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Business Decision Process. Overview. Steps in rational decision making Tests of rationality? Types of organizational decisions. Steps in “ Rational” Decision Making – in a Choice problem. Define the problem Generate alternative solutions Identify criteria for choosing between solutions

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Overview
Overview

  • Steps in rational decision making

  • Tests of rationality?

  • Types of organizational decisions


Steps in rational decision making in a choice problem
Steps in “ Rational” Decision Making – in a Choice problem

  • Define the problem

  • Generate alternative solutions

  • Identify criteria for choosing between solutions

  • Weight the criteria

  • Rate each alternative on each decision

  • Compute the optimal decision


Are people rational
Are people rational? problem

  • Decision makers forego best solution in favor of one that is acceptable or reasonable. They satisfice

  • People often lack sufficient data on problem, alternatives and criteria.

  • They have limited amount of working memory to store and process data.

  • Yet, they make decisions using heuristics


Heuristics
Heuristics problem

  • A heuristic is a “mental short-cut” in judgment and decision making

  • They are essential for living in an uncertain world

  • Rule of thumb

  • Mechanisms to cope with in a complex world

  • But can lead to faulty beliefs and suboptimal decisions


Example uses of heuristics
Example uses of heuristics problem

  • One negative comment outweighs many positive comments (e.g. Online purchases)

  • Information from direct perception given more importance than secondary data that has greater evidential value (my impressions of India)

  • Case histories and anecdotes have greater impact than more informative abstract statistical data (e.g. Mitsubishi Montero safety tests)


Availability heuristic
Availability Heuristic problem

  • What is readily available in memory influences the people’s judgments

  • Which is more harmful health?

    • Speeding?

    • Smoking?

  • People’s choice may be influenced by

    • Their closeness of victims of either

    • Vividness of their experience in dealing with either

  • People tend to make judgments using retrievability of information


Problem 1
Problem #1 problem

The following 10 corporations were ranked by Fortune magazine to be among the largest 500 US-based firms according to sales revenue for 2003

Group A: Reebok Intl, Hilton Hotels, Starbucks, RadioShack, Hershey Foods

Group B: CoconoPhillips, American International Group, McKesson, Amerisource Bergen, The Altria Group

Which group of companies has the largest total sales revenue?


Your answer to problem 1
Your answer to Problem #1 problem

  • Correct answer : Group B

  • You chose Group A, because of familiarity of the names of companies in Group A

  • Availability heuristic and resulting bias


Problem 2
Problem #2 problem

In four pages of a novel (about 2000) words, how many words would you expect to find the form _ _ _ _ ing (seven-letter words that end with ing)?

Choices: 0 1-2 3-4 5-7 8-10 11-15 16+


Problem 2 contd
Problem #2 (contd) problem

In four pages of a novel (about 2000) words, how many words would you expect to find the form _ _ _ _ _ n _ (seven-letter words with n in the sixth position)?

Choices: 0 1-2 3-4 5-7 8-10 11-15 16+


Retrievability
Retrievability problem

  • Did you respond with higher number for Problem 2a than for 2b?

  • Retrievability of 7-letter words ending with “ing” apparently easier than 7-letter words with “n” as the 6th letter.

  • Retrievability is exploited by business

    • ‘Upscale’ retailers in the same mall

    • Multiple gas-stations at an intersection

    • Pharmacists in the same intersection (12th Street and Main)


Problem 3
Problem #3 problem

  • How would you respond to “Is marijuana use related to delinquency?”

  • Typically, people start by recalling marijuana users who are delinquent

  • Correct way to make a judgment is to use four sets of people


Problem 4
Problem #4 problem

Mark is finishing his MBA at a prestigious university. He is very interested in the arts and at one time considered a career as a musician. Where is he more likely to take a job?

  • In arts management

  • With a consulting firm


Problem 41
Problem #4 problem

  • Did you choose “A”?

  • Your image of an arts management person might have influenced your decision

  • You forgot the base-rate

  • Proportionately more MBA’s work for consulting firms than Arts management


Problem 5
Problem #5 problem

You have started buying stocks on the Internet, beginning with five different stocks. Each stock goes down soon after you purchase. As you prepare to make a sixth purchase, you reason that it should be more successful, since the last five were “lemons”. After all, the odds favor making at least one successful pick in six decisions. This thinking is

  • Correct

  • Incorrect


Problem 51
Problem #5 problem

  • Answer : Incorrect

  • Performance of 6th stock is independent of the performance of other five stocks

  • Gambler’s fallacy

    • Perceives higher chance of winning after a long streak of losses


Are people rational1
Are people rational? problem

  • Decision makers forego best solution in favor of one that is acceptable or reasonable. They satisfice

  • People often lack sufficient data on problem, alternatives and criteria.

  • They have limited amount of working memory to store and process data.

  • Yet, they make decisions using heuristics


How to make decisions
How to make decisions problem

  • Herb Simon (1916 –2001)

  • Researcher in cognitive psychology, computer science, public administration, economics and philosophy

  • Won Nobel price for economics in 1978 for his work on decision-making in organizations


Simon s 3 stage model
Simon’s 3-stage model problem

  • Intelligence

  • Design

  • Choice


Stage 1 intelligence
Stage 1 - Intelligence problem

  • Gathering intelligence about the decision problem

  • Requirements gathering and analyzing requirements

  • E.g. : Wanting a solution to transport problem


Stage 2 design
Stage 2 - Design problem

  • Create solutions

  • Must have more than one alternative solutions

  • Find or create or develop alternatives

  • E.g. What choices do we have for solving the transportation problem?


Stage 3 choice
Stage 3 - Choice problem

  • Consider the alternatives and their attributes and make a choice

  • Select a choice or alternative for implementation

  • Eg. How to choose between various alternatives?


Evaluating decisions
Evaluating decisions problem

  • Is the problem solved?

  • Are the objectives achieved?

  • Is the solution acceptable by the users?

  • Is there no conflict of interest?

  • Do users perceive usefulness of the solution?

  • Do the users use the solution?


Managerial decisions
Managerial Decisions problem

  • The decision can be classified based on the level of the organization

  • Decisions can be classified based on the context of the decision



Operational performance decisions
Operational performance decisions problem

Day-to-day decisions


Operational control decisions
Operational control decisions problem

Related to effectiveness of

Operations; monitoring and

Correcting deviations


Management control decisions
Management control decisions problem

Decisions related to allocation of

resources; analyzing buyer and supplier behavior


Strategic planning decisions
Strategic planning decisions problem

Establishing broad policiesEvaluating investment proposals