Managerial Decision Making

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Managerial Decision Making
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Learning Objectives

• After studying the chapter, you should be able
  to
• Differentiate between programmed and
  non-programmed decisions, and explain why
  non-programmed decision making is a complex,
  uncertain process.
• Describe the six steps that managers should take
  to make the best decisions.
• Explain how cognitive biases can lead managers to
  make poor decisions.

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The Nature of Managerial Decision Making

• Decision Making
• The process by which managers respond to
  opportunities and threats that confront them by
  analyzing options and making determinations about
  specific organizational goals and courses of
  action.

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The Nature of Managerial Decision Making

• Decisions in response to opportunities
• occurs when managers respond to ways to improve
  organizational performance to benefit customers,
  employees, and other stakeholder groups
• Decisions in response to threats
• events inside or outside the organization are
  adversely affecting organizational performance

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Decision Making

• Programmed Decision
• Routine, certain and fairly structured decisions
• Virtually automatic decision making that follows
  established rules or guidelines.
• Managers have made the same decision many times
  before
• Little ambiguity involved

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Decision Making

• Non-Programmed Decisions
• Non routine decision made in response to unusual
  or novel opportunities and threats.
• The are no rules to follow since the decision is
  new.
• Decisions are made based on information, and a
  managers intuition, and judgment.

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Decision Making

• Intuition
• feelings, beliefs, and hunches that come readily
  to mind, require little effort and information
  gathering and result in on-the-spot decisions

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Decision Making

• Reasoned judgment
• decisions that take time and effort to make and
  result from careful information gathering,
  generation of alternatives, and evaluation of
  alternatives

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• MODELS FOR DECISION-MAKING

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The Classical Model

• Classical Model of Decision Making
• A prescriptive model of decision making that
  assumes the decision maker can identify and
  evaluate all possible alternatives and their
  consequences and rationally choose the most
  appropriate course of action.
• Optimum decision
• The most appropriate decision in light of what
  managers believe to be the most desirable future
  consequences for their organization.

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The Classical Model of Decision Making
Figure 7.1
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The Administrative Model

• Administrative Model of Decision Making
• An approach to decision making that explains why
  decision making is inherently uncertain and risky
  and why managers can rarely make decisions in the
  manner prescribed by the classical model.
• This model is based on three important concepts
  bounded rationality, incomplete information, and
  satisficing.

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The Administrative Model

• Administrative Model of Decision Making
• Bounded rationality
• A large number of alternatives and available
  information can be so extensive that managers
  cannot consider it all.
• Decisions are limited by peoples cognitive
  limitations.
• Incomplete information
• Because of risk and uncertainty, ambiguity, and
  time constraints

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Why Information Is Incomplete
Figure 7.2
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Causes of Incomplete Information

• Risk
• Present when managers know the possible outcomes
  of a particular course of action and can assign
  probabilities to them.
• Uncertainty
• Probabilities cannot be given for outcomes and
  the future is unknown.

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Causes of Incomplete Information
Young Woman or Old Woman

• Ambiguous Information
• Information whose meaning is not clear allowing
  it to be interpreted in multiple or conflicting
  ways.

Figure 7.3
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Causes of Incomplete Information

• Time constraints and information costs
• managers have neither the time nor money to
  search for all possible alternatives and evaluate
  potential consequences

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Causes of Incomplete Information

• Satisficing
• Searching for and choosing an acceptable, or
  satisfactory response to problems and
  opportunities, rather than trying to make the
  best decision.

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Causes of Incomplete Information

• Managers explore a limited number of options and
  choose an acceptable decision rather than the
  optimum decision.
• This is the typical response of managers when
  dealing with incomplete information.

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Six Steps in Decision Making
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Decision Making Steps

• Step 1. Recognize Need for a Decision or
  Awareness of a problem
• Sparked by an event such as environment changes.
• Managers must first realize that a decision must
  be made.
• Step 2. Generate Alternatives
• Managers must develop feasible alternative
  courses of action.
• If good alternatives are missed, the resulting
  decision is poor.
• It is hard to develop creative alternatives, so
  managers need to look for new ideas.

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Decision Making Steps

• Step 3. Evaluate Alternatives
• What are the advantages and disadvantages of each
  alternative?
• Managers should specify criteria, then evaluate.

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Decision Making Steps
Step 3. Evaluate alternatives
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General Criteria for Evaluating Possible Courses
of Action
Figure 7.5
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Decision Making Steps

• Step 4. Choose Among Alternatives
• Rank the various alternatives and make a decision
• Managers must be sure all the information
  available is brought to bear on the problem or
  issue at hand

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Decision Making Steps

• Step 5. Implement Chosen Alternative
• Managers must now carry out the alternative.
• Often a decision is made and not implemented.
• Step 6. Learn From Feedback
• Managers should consider what went right and
  wrong with the decision and learn for the future.
• Without feedback, managers do not learn from
  experience and will repeat the same mistake over.

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Feedback Procedure

1. Compare what actually happened to what was
   expected to happen as a result of the decision
2. Explore why any expectations for the decision
   were not met
3. Derive guidelines that will help in future
   decision making

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Cognitive Biases and Decision Making

• Heuristics
• Rules of thumb that simplify the process of
  making decisions.
• Decision makers use heuristics to deal with
  bounded rationality.
• If the heuristic is wrong, however, then poor
  decisions result from its use.
• Systematic errors errors that people make over
  and over and that result in poor decision making

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Sources of Cognitive Bias at the Individual and
Group Levels
Figure 7.6
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Types of Cognitive Biases

• Prior Hypothesis Bias
• Allowing strong prior beliefs about a
  relationship between variables to influence
  decisions based on these beliefs even when
  evidence shows they are wrong.
• Representativeness
• The decision maker incorrectly generalizes a
  decision from a small sample or a single incident.

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Types of Cognitive Biases

• Illusion of Control
• The tendency to overestimates ones own ability
  to control activities and events.
• Escalating Commitment
• Committing considerable resources to project and
  then committing more even if evidence shows the
  project is failing.

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Group Decision Making

• Superior to individual making
• Choices less likely to fall victim to bias
• Able to draw on combined skills of group members
• Improve ability to generate feasible alternatives

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Group Decision Making

• Allows managers to process more information
• Managers affected by decisions agree to cooperate

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Methods for Group Decision - making

• Nominal Technique
• Delphi Technique

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1. Nominal Group Technique

• The nominal group technique (NGT) is a decision
  making method for use among groups of many sizes,
  who want to make their decision quickly, as by a
  vote, but want everyone's opinions taken into
  account
• The nominal technique restricts discussion or
  interpersonal communication during the
  decision-making process, and hence, the term
  nominal.

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Process for Nominal Group Technique

• When any problem is presented and then the
  following steps are taken by group members
• Members meet as a group. But before any
  discussion takes place, each member independently
  writes down his or her ideas on the problem.
• After this silent period, each member presents
  one idea to the group. Each member takes his or
  her turn, presenting a single idea until all
  ideas have been presented and recorded. No
  discussion takes place until all ideas have been
  recorded.

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Continue.

• The group now discusses the ideas for clarity and
  evaluates them.
• Each group member silently and independently
  rank-orders the ideas. The ideas with the highest
  aggregate ranking determine the final decision.

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2. Delphi Technique

• The Delphi method is a systematic, interactive
  forecasting method which relies on a panel of
  experts.
• The experts answer questionnaires in two or more
  rounds. After each round, a facilitator provides
  an anonymous summary of the experts forecasts
  from the previous round as well as the reasons
  they provided for their judgments.

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• Thus, experts are encouraged to revise their
  earlier answers in light of the replies of other
  members of their panel.
• It is believed that during this process the range
  of the answers will decrease and the group will
  converge towards the "correct" answer.

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2. Delphi Technique

• Written approach to creative problem solving.
• Group leader writes a statement of the problem to
  which managers respond
• Questionnaire is sent to managers to generate
  solutions
• Team of managers summarizes the responses and
  results are sent back to the participants
• Process is repeated until a consensus is reached

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Group Decision Making

• Potential Disadvantages
• Can take much longer than individuals to make
  decisions
• Can be difficult to get two or more managers to
  agree because of different interests and
  preferences
• Can be undermined by biases

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References

• Gareth R. Jones. Contemporary Management, Tata
  McGraw hill publication.
• Stephen Robbins. Organizational Behaviour.
  Pearson Education India.