Topic 6: Decision-Making
This topic explores the role of decision-making in managerial life. Decision-making is the essence of a manager’s
job, and a manager is ultimately judged by the outcomes of their decisions. We explore the steps of typical
decision-making processes, the different types of decisions and decision-making styles in organisations, as well as
common pitfalls for decision-makers. A solid understanding of the decision-making process and pitfalls to avoid is
essential for effective management.
How Do We Make Decisions?
Most decision-making follows a path of the following 8 steps.
Identifying
the Problem
Need to pinpoint problems
that require a decision
Allocation
of Weights
to Criteria
Weight decision criteria to give
correct priority to decision
Analysis of
Alternatives
Critically analyse each
decision alternative
Implementation
of Alternatives
Put decision into action
Identification
of Decision-Making
Criteria
Determine criteria relevant
in decision-making
Development of
Alternatives
List viable alternatives that could
resolve the problem
Selection of
Alternatives
Choose best alternative among
those considered
Evaluating Decision
Effectiveness
Evaluate outcome to see
if problem
has been resolved
What Factors Influence Managerial Decision-Making?
No two decisions are alike, as the types of decisions and the decision-making style of managers vary widely. While
most managers try to make rational decisions, their efforts are hampered by bounded rationality and incomplete
information.
Decision Rationality
•
Ideally, all decisions are rationale, but managers are limited by bounded rationality, a simplified
decision-making process due to limited processing capacity
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Satisficing: a decision making strategy that is not exhaustive but produces a result that is ‘good enough’
•
Escalation of commitment: Increased commitment to previous decision despite evidence that decision
may be wrong
Types of Decisions
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Well-structured, programmed decisions: Familiar and easily defined problems
•
Unstructured, non-programmed decisions: New or unusual problems with incomplete data
Decision-Making Styles
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Linear thinking style:preference for using external data and facts and using logical, rational thinking
•
Non-linear thinking style: preference for internal sources of information and using internal insights
and feelings
Decision-Making Biases and Errors
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Overconfidence bias
Immediate gratification bias
Anchoring effect
Selective perception bias
Confirmation bias
Framing bias
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Availability bias
Representation bias
Randomness bias
Sunk cost error
Self-serving bias
Hindsight bias
How Can We Make More Effective Decisions?
Strategies for Effective Decision-Making
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Awareness of decision biases
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Understand cultural differences
•
Create standards for good decision-making
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Know when it is time to call it quits
•
Use effective decision-making processes