Managers Making Decisions: • Decisions making in all four managerial functions. • Exhibit 6-5 page 141 showing that. • Most decision making is routine, every day of the year you make a decision about your activities. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-1 Exhibit 6-5 Decisions Managers May Make Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-2 Exhibit 6-5 Decisions Managers May Make (cont.) Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-3 Managers Making Decisions: continued: • How managers make decisions? three perspective on how managers make decisions: rational, bounded, and intuition • a) Rational Decision-Making - a type of decision making in which choices that are logical and consistent while maximizing value. • After all, managers have all sorts of tools and techniques to help them be rational decision makers. Managers aren’t always rational. What does it mean to be a “rational” decision maker: assumptions of rationality: Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-4 Making Decisions: Rationality • Assumptions of Rationality – The decision maker would be fully objective and logical – The problem faced would be clear and unambiguous – The decision maker would have a clear and specific goal and know all possible alternatives and consequences and consistently select the alternative that maximizes achieving that goal – and decisions are made in the best interests of the organization. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-5 Making Decisions: Bounded Rationality b) Bounded Rationality - decision making that’s rational, but limited (bounded) by an individual’s ability to process information. Because they can’t possibly analyze all information on all alternatives there for: - managers satisfice, rather than maximize. :That is, they accept solutions that are “good enough.” They’re being rational within the limits (bounds) of their ability to process information. Also Managers decision making influence by the organization’s culture, internal politics, power considerations, and a phenomenon called - Escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been a poor (wrong) decision. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-6 Making Decisions: The Role of Intuition c) Intuitive decision- making – Making decisions on the basis of experience, feelings, and accumulated judgment. Researchers studying managers’ use of intuitive decision making have identified five different aspects of intuition which are described in exhibit 6-6 page 142. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-7 Exhibit 6-6 What Is Intuition? Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-8 Managers Making Decisions: continued: Intuitive decision making can complement both rational and boundedly rational decision making, how? - managers who has had experience with a similar type of problem or situation often can act quickly with what appears to be limited information and can achieved higher decision making performance, because of that past experience. - - Managers should ignore emotions when make decisions may not be the best advice. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-9 Types of Decisions: Structured Problems and Programmed Decisions : Structured Problems - straightforward, familiar, and easily defined problems.. Example might include: - when a customer returns a purchase to a store. - When a supplier is late with an important delivery. because they’re straightforward, familiar, and easily defined, Because it’s not an unusual occurrence, there’s probably some standardized routine for handling it becomes: : Programmed decision – a repetitive decision that can be handled by a routine approach, Because the problem is structured, the manager doesn’t have to go the trouble and expense of going through an involved decision making process. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-10 Structured Problems and Programmed Decisions (cont.) The manager relies on one of three types of programmed decisions: procedure, rule, or policy. • Procedure - a series of sequential steps used to respond to a well-structured problem. Ex: when a purchasing manager receives a request from a warehouse manager to purchase some thing to complete the work . Rule - an explicit statement that tells managers what can or cannot be done. Rules are frequently used because they are simple to follow and ensure consistency. Ex: rules about lateness and absenteeism permit supervisors to make disciplinary decisions rapidly and fairly. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-11 Structured Problems and Programmed Decisions (cont.) • Policy - a guideline for making decisions • Its establishes general parameters for the decision maker rather than specifically stating what should or should not be done. • Policies contain an ambiguous term that leaves interpretation up to the decision maker, here some sample policy statements: • • • the customer always comes first and should always be satisfied. We promote from within whenever possible. Employee wages shall be competitive within community standards. • The terms satisfied, whenever, and competitive require interpretation. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-12 Types of Decisions: Unstructured Problems and Nonprogrammed Decisions Not all problems managers face can be solved using programmed decisions, some involve: • :Unstructured Problems : a problem that is new or unusual and for which information is ambiguous or incomplete. When the problem are unstructured, managers should rely on nonprogrammed decisions in order to develop unique solutions • :Nonprogrammed decisions : a unique and nonrecurring decision that requires and involve a custom made solutions. Exhibit 6-7 page 145 describe the differences between programmed and nonprogrammed decisions. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-13 Exhibit 6-7 Programmed Versus Nonprogrammed Decisions Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-14 Decision-Making Conditions When making decisions, managers may face three different conditions: certainty, risk, and uncertainty. • Certainty - a situation in which a manager can make accurate decisions because all outcomes are known. For example, when Wyoming’s state treasurer decides where to deposit excess state funds, he knows exactly the interest rate offered by each bank and the amount that will be earned on the funds. He is certain about the outcomes of each alternative Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-15 Decision-Making Conditions • Risk - a situation in which the decision maker is able to estimate the likelihood of certain outcomes managers have historical data from past personal experiences or secondary information that lets them assign probabilities to different alternatives. • Uncertainty - a situation in which a decision maker has neither certainty nor reasonable probability estimates available. the choice of alternative is influenced by the limited amount of available information and by the psychological orientation of the decision maker. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-16 Decision-Making Conditions • Under uncertainty: The manager may be: – optimistic manager: he will follow a maximax choice (maximizing the maximum possible payoff). Or – a pessimist manager: he will follow a maximin choice (maximum the minimums possible payoff). – A manager may follow a minimax choice, when he desires to minimize his maximum (regret). Exhibit 6-9 page 146 and 6-10 page 147 demonstrate that. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-17 Decision-Making Styles • Some managers tend to rely more on data and facts when making decisions, while other used his judgment and feeling to make decisions. Linear-nonlinear thinking style profile: The decision making affected by a person thinking style reflect two things: - the source of information you tend to use (external data and facts or internal sources) such as feeling and intuition. - How you process that information (linear-rational, logical, analytical, or nonlinear- intuitive, creative, insightful). These dimensions are collapsed into two style: Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-18 Decision-Making Styles: continued: • a) the linear thinking style: is a decision style characterized by a person’s preference for using external data and facts and processing this information through rational, logical thinking to guide decisions and actions. • b) The nonlinear thinking style: is a decision style characterized by a person’s preference for using internal resources of information (feeling and intuition) and processing this information with internal insights, feeling, and hunches to guide decisions and actions. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-19 Decision-Making Biases and Errors • Managers may use rules of thumb (heuristics) to simplify their decision making. • Heuristics can be useful because they help managers to make sense of complex, uncertain, and ambiguous information. • The rules of thumb may lead to errors and biases in processing and evaluation information. • Exhibit 6-11 page 149 identifies 12 common decision errors and biases that managers make. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-20 Exhibit 6-11 Common Decision-Making Biases Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-21 Decision-Making Biases and Errors - Overconfidence Bias - when decision maker tend to think they know more than they do. unrealistically positive views of oneself and one’s performance. - Immediate Gratification Bias - describe decision maker who tend to want immediate rewards and to avoid immediate costs holding. choosing alternatives that offer immediate rewards and avoid immediate costs. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-22 Decision-Making Biases and Errors (cont.) - Anchoring Effect - describe the situation when decision makers fixating on initial information and ignoring subsequent information. • Selective Perception Bias - when decision makers selecting, organizing and interpreting events based on the decision maker’s biased perceptions. • Confirmation Bias - decision makers tend to at face value information that confirms their preconceived views and are critical and skeptical of information. seeking out information that reaffirms past choices while discounting contradictory Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-23 Decision-Making Biases and Errors (cont.) • Framing Bias - decision makers selecting and highlighting certain aspects of a situation while ignoring other aspects. • Availability Bias - causes decision makers to tend to remember events that are the most recent and vivid in their memory (losing decision- making objectivity by focusing on the most recent events). • Representation Bias - when decision makers assess the likelihood of an events based on how closely it resembles other events or sets of events. (drawing analogies and seeing identical situations when none exist). • Randomness Bias - occurs when decision makers creating unfounded meaning out of random events. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-24 Decision-Making Biases and Errors (cont.) • Sunk Costs Errors - decision makers forget that current choices can’t correct the past. (forgetting that current actions cannot influence past events and relate only to future consequences). • Self-Serving Bias - occurs when decision makers taking quick credit for successes and blaming outside factors for failures. • Hindsight Bias - when decision makers tend to falsely believe after that outcome is actually known. (mistakenly believing that an event could have been predicted once the actual outcome is known (afterthe-fact). Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-25 Exhibit 6-12 Overview of Managerial Decision Making Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-26 Guidelines for Making Effective Decisions: • Understand cultural differences • Create standards for good decision making • Know when it’s time to call it quits • Use an effective decision making process • Build an organization that can spot the unexpected and quickly adapt to the changed environment Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-27 Guidelines for Making Effective Decisions: continued: • Highly reliable organizations: share 5 habits: • they are not tricked by their success, alert to the smallest deviations and react quickly to anything that doesn’t fit with their expectations • defer to the expert on the front line workers (interact day to day with customers). • Let unexpected circumstances provide the solution: reaction of the foreman illustrates how effective decision makers respond to unexpected circumstances. • Embrace complexity: • Anticipate but also recognize their limits. Copyright 2012 Pearson Education, Copyright © 2014 Pearson©Education, Inc. publishing as Prentice Hall Inc. Publishing as Prentice Hall 6-28
