Decision Making Chapter 6

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Decision MakingChapter 6
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Topics in Decision Making

• Models of Decision Making
• Rationality
• Bounded Rationality
• Effects of Risk and Uncertainty on Decision
  Making
• Common Decision Problems
• Improving the Decision Process

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Rational Decision Making
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Rational Decision Making
Define the problem
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• Problem exists when there is a gap between a
  desired state and an existing state
• To make decisions about problems, managers must
• be aware of the gap
• be motivated to reduce the gap
• have the knowledge, skills, abilities, and
  resources to fix the problem

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Rational Decision Making
Identify decision criteria
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• Standards used to guide judgments and decisions
• The more criteria a potential solution meets, the
  better that solution should be

Our values often are reflected in the criteria we
choose
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Rational Decision Making
Weight the criteria
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• Absolute comparisons
• each criterion is compared to a standard or
  ranked on its own merits
• Relative comparisons
• each criterion is compared directly to every
  other criterion

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Absolute Weighting of Decision Criteria for Car
Buying
5 critically important 4 important 3 somewhat
important 2 not very important 1 completely
unimportant PERFORMANCE CHARACTERISTICS 1.
starting and acceleration 1 2 3 4 5 2. fuel
economy 1 2 3 4 5 3. handling and
steering 1 2 3 4 5 4. shifting/transmission 1 2
3 4 5 5. ride quality 1 2 3 4 5 6.
braking 1 2 3 4 5 DESIGN CHARACTERISTICS 1.
overall design 1 2 3 4 5 2. interior
ergonomics 1 2 3 4 5 3. seating 1 2 3 4 5 4.
accessories and amenities 1 2 3 4 5 5. cargo
space 1 2 3 4 5 6. fit and finish
1 2 3 4 5
1.3
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Relative Weighting of Decision Criteria
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Rational Decision Making
Generate alternative courses of action
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Evaluate each alternative
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Evaluate Each Alternative
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Rational Decision Making
Compute the optimal decision
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• Multiply the rating for each criterion by the
  weight for that criterion
• Sum the scores for each alternative course of
  action

Example from previous slide Amsterdam (.59
x .32) (.57 x .44) (.51 x .64) (.46 x .31)
(.34 x .56) (.32 x .25) (.30 x .37) (.27
x .34) (.21 x .35) (.20 x .98) (.18 x .31)
(.12 x .38) 1.75
1.6
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Bounded Rationality

• Managers try to be rational
• restricted by real-world constraints
• cannot be completely rational
• Four constraints on rational decision making
• Limited resources
• Information overload
• Memory problems
• Expertise problems
• Biases

Optimizing vs. satisficing decisions
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Effects of Risk and Uncertainty on Decision Making
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Risk and Decision Making
A large car manufacturer has been hit with a
numberof economic difficulties, and it appears
as if three plants need to be closed and 6,000
employees laid off. The vice-president of
production has been exploring alternative ways
to avoid this crisis. She has developed two
plans
Plan A This plan will save one of three plants
and 2,000 jobs.
Plan B This plan has a 1/3 probability of saving
allthree plants and 6,000 jobs, but has a 2/3
probability of saving no plants and no jobs.
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Risk and Decision Making
Did you choose Plan A? What would you have
doneif you were faced with the following choices
to the sameproblem?
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Framing Effects on Decision Making

• Positive Frame
• a problem presented as a gain
• become more risk-averse
• Negative Frame
• a problem presented as a loss
• become more risk-seeking

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Conditions of Uncertainty
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Common Decision-Making Mistakes
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Overreliance on Intuition

• Two types of intuition
• Expertise-based
• Feeling-based
• Intuition works best for experienced managers
• Overreliance can lead to careless and
  inconsistent decision making

• Intuition is often wrong, but never in doubt

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Decision Biases

• Availability bias The tendency of decision
  makers to give preference to recent information,
  vivid images that evoke emotions, and specific
  acts and behaviors that they personally observed

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Representative Bias

• Representative bias When decision makers judge
  the likelihood of an events occurrence based on
  its similarity to previous events and their
  likelihood of occurrence
• Anchoring and adjusting bias The tendency of
  decision makers to use an initial value or
  experience as a basis of comparison
• All alternatives are compared to the anchor

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Improving the Decision Process
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Decision Rules
Dictionary Rule
Decision Rules
MinimumThreshold Rule
A set of criteria that alternative solutions
must meet to be acceptableto the decision maker
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Multivariable Testing

• A systematic approach of experimentation to
  analyze and evaluate potential solutions
• Improves decision making by
• conducting experiments and letting the data
  decide
• saving time and money by using a mathematical
  shortcut to test variables

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Decision Software

• Most decision makers accept the first good
  enough solution
• Unstructured decision making is the norm
• PC software can help walk decision makers
  through decision process

http//www.performancesolutionstech.com
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Avoid Escalation of Commitment

• The tendency to stick with a wrong decision
• Often leads to a greater commitment of resources
• Protecting against escalation
• Progress reports
• Outside auditors
• Change managers
• Label the decision as an Experiment

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Using Groups to Improve Decision Making
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Group Decision Making
Advantages

• View problems from multiple perspectives
• Find and access more information
• Generate more alternative solutions
• More committed to making chosen solutions work

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Group Decision Making
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Groupthink
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Structured Conflict
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Devils Advocacy
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Dialectical Inquiry
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Nominal Group Technique
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Delphi Technique
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Stepladder Technique
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Electronic Brainstorming
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Electronic Brainstorming

• Overcomes production blocking
• technology allows everyone to record their ideas
  as they are created
• no ideas lost waiting your turn to speak
• Overcomes evaluation apprehension
• anonymity creates free expression

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Electronic Brainstorming

• Greater expense
• No automatic acceptance of ideas because of ones
  position
• Some find it difficult to express themselves in
  writing
• Lack of typing skills can frustrate participants