CHAPTER OBJECTIVES
After studying this chapter and the case exercises at the end, students should be able to:
1. Spell out what triggered the problem.
2. List at least four ways to define the problem, and choose the best definition.
3. Propose at least five objectives for the person making the decision.
4. Recommend at least four possible alternative solutions.
5. Develop a Consequences Matrix for the decision.
6. Develop a Decision Matrix for the decision.
LECTURE OUTLINE
The Management Challenge
Introduction
Understanding Decision Making
Types of Decisions
Decision-Making Models
How Managers Make Decisions: The Process
Step One: Define the Problem
Step Two: Clarify Your Objectives
Step Three: Identify Alternatives
Step Four: Analyze the Consequences
Step Five: Make a Choice
How to Make Better Decisions
Increase Your Knowledge
Use Your Intuition
Weigh the Pros and Cons
Don’t Overstress the Finality of Your Decision
Make Sure the Timing is Right
How to Use Creativity to Make Decisions
Avoiding Psychological Traps
Decision-Making Shortcuts
Anchoring
Psychological Set
Perception
Summary
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ANNOTATED OUTLINE
The Management Challenge
In order to compete with Wal-Mart, K-Mart CEO, Charles Conway, decided to change the company’s marketing approach (by eliminating circulars), and slash prices. The results were disastrous. The decision left K-Mart with higher prices, and no circulars. Sales fell, and the company was forced to declare bankruptcy, close 284 stores, and fire 22,000 employees.
Understanding Decision Making
A decision is a choice from among the available alternatives.
Decision-making is the process of developing and analyzing alternatives and making a choice. A problem is a discrepancy between a desirable and an actual situation. The problem-solving process is the same as making decisions. Judgment refers to the cognitive aspects of the decision making process. Decision making is a key to effective management. Each of the four primary functions of management requires decision making.
Nearly everything a manager does requires decision making.
Types of Decisions
Programmed and Nonprogrammed Decisions: Decisions can be classified as programmed or nonprogrammed. Programmed decisions are repetitive, routine, and can be solved through mechanical procedures such as applying rules. It is estimated that up to 90 percent of decisions are programmed.
Nonprogrammed decisions are unique and novel, and mechanical procedures are not available nor applicable. Crisis decisions are an example of nonprogrammed decisions.
Making Programmed and Nonprogrammed Decisions
Managers can use standard rules or methods to make programmed decisions automatically. Rules and regulations are among the most familiar programmed decisions. Nonprogrammed decisions generally require a very different decision-making methodology. Nonprogrammed decisions involve a vast array of factors, and rely heavily on judgment. Top level manager tend to face more nonprogrammed decisions, while lower-level managers face more programmed ones.
Decision Making Models
The Classical Approach
Classical economists accepted a number of assumptions about how managers made decisions. Rational managers: 1) had complete information about the situation, including full range of goods and services available on the market and the exact price of each good or service; 2) could distinguish perfectly between the
NOTES
Table 3-1
Everything Managers Do
Involves Making
Decisions
Table 3-2
Decisions Business
Team Managers Make
Figure 3-1
Procedure and Form to
Use for Developing a
Workplace Rule
Table 3-3
List of Disciplinary Rules
Table 3-4
Comparing Programmed and Nonprogrammed
Decisions
36

problem and its symptoms; 3) could identify all criteria and accurately weigh all the criteria according to his or her preferences; 4) knew all alternatives and could assess each one against each criterion; 5) could accurately calculate and choose the alternative with the highest perceived value; 6) could, therefore, be expected to make an “optimal” choice, without being confused by “irrational” thought processes.
The Administrative Approach
Herbert Simon and his associates proposed a model that better reflects reality. They agreed that decision makers try to be rational, but they point out that such rationality is, in practice, subject to many constraints. Simon argues that “bounded rationality” more accurately represents how managers make decisions. Bounded rationality —a manager’s decision making is only a rational as his or her unique values, abilities, and limited capacity for processing information permit him or her to be. There are two implications to this: 1) manager’s search for solutions, and
2) many cognitive biases and traps lie in wait for unsuspecting managers.
Management in Action
So Many Decisions, So Little Time. Dominic Orr, president and
CEO of Alteon WebSystems.
How to Make Decisions: The Process
Step 1. Define the Problem
Alternatives you identify and the decisions you make reflect how you define the problem. How to Define the Problem —1) ask
“What triggered this problem?”; 2) write down your initial assessment of the problem; 3) then analyze it.
Step 2. Clarify Your Objectives
Have more than one objective. How to Clarify Objectives —your objectives should provide an explicit expression of what you really want. Five step procedure: 1) Write down all the concerns you hope to address through your decision; 2) Convert your concerns into specific, concrete objectives; 3) Separate ends from means to establish your fundamental objectives, 4) Clarify what you mean by each objective; 5) Test your objectives to see if they capture your interests.
Step 3. Identify Alternatives
How to identify alternatives —1) be creative; 2) expand your search; 3) ask “how?”; 4) know when to stop.
Step 4. Analyze the Consequences
The next decision-making question to address is: How does each alternative stack up, given your objectives? How to Analyze the
Consequences —1) Mentally put yourself into the future; 2)
Checklist 3.1
The Decision-Making
Process
Checklist 3.2
How to Clarify Your
Objectives
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Eliminate any clearly inferior alternatives; 3) Organize your remaining alternatives into a Consequences table.
Step 5. Make a Choice
Review the consequences of each alternative, and choose the alternative that maximizes your benefits.
How to Make Better Decisions
Increase Your Knowledge
As decision makers gain experience, they tend to be more effective in making decisions. Additionally, the more experience the decision maker has, the more confident he or she will be in making an informed choice. To increase your knowledge: ask questions, get experience, use consultants, do your research, and force yourself to recognize the facts when you see them.
Managing at the Speed of Thought
Knowledge Management —Xerox.
Use Your Intuition
Many behavioral scientists have argued that overemphasizing rationality and logic can actually backfire by blocking the decision maker from using intuition. Intuition is a cognitive process whereby a person unconsciously makes a decision based on his or her accumulated knowledge and experience.
Management in Action
Overconfidence Can Be Fatal.
Weigh the Pros and Cons
The weighing process permits another, more concrete analysis of your options.
Don’t Overstress the Finality of Your Decision
Decision makers need to recognize that very few decisions are forever. Therefore, it is not necessary to become frozen in the finality of a decision. Escalation is the act of making a wrong decision and lose more in order to continue to adhere to that decision.
Make Sure the Timing Is Right
Decision makers need to recognize that their mood at the time could have a significant impact on the quality of the decision.
Decision makers should not be swayed by passing moods. One research study found that decision makers tend to be aggressive and destructive when making decisions when they feel “down,” and tolerant and balanced in decision making when they feel good.
Figure 3-2
Are You More Rational or More Intuitive?
Figure 3-3
Decision Matrix
Checklist 3.3
Making a Choice
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How to Use Creativity to Make Better Decisions
An essential aspect of successful decision making is creativity, which is the process of developing original, novel responses to a problem. Creativity is needed to develop new alternatives and correctly define the problem. Decision makers should check their assumptions and think through the whole decision-making process to improve creativity. Techniques to cultivate creativity include: create a culture for creativity, encourage brainstorming, suspend judgment, get more points of view, provide physical support for creativity, and encourage anonymous input.
Avoiding Psychological Traps
Decision-Making Shortcuts
People often take shortcuts, or heuristics, by applying rules of thumb to help them deal with the complexities of decision making.
This undermines the ideal of the perfectly rational decision maker.
Either the similarity heuristic or the availability heuristic may be applied by decision makers to simplify their efforts. The similarity heuristic is used when a manager tries to predict a person’s performance based on that person’s similarity to other individuals he has known in the past. The availability heuristic is applied when the decision maker uses more recent information that is more readily available in memory to make a decision.
Anchoring
Anchoring, which is the unconscious giving of disproportionate weight to the first information one hears, can lead to errors in framing.
Psychological Set
Psychological set is the tendency to focus on a rigid strategy or approach to certain types of problems. This approach also limits a manager’s ability to find alternative solutions.
Perception
Perception is the selection and interpretation of information we receive through our senses and the meaning we give to the information.
Checklist 3.4
How to Be More
Creative
Figure 3-4
Looking at the Problem in Just One Way
Figure 3-5
The Advantages of Not
Just Looking at the
Problem in One Way
Figure 3-6
Using Creativity to Find a Solution
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Summary
1. A decision is a choice from among available alternatives. Decision making is the process of developing and analyzing alternatives and making a choice.
2. Decisions can be either programmed (repetitive and routine) or nonprogrammed (unique and novel). Nonprogrammed decisions require more intuition and judgment of decision makers.
3. Rational decision-making assumes ideal conditions, such as an accurate definition of the problem and complete knowledge about all relevant alternatives and their values.
4. In contrast, decision making in reality is bounded by differences in mana gers’ ability to process information, and by reliance on heuristics or shortcuts, framing, anchoring, escalation, psychological set, and factors in the organization itself.
5. Bounded rationality describes decision-making in reality and often implies satisficing, or accepting satisfactory (as opposed to optimal) alternatives.
6. Guidelines for making better decisions include increase your knowledge, use creativity, use intuition, don’t overstress finality, and make sure the timing is right.
7. Psychological traps include decision-making shortcuts, anchoring, psychological set, and perception.
KEY TERMS decision 53 decision making 53 problem 53 programmed decision 54 nonprogrammed decision 54 bounded rationality 57 satisfice 58 process analysis 62 knowledge management 65 creativity 69 brainstorming 69 heuristics 70 anchoring 71 psychological set 71 perception 72 breakeven analysis 76 breakeven chart 67 linear programming 77 waiting-line/queuing techniques 77 statistical decision theory techniques 78 certainty 78 uncertainty 78 risk 78 decision tree 78 expected value 78
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