation
• Establish specific time parameters for the
  meeting specify when it will start and end.
• Maintain focused discussion during the meeting
• Encourage and support participation by all
  members
• Encourage the clash of ideas
• discourage the clash of personalities
• Bring closure by summarizing accomplishments and
  allocating follow-up assignments

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Social responsibility and ethics Argument s for
it (see Chap 2 p58)
Arguments for Social Responsibility

• Public expectations
• Long-run profits
• Ethical obligations
• Public relations image
• Better environment

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Social responsibility and ethics Argument s for
it (see Chap 2 p58)
Arguments for Social Responsibility

• Fewer government regulations
• Balance of responsibility and power
• Stockholder interests
• Possession of resources
• Prevention versus cures

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Social responsibility and ethics Argument s
against it (see Chap 2 p58)
Arguments Against Social Responsibility

• Violation of profit maximization
• Dilution of purpose
• Costs outweigh benefits
• Too much power
• Lack of skills
• Lack of accountability
• Lack of broad public support

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Social responsibility and ethics Level of
involvement (see Chap 2 p59)
Social Responsibility
Social Involvement in Business
Social Obligation
Social Responsiveness
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Ethics and Code of Ethics
Social responsibility and ethics Ethics (see
Chap 2 p59)
Ethics refers a set of rules or principles that
define right and wrong conduct Code of Ethics is
a formal document that states an organizations
primary values and the ethical rules it expect
employees to follow.
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Three Views of Ethics
Social responsibility and ethics Ethics (see
Chap 2 p60)
Rights View
Utilitarian View
Theory of Justice View
see chap 2 (p60)
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Management skills Acting ethically
Guidelines for Acting Ethically

• Know your organization's policy on ethics.
• Understand the ethics policy.
• Think before you act.
• Ask yourself what-if questions.
• Seek opinions from others.
• Do what you truly believe is right.

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Chapter Summary

• Steps in decision-making process
• Rational decision-making model
• Limits of rationality
• Certainty, risk and uncertainty
• Bounded-rational decision maker
• Two type of problems and two decisions

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Chapter Summary

• Four decision-making styles
• Heuristics in decision making
• Cultural factors in decision making
• Pros and cons of group decisions
• Techniques to improve group decisions
• Social responsibility an ethics

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Payoff Matrix
Quantitative Tools to Decision Analysis (see
Quantitative module p141)
Visas response
Discovers strategy
Maximax choice D4
Maximin choice D3
Minimax choice D4
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Decision Tree
Quantitative Tools to Decision Analysis (see
Quantitative module p143)
320 000
Strong market 0.7
Expected value for large store 239 000
Rent a large store
Weak market 0.3
50 000
1
Strong market 0.7
240 000
Rent a small store
Expected value for large store 239 000
Weak market 0.3
130 000
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Quantitative Tools to Decision Analysis (see
Quantitative module p145)
Break-Even Analysis
Total Revenue
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Break-even point
Profit area
70
Break-Even Point
60
Variable Costs
50
40
Loss Area
Revenues/Costs (000)
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Fixed Costs
20
10
10 20 30 40 50
60 70
Output (000)
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Popular Financial Ratios
Quantitative Tools to Decision Analysis (see
Quantitative module p146)

• Operation Test
• Inventory turnover
• Total asset turnover

• Liquidity Test
• Current ratio
• Acid test

• Leverage Test
• Debt-to-assets
• Time-interest-earned

• Profitability test
• Profit margin-on-revenue
• Return-on-investment

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Quantitative Tools to Decision Analysis (see
Quantitative module p148)
Linear Programming
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Queuing Theory
Quantitative Tools to Decision Analysis (see
Quantitative module p148)
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Economic Order Quantity
Quantitative Tools to Decision Analysis (see
Quantitative module p150)
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Decision-making process Car buying example
Team skill building exercise
A salesclerk had just turned off the
lights in the store when a man appeared and
demanded money. The owner opened a cash register.
The contents of the cash register were scooped
up, and the man sped away. A member of the police
was notified promptly.
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Decision-making process Car buying example
Team skill building exercise

• A man appeared after the owner had turned off his
  store light. F
• The robber was a man. ?
• The man did not demand money. F
• The man who opened the cash register was the
  owner. ?
• The store owner scooped up the content of the
  cash register and run away. ?
• Some one opened a cash register. T
• After the man who demanded the money scooped up
  the content of the cash register, he run away. ?
• The cash register contained money ,but the story
  does not state how much. ?
• The robber demanded money of the owner. ?
• The story concerns a series of events in which
  only three persons are referred to the owner of
  the store, a man who demanded money and a member
  of the police force. F
• The following events in the story are true
  someone demanded money a cash register was
  opened its contents were scooped up and a man
  dashed out of the store. T