This document summarizes key aspects of decision making discussed in a lecture on principles of management. It defines decision making as choosing from two or more alternatives. It then outlines the eight step decision making process as identifying a problem, criteria, weights, alternatives, analysis, selection, implementation, and evaluation. It discusses types of problems and decisions as structured vs unstructured. It also covers decision making conditions of certainty, risk and uncertainty. Finally, it discusses biases that can influence decision making.

1. Principles of ManagementLecture # 04Asghar Ali NarejoContact: 0300-3141046E-mail: asghar_204u@yahoo.com

2. Decision MakingDecisionMaking a choice from two or more alternatives.The Decision-Making ProcessIdentifying a problem and decision criteria and allocating weights to the criteria.Developing, analyzing, and selecting an alternative that can resolve the problem.Implementing the selected alternative.Evaluating the decision’s effectiveness10/1/20112

3. Problem A situation in which the existing circumstances differ significantly from the preferred situation. Types of Problems:Crises ProblemA situation that urgently require an immediate decision.No crises ProblemsA situation that require decision but less urgently than a crises problem.Opportunity ProblemsA Situation that can be dealt with in a way that has a positive effect on the organization and its performance.10/1/20113

4. Types of Problems and DecisionsStructured ProblemsInvolve goals that clear.Are familiar (have occurred before).Are easily and completely defined means information about the problem is available and complete.Programmed DecisionsA repetitive decision that can be handled by a routine approach. (Preprogrammed Decision Rules)10/1/20114

5. Types of Programmed DecisionsPolicyA general guideline for making a decision about a structured problem.ProcedureA series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.RuleAn explicit statement that limits what a manager or employee can or cannot do.10/1/20115

6. Problems and DecisionsUnstructured ProblemsProblems that are new or unusual and for which information is uncertain or incomplete.Problems that will require custom made solutions.Nonprogrammer DecisionsDecisions that are unique and nonrecurring.Decisions that generate unique responses.10/1/20116

7. Exhibit 1.1 Programmed versus Nonprogrammer Decisions10/1/20117

8. Decision-Making ConditionsCertaintyA situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.RiskA situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.10/1/20118

9. Decision-Making ConditionsUncertaintyLimited information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”.Maximax: the optimistic (confident) manager’s choice to maximize the maximum payoffMaximin: the pessimistic ( negative) manager’s choice to maximize the minimum payoffMinimax: the manager’s choice to minimize maximum regret.10/1/20119

10. The decision making process-ExampleIdentification of a problemIdentification of Decision CriteriaAllocation of weights to criteriaDevelopment of alternativesAnalyzing of alternativesSelection of alternativesImplementation of alternativesEvaluation of decision alternatives “My sales Reps need new computers!”Memory and Storage, Display Quality, BetterLife,Warranty, Carrying weightMemory and Storage-10, Display Quality -8, Better Life -6,Warranty -4, Carrying weight-3Toshiba, HP, Soni Vaio, Qosmio, Gateway, Apple iBook, Lenovo, DellToshiba, HP, Soni Vaio, Qosmio, Gateway, Apple iBook, Lenovo, DellToshiba, HP, Soni Vaio, Qosmio, Gateway, Apple iBook, Lenovo, Dell“ Toshiba!”

11. The Decision Making Process10/1/201111

12. Step 1: Identifying the ProblemProblemA discrepancy between an existing and desired state of affairs.Characteristics of ProblemsA problem becomes a problem when a manager becomes aware of it.There is pressure to solve the problem.The manager must have the authority, information, or resources needed to solve the problem.10/1/201112

13. Step 2: Identifying Decision CriteriaDecision criteria are factors that are important (relevant) to resolving the problem.Costs that will be incurred (investments required)Risks likely to be encountered (chance of failure)Outcomes that are desired (growth of the firm)Step 3: Allocating Weights to the CriteriaDecision criteria are not of equal importance:

14. Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.10/1/201113

15. Step 4: Developing AlternativesIdentifying viable alternativesAlternatives are listed (without evaluation) that can resolve the problem.Step 5: Analyzing AlternativesAppraising each alternative’s strengths and weaknesses

16. An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3.10/1/201114

17. Step 6: Selecting an AlternativeChoosing the best alternativeThe alternative with the highest total weight is chosen.Step 7: Implementing the AlternativePutting the chosen alternative into action.

18. Conveying the decision to and gaining commitment from those who will carry out the decision.10/1/201115

19. Step 8: Evaluating the Decision’s EffectivenessThe soundness of the decision is judged by its outcomes.How effectively was the problem resolved by outcomes resulting from the chosen alternatives?If the problem was not resolved, what went wrong?10/1/201116

20. Exhibit 1.2 Decisions in the Management Functions10/1/201117

21. Making DecisionsRationalityManagers make consistent, value-maximizing choices with specified constraints.Assumptions are that decision makers:Are perfectly rational, fully objective, and logical.Have carefully defined the problem and identified all viable alternatives.Have a clear and specific goalWill select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests.10/1/201118

22. Exhibit 1.3 Assumptions of Rationality10/1/201119

23. Making Decisions (cont’d)Bounded RationalityManagers 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 alternativesWill satisfied—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 makingEscalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong. 10/1/201120

24. The Role of Intuition ( Perception)Intuitive decision makingMaking decisions on the basis of experience, feelings, and accumulated judgment. 10/1/201121

25. Exhibit 1.4 What is Intuition?10/1/201122

26. Decision-Making StylesDimensions of Decision-Making StylesWays of thinkingRational, orderly, and consistentIntuitive, creative, and uniqueTolerance for ambiguityLow tolerance: require consistency and orderHigh tolerance: multiple thoughts simultaneously10/1/201123

27. Decision Making StylesTypes of Decision MakersDirectiveUse minimal information and consider few alternatives.AnalyticMake careful decisions in unique situations.ConceptualMaintain a broad outlook and consider many alternatives in making decisions.BehavioralAvoid conflict by working well with others and being receptive to suggestions.10/1/201124

28. Exhibit 1.5 Decision-Making Matrix10/1/201125

29. Exhibit 1.6 Common Decision-Making Errors and Biases10/1/201126

30. Decision-Making Biases and ErrorsHeuristicsUsing “rules of thumb” to simplify decision making.Overconfidence BiasHolding unrealistically positive views of one’s self and one’s performance.Immediate Gratification BiasChoosing alternatives that offer immediate rewards and that to avoid immediate costs.10/1/201127

31. Decision-Making Biases and Errors Anchoring EffectFixating on initial information and ignoring subsequent information.Selective Perception BiasSelecting organizing and interpreting events based on the decision maker’s biased perceptions.Confirmation BiasSeeking out information that reaffirms past choices and discounting contradictory information.10/1/201128

32. Decision-Making Biases and ErrorsFraming BiasSelecting and highlighting certain aspects of a situation while ignoring other aspects.Availability BiasLosing decision-making objectivity by focusing on the most recent events.Representation BiasDrawing analogies and seeing identical situations when none exist.Randomness BiasCreating unfounded meaning out of random events.10/1/201129

33. Decision-Making Biases and Errors Sunk Costs ErrorsForgetting that current actions cannot influence past events and relate only to future consequences.Self-Serving BiasTaking quick credit for successes and blaming outside factors for failures.Hindsight BiasMistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact).10/1/201130

34. Exhibit 1.7 Overview of Managerial Decision Making10/1/201131