chapter 5 decisions-making the decision-making process the rational model the common errors in the...
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Chapter 5 Decisions-making
The decision-making process
The rational model
The common errors in the decision-making
Types of problems, decisions and level in the organization
Decision-making styles
Making-decision in groups
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Exhibit 5-1 The Decision-Making Process
Identification of a problem
Identificationof decision criteria
Allocationof weights To criteria
Development of
alternatives
Analysis ofalternatives
Selection of an alternative
Implementation of the alternative
Evaluation of decisioneffectiveness
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The problem A single, All alternatives Preferences Preferences No time Final choiceis clear and well-defined and are clear are constant or cost will maximizeunambiguous goal is to consequences and stable constraints economic be achieved are known exist payoff
Leadto
Rational Decision Making
Exhibit 5-2 Assumptions of Rationality
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Bounded Rationality
This is the behavior that people construct simplified models that extract the essential features from problems without capturing all of their complexities in order to decide rationally.
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Availability heuristic
This is the tendency to base judgments on information that is readily available.
Representative heuristic
This is the tendency for people to base judgments of probability on things with which they are familiar.
Escalation of commitment
It refers to an increased commitment to a previous decision despite negative information
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Exhibit 5-3 Types of Problems , Decisions and Level in the Organization
Level inorganization
Ill-structured
Type of problem
Well-structured
Top
Lower
Programmeddecisions
Nonprogrammeddecisions
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Types of Problems
Well-structured problems are problems that are straightforward, familiar to the decision maker, and the goal is clear, the information about them are complete.
Ill-structure problems are new, or unusual, and information about such problems is ambiguous or incomplete.
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Types of Decisions
Programmed decision is a repetitive decision that can be handle by a routine approach. (Procedure, rule, policy)
Non-programmed decision is a decision that must be custom-made to solve unique and non-recurring problems.
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Exhibit 5-4 Decision-MakingHigh
LowRation Intuitive
Analytic Conceptual
Directive Behavioral
Way of Thinking
Tole
ran
ce f
or
Am
big
uit
y
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The Advantages and Disadvantages of Group Decision Making
More complete informationMore alternativesIncreasing acceptance of a solutionIncreasing legitimacy and democracy
Advantages
Time-consumingMinority dominationPressures to conform (groupthink)Ambiguous responsibility
Disadvantages
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Several Effective Ways of Group Decision-Making
Brainstorming This is an idea-generating process that encourages
alternatives while withholding criticism.
Nominal group technique This is a decision-making technique in which group
members are physically present but operate independently.
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Delphic technique
This is a decision-making technique in which participants are specialist in some field, they are not necessary to assemble together, and required to write solution alternatives anonymously.
Electronic meeting This is a type of nominal group technique in which
participants are linked by computers.
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Study & Practice
How to organize an effective meeting?
What’s the actions of the bounded-rational decision maker?
What’s the advantages and disadvantages of group decisions?
Understand several important ways of group decision
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Quantitative Decision-Making Techniques
Payoff Matrices
Decision Trees
Break-Even Analysis
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Payoff Matrices
Maximax choice
Optimistic decision, maximizing the maximum possible payoff
Maximin choice
Pessimistic decision , maximizing the minimum possible payoff
Regret choice
Minimizing the maximum regret
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Exhibit Payoff Matrix for Discover
Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 S2 9 15 18 S3 24 21 15 S4 18 14 28
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Exhibit 6-2 Maximax Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 14 S2 9 15 18 18 S3 24 21 15 24 S4 18 14 28 28
Max
S4 28
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Exhibit 6-3 Maximin Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 11 S2 9 15 18 9 S3 24 21 15 15 S4 18 14 28 14
Min
S3 15
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Exhibit 6-3 Regret Choice
Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13(11) 14(7) 11(17) 17 S2 9(15) 15(6) 18(10) 15 S3 24(0) 21(0) 15(13) 13 S4 18(6) 14(7) 28 (0) 7
Max
S4 7
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Exhibit 6-4 Decision Trees
=Decision point
=Alternatives branch
=Probability branch
=Possible value
=Outcome point
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Exhibit 6-4 Decision Tree and Expected Values for Renting a Large or Small Retail Space
$240,000Rent12,000sq.ft
Rent
20,000sq.ft
Strong
.70
Strong
.70
Weak.30
Weak.30
$320,000
$50,000
$130,000
Expected value(in 000s).70[320]+.30[50]=239
Expected value(in 000s).70[240]+.30[130]=207
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Rent12,000sq.ft
Rent
20,000sq.ft
Strong
.70
Strong
.70
Weak.30
Weak.30
$320,000
$50,000
$130,000
Add 4000
$10,000
No expansion
1.0
1.0
$300,000
$240,000
2 years
8 years
19208240
23001008300
n
a
E
E
239010239 lE
2336101303.022407.023007.0 mE
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Break-Even Analysis
This is a technique for identifying the point at which total revenue is just sufficient to cover total costs.
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Exhibit 6-5 The Break-Even Analysis
F(Total fixed cost)
Rev
enue
s/co
st
Output
S(Total revenue)
O
A
C(Total cost)
Variable cost
Fixed cost
EBreak-even point
B
VCP
TFCBE