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Managing Decision Making and Problem Solving. Learning Objectives. After studying this chapter, you should be able to: Define decision making and discuss types of decisions and decision-making conditions .

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learning objectives
Learning Objectives
  • After studying this chapter, you should be able to:
    • Define decision making and discuss types of decisions and decision-making conditions.
    • Discuss rational perspectives on decision making, including the steps in decision making.
    • Describe the behavioral nature of decision making.
chapter outline
The Nature of Decision Making

Decision Making Defined

Types of Decisions

Decision-Making Conditions

Rational Perspectives on Decision Making

The Classical Model of Decision Making

Steps in Rational Decision Making

Behavioral Aspects of Decision Making

The Administrative Model

Political Forces in Decision Making

Intuition and Escalation of Commitment

Risk Propensity and Decision Making

Ethics and Decision Making

Chapter Outline
decision making
Decision-making

Decision making and decision-making process.

Are they the same or different. Discuss

decision making1
Decision-making

Choosing

Steps

decision making2
Decision Making
  • The act of choosing one alternative from among a set of alternatives.
slide7
Best ?
  • To reach a decision the best alternative is usually selected.
    • Discuss what is meant ‘Best’?
    • Does it mean effective or efficient?
    • Does it always mean to increase?
    • Are decisions only used to solve problems?
slide8
Best = Effective
  • An effective decision is one that maximize or minimize
  • Managers make decisions about both problems and opportunities
decision making process
Decision Making Process
  • Arrange the Decision-Making Steps
    • Identifyingalternatives
    • choosing the “best” alternative, and
    • The process of recognizingand defining the nature of a decision situation,
    • putting it into practice
    • Evaluate the alternatives
the nature of decision making process
The Nature of Decision Making Process
  • The process of recognizingand defining the nature of a decision situation,
  • Identifying alternatives
  • Evaluate the alternatives
  • Choosing the “best” alternative, and
  • Putting it into practice
types of decisions
Types of Decisions
  • In G’eant Hypermarket, whenever inventory levels of various products such as coffee makers, electric drills, and folding chairs drop below a predetermined level, replacements are automatically ordered. Such a decision is called:
    • Programmed
    • Non-programmed decision
    • Provide an example of the other type of decision.
    • Programmed decisions are usually less critical to the firm and are made at lower levels of the organization, while non-programmed decisions involve top management and important issues. Discuss why.
types of decisions1
Types of Decisions
  • Programmed Decisions
    • A decision that is a fairly structured decision or recurs with some frequency or both.
      • Example: Starting your car in the morning.
  • Non-programmed decisions
    • A decision that is relatively unstructured and occurs much less often a programmed decision.
      • Example: Choosing a vacation destination.
decision making conditions cont d

The decision

maker faces

conditions of...

Certainty

Risk

Uncertainty

Level of ambiguity and chances of making a bad decision

Lower

Moderate

Higher

Decision-Making Conditions (cont’d)

Figure 9.1

decision making conditions1
Decision-Making Conditions
  • Decision Making Under Certainty
    • A condition in which the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative.
  • Decision Making Under Risk
    • A condition in which the availability of each alternative and its potential payoffs and costs are all associated with risks.
  • Decision Making Under Uncertainty
    • A condition in which the decision maker does not know all the alternatives, the risks associated with each, or the consequences of each alternative.
decision making conditions2
Decision-making conditions
  • Stock analysts are able to make predictions about the price movement of individual stocks or the market as a whole, based on probabilities that were derived from a study of historical stock prices. What is the decision-making condition faced by stock analyst.

(a) Conditions of certainty

(b) Conditions of Risk

(c) Conditions of Uncertainty

rational perspectives on decision making1

obtain complete

.

.

.

and end up with

When faced with a

and perfect information

a decision that best

decision situation,

eliminate uncertainty

serves the interests

managers

should

.

.

.

evaluate everything

of the organization.

rationally and logically

Rational Perspectives onDecision Making
  • The Classical Model of Decision Making

Figure 9.2

what are the assumptions of the rational model of decision making classical perspective
Managers obtain

Complete and perfect information

Incomplete and imperfect information

Decision-making condition is

Certainty

Risk

Uncertainty

Managers ------------ eliminate uncertainty

Can

Can’t

Managers must be focused on

Facts and logic

Subjective judgment

Decision-makers are

rational, logical, and dispassionate when they make decisions

irrational, illogical, and passionate when they make decisions

Decision-makers ---------------- take decisions that best serves the interest of the organization

always

sometimes

never

What are the assumptions of the rational model of decision-making (Classical Perspective)
the classical model of decision making

…and end up with a

decision that best

serves the interests

of the organization.

Obtain complete and perfect information. Eliminateuncertainty. Evaluate everything rationally and logically…

The Classical Model of Decision Making

When faced with a

decision situation,

managers should…

rational model of d m
Rational Model Of d-m
  • Recognizing and defining the decision situation
  • Identifying alternatives
  • Evaluate alternatives
    • Feasibility
    • Satisfactory
    • Affordable consequences
  • Select the an alternative (s)
  • Implement the decision
  • Follow up and evaluate the results
which of the following statements is true
which of the following statements is true

According to the Rational Model Of decision-making

  • The first step is to recognize that a decision is necessary. To do this, the situation must be defined clearly and fully.
  • All alternative courses of action must be listed for evaluation.
  • The proper sequence for evaluating a decision alternative is, satisfactoriness, feasibility and probable consequences.
  • The alternative that is selected is the one with the highest feasibility, satisfaction and affordable consequences.
  • Selecting an alternative is the crux (decisive factor) of decision-making
  • In implementing the chosen alternatively, some unexpected consequences might occur.
k mart steps of classical decision making model
K-mart Steps of Classical Decision-making Model
  • K-Mart is a company that sells shoes and has two divisions, specialty store and a discount. The former, specializes in high quality shoes while the later is in lower quality shoes. The company needed to take a decision regarding the future of the company. The company was loosing and was facing a possibility of bankruptcy.
  • What would be the first step to reach a decision?
  • Recognizing that a decision is necessary. To do this, the problem must be defined clearly and fully.
  • Define the problem and specify the indicators that you used to recognize the need to take a decision?
  • Kmart recently defined its decision situation as a need to decided what to do with the future of the company? How to recover from bankruptcy and to regain lost sales and profits.
  • If K-mart decided to continue then it needs an injection of fund of about 10 million to recover.
kmart criteria for evaluation of alternatives
Kmart Criteria for Evaluation of Alternatives

Kmart saw its primary options as

  • Option (1) Borrow 10m from a bank
  • Option (2) selling off its discount operations and concentrating on specialty

retailing,

  • Option (3) selling off its specialty store businesses to raise cash, or
  • Option (4) shutting down the company (selling the company)

Kmart have asked you, as a management consultant, to evaluate the alternatives on three criteria:

    • Feasibility
    • Satisfactory
    • Affordable consequences

In selecting an alternative, use the facts below only.

  • Banks and financial institutions were unwilling to lend the 10m due to the weak financial position.
  • There is one interested buyer who is willing to pay the market value of 8m. The shareholders are not interested in selling it as the projection of the future demand is increasing.
  • There are already interesting buyers for the specialty store. The value of this division is around 12m. Projection of future demand of quality shoes indicates a sharp decline as customers are increasingly interested in discount shoes. Therefore, Shareholders are willing to sell this division.
  • The market value of the company as a total is 18m. There is only one interested buyer who is willing to pay 14m for the whole company. The stockholders are not willing to sell at this price as it reduces their personal wealth.
3 evaluate alternatives
3. EVALUATE ALTERNATIVES

Feasible

Affordable

consequences

Satisfactory

evaluating alternatives in the decision making process

Are the alternative’s

Is the alternative

Is the alternative

Retain for further

consequences

Yes

Yes

Yes

feasible?

satisfactory?

consideration

affordable?

No

No

No

Eliminate from

Eliminate from

Eliminate from

consideration

consideration

consideration

Evaluating Alternatives in theDecision-Making Process
what are the assumptions the rational model of decision making
What are the assumptions the rational model of decision-making

Managers can obtain

  • Complete and perfect information
  • Incomplete and imperfect information

Decision-making condition is

    • Certainty
    • Risk
    • Uncertainty

Managers ------------ eliminate uncertainty

  • Can
  • Can’t

Managers must be focused on

  • Facts and logic
  • Subjective judgment

Decision-makers are

  • rational, logical, and dispassionate when they make decisions
  • irrational, illogical, and passionate when they make decisions

Decision-makers ------------------ take decisions that decision that best serves the interest of the organization

  • Always
  • Sometimes
  • never
behavioral aspects of decision making

...and end up with a decision that may or may not serve the interests of the organization.

Use incomplete andimperfect Information. Are constrained by bounded rationality. Tend to satisfice…

Behavioral Aspects of Decision Making
  • The Administrative Model of Decision Making

When faced with a

decision situation

managers actually…

behavioral and political aspects of d m
Behavioral and Political Aspects of d-m

Which of the following statements is true.

  • Decision makers are limited with their values, skills and knowledge.
  • In reality decision makers have the tendency to search for all alternatives.
  • In reality decision makers tend to search for alternative until one is found that meets some minimum standard of sufficiency.
  • It is impossible for an informal alliance of groups to effect the decision that will be selected.
  • Sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation.
  • It is impossible for a decision maker to stay with a decision when it appears to be wrong.
  • In reality a decision maker effected by his/her willingness to gamble when making a decision.
  • Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics affects the decision-maker.
behavioral aspects of decision making cont d
Behavioral Aspects ofDecision Making (cont’d)
  • Bounded Rationality
    • The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits.
  • Satisficing
    • The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem.
  • Coalition
    • A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal.
behavioral aspects of decision making cont d1
Behavioral Aspects ofDecision Making (cont’d)
  • Intuition
    • An innate belief about something without conscious consideration.
  • Escalation of Commitment
    • A decision maker is staying with a decision even when it appears to be wrong.
  • Risk Propensity
    • The extent to which a decision maker is willing to gamble when making a decision.
behavioral aspects of decision making cont d2
Behavioral Aspects ofDecision Making (cont’d)
  • Ethics and Decision Making
    • Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics.
    • Components of managerial ethics:
      • Relationships of the firm to employees
      • Employees to the firm
      • The firm to other economic agents
behavioral aspects of decision making1

use incomplete and

.

.

.

and end up with a

When faced with a

imperfect information

decision that may or may

decision situation

are constrained by

not serve the interests

managers actually…

bounded rationality

of the organization.

tend to satisfice

Behavioral Aspects of Decision Making
  • The Administrative Model of Decision Making

Figure 9.4

what are the assumptions of the administrative model behavioral perspective of decision making
In reality, managers obtain

Complete and perfect information

Incomplete and imperfect information

In reality, decision-making condition is NOT

Certainty

Risk

Uncertainty

In reality, managers ----------- completely eliminate uncertainty

Can

Can’t

In reality, managers focus on

Facts and logic only

Facts and logic along with subjective judgment and other behavioral aspects

In reality, decision-makers are

rational, logical, and dispassionate when they make decisions

Not fully rational, logical, when they make decisions

In reality, decision-makers ---------------- takedecisions that best serves the interest of the organization

Always

Sometimes

never

What are the assumptions of the administrative model (Behavioral perspective of decision-making)
the administrative model of decision making

...and end up with a decision that may or may not serve the interests of the organization.

Use incomplete andimperfect Information. Are constrained by bounded rationality.Tend to satisfice…

The Administrative Model of Decision Making

When faced with a

decision situation

managers actually…

behavioral and political aspects of d m1
Behavioral and Political Aspects of d-m

Discuss the following statements. D0 you agree or disagree and why? Correct the statements that you disagree with .

  • In reality, decision makers are limited by their values, skills and knowledge.
  • In reality, decision makers have the tendency to search for all alternatives.
  • In reality, decision makers tend to search for alternatives until one is found that meets some minimum standard of sufficiency.
  • It is impossible for an informal alliance of groups to effect the decision that will be selected.
  • In reality, sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation.
  • It is impossible for a decision maker to stay with a decision when it appears to be wrong.
  • In reality a decision maker is effected by his/her willingness to gamble when making a decision.
  • Individual ethics (personal beliefs about right and wrong behavior) combined with the organization’s ethics affect the decision-maker.
behavioral and political aspects of d m2
Behavioral and Political Aspects of d-m

Match the behaviors that you agree with with one of the following terms.

  • Escalation of Commitment
  • Intuition
  • Satisficing
  • Bounded Rationality
  • Risk Propensity
  • Ethics and Decision Making
  • Coalition
behavioral aspects of decision making cont d3
Behavioral Aspects ofDecision Making (cont’d)
  • Bounded Rationality
    • The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits.
  • Satisficing
    • The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem.
  • Coalition
    • A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal.
behavioral aspects of decision making cont d4
Behavioral Aspects ofDecision Making (cont’d)
  • Intuition
    • An innate belief about something without conscious consideration.
  • Escalation of Commitment
    • A decision maker is staying with a decision even when it appears to be wrong.
  • Risk Propensity
    • The extent to which a decision maker is willing to gamble when making a decision.
behavioral aspects of decision making cont d5
Behavioral Aspects ofDecision Making (cont’d)
  • Ethics and Decision Making
    • Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics.
    • Components of managerial ethics:
      • Relationships of the firm to employees
      • Employees to the firm
      • The firm to other economic agents
concepts covered
The Nature of Decision Making

Decision Making Defined

Types of Decisions

Decision-Making Conditions

Certainty

Risk

Uncertainty

Rational Perspectives on Decision Making

The Classical Model of Decision Making

Steps in Rational Decision Making

Behavioral Aspects of Decision Making

The Administrative Model

Political Forces in Decision Making

Bounded Rationality

Satisfice

Intuition and Escalation of Commitment

Risk Propensity and Decision Making

Ethics and Decision Making

Concepts Covered ….