Fundamentals of Decision Making

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Fundamentals of Decision Making

• Chapter 08

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Fundamentals of Decision Making

• Learning Goals

1. Explain certainty, risk, and uncertainty and how
   they affect decision making
2. Describe the characteristics of routine,
   adaptive, and innovative decisions
3. Discuss the rational and bounded rationality
   models of managerial decision making
4. Explain the features of political managerial
   decision making

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Decision making includes

1. defining problems,
2. gathering information,
3. generating alternatives, and
4. choosing a course of action

Weve got lots of challenges ahead of us. I
spend about 75 of my time 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.
David Hoover Chairman, CEO and President Ball
Corporation
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Summary of Decision-Making Conditions
Certainty
Uncertainty
Objectiveprobabilities
Subjectiveprobabilities
Risk
Intuition and judgment
Clear
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Decision-Making Conditions What is Certainty?

• 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

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• What is Risk?

• The condition under which individuals can

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

• Probability the percentage of times that a
  specific result would occur if an individual were
  to make the same decision a large number of times

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• What is Risk? (contd)

• Objective probability the likelihood that a
  specific result will occur, based on hard facts
  and numbers

• Subjective probability the likelihood that a
  specific result will occur, based on personal
  judgment

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• 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

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Examples of Possible Crises as Sources of
Uncertainty and High Risk
Physical Crises
Economic Crises
Industrial accidents Supply breakdowns Product
failures
Recessions Stock market crashes Hostile takeovers
Othercrises
Information Crises
Natural Disasters
Theft of proprietary information Tampering with
company records Cyberattacks
Fires Floods Earthquakes
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Integrating Framework
Unusual and ambiguous
Innovative Decisions
Uncertainty
Adaptive Decisions
Conditions under which decisions are made
Risk
Routine Decisions
Problem Types
Certainty
Known and well defined
Untried andambiguous
Solution Types (Alternative Solutions)
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Basic Types of Decisions Types of Problems

• Relatively common and well defined

• Unusual and ambiguous

• Firefighting

1. Solutions are incomplete
2. Problems recur and cascade
3. Urgency supersedes importance
4. Some problems become crises

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Routine Decisions

• Standard choices made in response to relatively
  well-defined and common problems and alternative
  solutions

• Typically made under certainty and objective
  probability

• Standards often used to set the framework for
  making routine decisions

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Routine Decisions
Reservations
Hotel Arrival
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
The doorman (or first-contact employee) will
actively greet guests, smile, make eye contact,
and speak clearly in a friendly
manner
Examples of decision rules at Four Seasons hotels
and resorts
Messages and Paging
Hotel Departure
Phone service will be highly efficient,
including answered before the fourth ring no
longer than 15 seconds
No guest will wait longerthan five minutes for
baggage assistance, once the bellmanis called
(eight minutes in resorts)
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• Adaptive Decisions

• Choices made in response to a combination of
  moderately unusual problems and alternative
  solutions

• Convergencea business shift in which two
  connections with the customer that were
  previously viewed as competing or separate(e.g.,
  brick-and-mortar bookstores and Internet
  bookstores) come to be seen as complementary

• Continuous improvementa managementphilosophy
  that approaches the challenge ofproduct and
  process enhancements as an ongoingeffort to
  increase the levels of quality and excellence

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Innovative Decisions

• Choices based on the discovery, identification,
  and diagnosis of unusual and ambiguous problems
  and/or the development of unique or creative
  alternative solutions

• 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
3. Management innovation major changes in the way
   organizations are structured and how managers
   perform their functions

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Process of Rational Decision Making Rational
Model

• 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 meanshow best to achieve one
  or more goals

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Rational Decision-Making Model(adapted from
Figure 8.3)
Environmental forces
1 Define and diagnose problem
Environmental forces
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Rational Model Define andDiagnose 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

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Rational Model Set Goals

• 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
  achievedin quantitative terms, for whom, and
  within what time period
• Hierarchy of goals represents the formallinking
  of goals between organizationallevels

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Rational Model Search forAlternative Solutions
I think many people in a rush to make a decision
do not have enough of the alternatives out in the
open. So, they have two of the alternatives and
say, Okay, Im going this way but they didnt
think through it enough when there were possibly
three or four alternatives. One of the hidden
ones might have been the best, and so the issue
is making sure that either all or enough of the
alternatives are out in the open to allow you to
make the best decision.
Gary Tooker Former CEO Chairman of Board of
Directors Motorola
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Bounded Rationality Model
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing
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Bounded Rationality Model(adapted from Figure
8.5)

• Contends that the capacity of the human mind for
  formulating and solving complex problems is small
  compared with what is needed for objectively
  rational behavior

Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing
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Bounded Rationality Model Decision Biases
Selective perception bias
Concrete information bias
Availability bias
Gamblersfallacy bias
Law of small numbers bias
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Bounded Rationality Model Decision Biases
When someone comes to you, you often have a
bias about what they are talking about. If you
have been in business for 20 to 30 years, chances
are youve been there and done that. Their idea
is generally not so new or innovative as they
think. You have a strong prejudice about
outcomes. That is a dangerous thing. One of the
things you have to do very cognitively to be a
good leader is not let your biases or your
filters totally cloud the message someones
trying to deliver.
Jeffrey McKeever Chairman and CEO MicroAge
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Bounded Rationality Model

• 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

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Bounded Rationality Model Satisficing
Satisficing is intended to be used in contrast to
the classical economists idea that in making
decisions in business or anywhere in real life,
you somehow pick, or somebody gives you, a set of
alternatives from which you select the best
onemaximize. The satisficing idea is that first
of all, you dont have the alternatives, youve
got to go out and scratch for themand that you
have mighty shaky ways of evaluating them when
you do find them. So you look for alternatives
until you get one from which, in terms of your
experience and in terms of what you have reason
to expect, you will get a reasonable result.
Herbert Simon Recipient of Nobel Prize in
Economics
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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

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Political Model of Decision Making(adapted from
Figure 8.6)
Multiple Stakeholders with power such as
Investors
Employees
Customers
Divergence in problem definition
Divergence in goals
Divergence in solutions
Political decision making
Competitors
Unions
Legislative Bodies
Suppliers
Regulatory Agencies