Download - A technical approach for Decision Making
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Foundationsof Decision Making
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Learning Outcomes
• Describe the decision-making process• Explain the three approaches managers can
use to make decisions• Describe the types of decisions and decision-
making conditions managers face• Discuss group decision making• Discuss contemporary issues in managerial
decision making
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How Do Managers Make Decisions?• Decision-Making Process
• A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution
• Problem• A discrepancy between an existing and a desired
state of affairs
• Decision Criteria• Factors that are relevant in a decision
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Decision Implementation
• Putting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it.
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Common Errors in the Decision-Making ProcessHeuristics -“rules of thumb” to simplify decision making, May lead to errors and biases
Overconfidence Bias, Unrealistically positive views of one’s self
Hindsight bias - also known as the knew-it-all-along effectSelf-serving bias - individuals attributing their successes to internal or personal factors but attributing their failures to external or situational factors
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Errors Contd.
• Framing error - result of starting to read a sequence of data at the wrong point
• Anchoring - human tendency to rely too heavily on the first piece of information offered
• Randomness error - when managers try to create meaning out of random events based on false information or superstition.
• Immediate gratification, selective perception, confirmation etc
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What is the Rational Model of Decision Making?• Rational Model assumes
– that managers’ decision making will be rational logical and consistent choices to maximize value
– The problem faced would be clear and unambiguous
– the decision maker would have a clear and specific goal
– know all possible alternatives and consequences
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What is Bounded Rationality?
• Managers are limited in their ability to process information
• Because managers can’t analyze information on all alternatives, they satisfice
• Satisficing is picking a course of action that is satisfactory or good enough under the circumstances
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What Role Does Intuition Play in Managerial Decision Making?
• Intuitive Decision Making– making decisions on the basis of experience,
feelings and accumulated judgment– described as “unconscious reasoning.”
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How Do Problems Differ?
• Structured Problem– A straightforward, familiar, and easily defined
problem
• Unstructured Problem– A problem that is new or unusual for whichinformation is ambiguous or incomplete.
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What Are Programmed and Nonprogrammed Decisions?
• Programmed Decisions– A repetitive decision that can be handled using a
routine approach
• Nonprogrammed Decisions– A unique and nonrecurring decision that requires
a custom-made solution.
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Programmed Decision-Making Aids
• Policy– A general guide that establishes parameters for making
decisions about recurring problems.
• Procedure– A series of interrelated sequential steps that can be used
to respond to a well-structured problem (policy implementation).
• Rule– An explicit statement that tells managers what they ought
or ought not to do (limits on procedural actions).
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What Decision Making Conditions Do Managers Face?• Certainty
– A situation in which a decision maker can make accurate decisions because all outcomes are known
• Uncertainty– A situation in which a decision maker has neither certainty
nor reasonable probability estimates available
• Risk– A situation in which a decision maker is able to estimate
the likelihood of certain outcomes
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Group Decision Making
• Advantages– Group decisions provide
more complete information
– Diversity of experiences and perspectives are higher
– Groups generate more alternatives
– Group decisions increase acceptance of a solution
• Disadvantages– Group decisions are time
consuming– May be subject to
minority domination– Subject to pressure to
conform– Responsibility is
ambiguous– Subject to Groupthink
which undermines critical thinking
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When Are Groups Most Effective?
• Groups are more effective for decisions requiring– Accuracy– Speed– Creativity– Acceptance
• Ideal Group Size– 5-15
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How Can You Improve Group Decision Making?• Brainstorming
– An idea-generating process that encourages alternatives while withholding criticism
• Nominal Group Technique– A decision-making technique in which group
members are physically present but operate independently
• Electronic Meeting– Participants are linked by computer
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What Contemporary Decision-Making Issues Do Managers Face?• Ringisei
– Japanese consensus-forming group decisions.
• Creativity– The ability to
produce novel and useful ideas
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Forecasting
• It is the process of estimating the relevant events of future, based on the analysis of their past and present behaviour
• Acc to Neter & Wasserman: Business forecasting refers to the statistical analysis of the past & current movement in the given time series so as to obtain clues about the future pattern of those movements
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Features of forecasting
• It relates to future events• Defines the probability of happening of future
events• Analysing the past & present relevant events• Use of some statistical tools & techniques
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Planning & Forecasting
• Planning is more comprehensive and forecasting involves the estimation of future events & provides parameters to planning
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Importance of Forecasting
• Promotion of organisation• Key to planning• Coordination & control• Success in organisation
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Premising
• Premises are the assumptions on which plans are formulated
• A major source of premising is forecasting