Decision Making
(Note: This Chapter Outline corresponds to Chapter 11 within Management: Comprehension, Analysis,
and Application, Gatewood, Taylor & Ferrell, 1st edition, 1995. Numbers at right are the corresponding
page numbers for your use in referencing.)
Executive Summary: Theoretically, managers should make purely rational and optimal decisions, relying
on logic, quantitative methods, and complete information.
Such an approach, however, is not very
practical. Managers typically make decisions that "satisfice;" that solve the problem, even if it is not
optimal, effecting a "trade-off" that saves time versus searching endlessly for optimality and that adds a
degree of certainty about success that can be lost in more complicated, optimal solutions. Their decisions
are typically made under rationality "bounded" (eg "limited") by their time, resources, emotion, values and
skills and by their lack of complete information a/o their ability to process it. Managers frequently rely on
"intuition" (eg, practice and past experience, "judgment," pattern recognition) in deciding upon the best
course of action. A degree of risk-taking is evidenced in the decisions of successful managers.
"Our" definition of decision making
(302)
process of choosing among alternative courses of action to
resolve a problem
Five steps of decision making
(305-306)
Identifying the problem
Generating alternative courses of action
Evaluating the alternatives
Selecting the best alternative
Implementing the decision
Reminder: "Our" definition of management, from Chapter 1
"The collection and use of information in order to make decisions
regarding the effective and efficient allocation of resources."
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"Our" "better" (in the sense it is more precise) definition of management
"The collection and use of information in order to generate, evaluate,
and select a course of action regarding the effective and efficient
allocation of resources."
Classical Model of Decision Making
A prescriptive (ie, "this is what managers should do") approach
(309)
Assumed characteristics of business situation in which a decision
must be made
Complete and unambiguous information
(309)
"full knowledge" regarding alternatives and their outcomes
(309)
"Full" rationality and logic, to be used in evaluating alternative
courses of action
(305, 309)
Example: Star Trek's Dr. Spock
(Full knowledge, rationality and logic will assure)
decision certainty, "the one best solution"
(309)
Management seeks optimal solutions
Quite similar to, and associated with, the Classical School of Management
Thought (36), quantitative (or decisional) approach (38), scientific management
(37), et. al.
Administrative (or Behavioral) Model of Decision Making
Developed by Herb Simon, earned a Nobel Prize
(309)
A descriptive (ie, "this is what managers actually do") approach
(309)
Actual characteristics of business situation in which a decision
must be made
Incomplete a/o ambiguous information
(304)
Lack of decision certainty
(304)
Limited logic and "bounded" rationality will be used to evaluate
and choose alternative courses of action
(305, 310)
"bounded" by values and skills
"bounded" by time and resources
"bounded" by ability to process information
"bounded" by lack of complete information
"bounded" by emotion
Management seeks "satisficing" solutions
means "satisfies" and "suffices"
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solution that "solves" the problem, even if its not the best solution
A "trade-off" that saves time versus searching endlessly for optimality
A "trade-off" that adds a degree of certainty about success that can be
lost in more complicated, optimal solutions
Here are a couple of "classical versus administrative" decision making examples. Theoretically, buying a
new car is a big decision and so should be an analytical event. Dr. Spock would likely collect a lot of data
about the available cars and his own automobile requirements, conduct cost/benefit analysis and such,
pick the vehicle that provides an optimal match, and determine the exact amount that should be offered to
buy it. In fact, most people buy cars quite differently. They buy cars they "like," and they do not have
much "hard data" about the true dealer cost or vehicle reliability or operating costs per mile. They often do
not have the time or skill to analyze or evaluate such information, even if they have it. They do not usually
compare several equivalent cars, and are not willing to pick the "best" car, even when it is not "their
favorite." They get "swept up" in their selling process, and can be persuaded to pay more than they
should. Their actions suggest that their values do not include car buying as a business decision.
Marriage also is an important decision. If only a person had, in advance of the marriage decision,
complete information, "full knowledge of the alternatives and outcomes, then perhaps the divorce rate
would not be 50%. But no one could possible know everything about every possible marriage partner in
the world. Even if one did had all that information, would he/she have the ability or the time to analyze it all
so as to have full knowledge of all the various outcomes for every possible partner in every scenario?
There isn't enough time in a lifetime for one to find the "optimal" solution to the marriage decision. And if
the "optimal solution" was available, would he/she choose it regardless of "emotion?" In Moonstruck,
Nicholas Cage tells Cher after the opera that "love isn't supposed to be neat ..." -- perhaps Cher was
looking for "the optimal" solution! Instead, most of us use some "intuition" (in addition to any available
"information") about who would be a good partner over the long run. Hopefully, these examples clarify
why the book states that classical decision making and systematic analysis is not very practical. (310, 311)
Intuition
Managers frequently rely on intuition for decision-making
(305, 311)
Intuition is based on
Practice and past experience
(305, 311)
Judgment
(305)
Pattern recognition
Examples: The spotty R, the table in this room
(good justification for the HBS case study method ! )
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Evaluating Alternatives
Managers evaluate, and select from, alternatives in terms of their
feasibility, effectiveness, and consequences
(307)
Example: An alternative -- Team throws for the bullseye every time.
Feasability
Can this work?
Do we even have any resources (eg, darts to throw)?
Do we even have a team? Are we allowed to play?
Effectiveness
How well will it work?
How close are we going to get to the bullseye?
Consequences
What will happen if it does work?
Did we make any bets and what will they pay?
What will it cost if we lose?
Actually, there is a "trade-off" between these three criteria
Example: Pay professional dart throwers to join the team. This alternative has higher
effectiveness but also has higher consequences (eg, costs).
Social/Psychological Factors Influencing Decision Making
Framing
(313)
human tendency to view positively presented information
favorably and negatively presented information unfavorably
Example: Questionnaire, 50% agree or 50% disagree
Escalation to Commitment
(314)
Reasons for escalation
Successful managers often have a history of continual
success through persistence.
(att)
Managers are often unwilling to accept the loss of
"sunk costs."
(314)
Managers are often unwilling to admit or recognize that
the original decision was incorrect.
(314)
Managers may realize a loss of power or position
if they abandon the original decision.
(att)
Groupthink
(322)
Everyone in the groups believes the decision is wrong, but
no one wants to disagree
Classic Example: Bay of Pigs
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Risk Taking
(316)
A degree of risk-taking is evidenced in the decisions of
successful manager
(att)
Don't assume that risk taking leads to successful management; (att)
there are lots of risk-takers that "didn't make it."
As a practical matter, managers must do some risk-taking
Example: Will the axle be delivered by 2pm? Two choices....
Group Decisions
Groups tend to make riskier decisions that individuals
(320)
... when accountablity is not "shared"
(att)
Exceptional individuals tend make higher-level quality decisions (320)
than the group when the task is complex and the group is composed
of relatively low-ability people.
Groups tend to make higher-level quality decisions than the average
individual acting alone
(320)
Said another way, when the members of a team are truly peers, the
team will make a better decision than its individual members. (Think
synergy ...)
Example: Wilderness Survival
Example: Business School Admission
More on this later in the chapter on teams .....
Group Decision Making Techniques
Brainstorming
(318)
Members generates as many ideas as possible without
criticism or evaluation. Once the "idea generating" process
is complete, evaluation begins.
Nominal
(319)
Delphi
(319)
Orchestrated (ie, facilitated) ( and typically anonymous)
communication and decision process towards better
decision quality
Current example: Collabra/Netscape Groupware
Computer-based Decision Making Techniques
(323)
Decision support systems (DSS)
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Expert systems
Software that mimics an expert
Example: bank loan officer, residency, credit history
Problem: The Bill Gates loan
Artifical Intelligence / Neural Networks
Software that mimics a brain (eg, pattern recognition, spotty Rs)
Example: Tanks a lot, pal!
PS: Do you still remember the "orchestra test" for management ideas?
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