Chapter 6
Decision Making
What Would You Do?




Low gas prices lead to lower profits
Lower profits lead to employee layoffs
Exploration needs, however, continue
How will you convince top management to approve
the risky deepwater drilling?
2
Blast From The Past


Rational decision making can be traced back to
Benjamin Franklin’s “moral algebra”
Frederick W. Taylor




scientific study of work
scientifically select, train, and develop workers
cooperate with employees
partnership between employees and management
3
Learning Objectives
What Is Rational Decision
Making?
After discussing this section you
should be able to:
1.
2.
explain the steps to rational decision
making
discuss the limits to rational decision
making.
4
Steps to Rational Decision Making
Define the Problem
Identify Decision Criteria
Weight the Criteria
Generate Alternative Course of Action
Evaluate Each Alternative
Compute the Optimal Decision
Adapted from Exhibit 6.1
5
Define the Problem


Problem exists when there is a gap between
a desired state and an existing state
To make decisions about problems,
managers must:



aware of the gap
motivated to reduce the gap
have the knowledge, skills, abilities, and
resources to fix the problem
6
Weight the Criteria

Absolute comparisons


each criterion is compared to a standard or
ranked on its own merits
Relative comparisons

each criterion is compared directly to every other
criterion
7
Performance Characteristics
1. starting and acceleration
2. fuel economy
3. handling and steering
4. shifting/transmission
5. ride quality
6. braking
1
1
1
1
1
1
2
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
4
5
5
5
5
5
5
Design Characteristics
1. overall design
2. interior ergonomics
3. seating
4. accessories and amenities
5. cargo space
6. fit and finish
1
1
1
1
1
1
2
2
2
2
2
2
3
3
3
3
3
3
4
4
4
4
4
4
5
5
5
5
5
5
Adapted from Exhibit 6.2
8
Car
Performance
Characteristics
starting/
acceleration
starting/
acceleration
fuel
economy
+1
handling
and
steering
shifting/
transmission
ride
quality
braking
-1
-1
-1
0
-1
-1
-1
-1
0
0
+1
0
0
fuel economy
-1
handling and
steering
+1
+1
shifting/
transmission
+1
+1
0
ride quality
+1
+1
0
0
braking
0
+1
-1
0
0
Total
Weight
+2
+5
-3
-2
-2
0
0
Adapted from Exhibit 6.3
9
Criteria Ratings Used to Evaluate the
Best Locations for Insurance
Companies
Climate
Accessibility
Labor
Living
Environment
Atlanta
3
5
4
6
4
4.35
Baltimore
5
4
2
4
5
4
Chicago
7
6
6
5
4
5.75
Des Moines
7
1
4
2
7
4.2
Kansas City
5
3
2
4
6
3.95
Milwaukee
6
2
4
3
5
4.05
Minneapolis
5
5
4
5
5
4.8
Seattle
4
4
3
6
4
4.2
St. Louis
3
5
1
4
5
3.5
Tampa
2
3
4
3
7
3.55
Regulatory
City
Adapted From Exhibit 5.4
Operating
Costs
Weighted
Average
Source: K. Galloway, “America's Best Insurance Cities,” Best's
Review/Property-Casualty Insurance Edition, 1 November 1994, 38
10
Cities Ranked by Optimal Value and
Optimal Values
Average Ratings 1 Chicago
5.75
2 Minneapolis
3 Atlanta
4.35
4 Des Moines
Seattle
4.2
6 Milwaukee
7 Baltimore
4.05
8 Kansas City
9 Tampa
3.95
10 St. Louis
Adapted From Exhibit 6.5
4.8
4.2
4
3.55
3.5
Source: K. Galloway, “America's Best Insurance Cities,” Best's
Review/Property-Casualty Insurance Edition, 1 November 1994, 38
11
Been There, Done That
Making Better Decisions



People often start to solve the wrong problem
It is critical to pose the correct problem
Your intuition and analysis should “fit”
together
12
Limits to Rational Decision Making
Bounded Rationality
Risk & Risky Conditions
Common Decision Making Mistakes
13
Bounded Rationality

Managers try to be rational



they are restricted by real-world constraints
cannot be completely rational
Four constraints on rational decision making
14
Four Constraints to Rational
Decision Making
Limited
Resources
Information
Overload
Expertise
Memory
Problems
Problems
15
Choosing Solutions

Maximizing decisions



choosing the optimal solution
requires fully rational decision conditions
Satisficing decisions



choosing the “good enough” solution
maximization is not possible due to constraints
fits with bounded rationality
16
Risk & Decision Making under
Risky Conditions

Rationality assumes a certain decision
condition


complete information and knowledge of all
possible outcomes
Most decisions made under conditions of risk

there exists a real possibility of failure
17

A large car manufacturer has recently been hit with
a number of economic difficulties, and it appears as
if three plants need to be closed and 6,000
employees laid off. The vice-president of
production has been exploring alternative ways to
avoid this crisis. She has developed two plans:
 Plan A: This plan will save one of three plants
and 2,000 jobs.
 Plan B: This plan has a 1/3 probability of saving
all three plants and 6,000 jobs, but has a 2/3
probability of saving no plants and no jobs.
18

A large car manufacturer has recently been hit with
a number of economic difficulties, and it appears as
if three plants need to be closed and 6,000
employees laid off. The vice-president of
production has been exploring alternative ways to
avoid this crisis. She has developed two plans:
 Plan C: This plan will result in the loss of two of
the three plants and 4,000 jobs.
 Plan D: This plan has a 2/3 probability of
resulting in the loss of all three plants and all
6,000 jobs, but has a 1/3 probability of losing no
plants and no jobs.
19
Framing Effects on Decision Making

Positive Frame



a problem presented as a gain
become more risk-averse
Negative Frame


a problem presented as a loss
become more risk-seeking
+
-
20
Conditions of Uncertainty


The odds of winning or losing are unknown
Risk propensity


a person’s willingness to take risks
a high risk propensity need by individuals in
uncertain conditions
21
Common Decision-Making Mistakes
Over Reliance on Intuition
Availability Bias
Representative Bias
Anchoring and Adjustment Bias
22
Over Reliance on Intuition



Intuition plays a part in many managerial
decisions
Intuition works best for experienced
managers
Over use, however, causes decision makers
to ignore available data
23
Availability Bias


The tendency of decision makers to give
preference to recent information, vivid images
that evoke emotions, and specific acts and
behaviors that they personally observed
May overlook “rational data”
24
Representative Bias


When decision makers judge the likelihood of
an event’s occurrence based on its similarity
to previous events and their likelihood of
occurrence
We ignore objective data that does not fit our
experiences
25
Anchoring & Adjustment Bias


When judgment (good-bad, large-small, yesno, etc.) is “anchored” by an initial value
Once the anchor is “dropped,” two things
happen:


all subsequent experiences are judged by their
similarity to the anchor
all possible decision alternatives tend to cluster
around the anchor
26
Learning Objectives
Improving Decision Making
After discussing this section you
should be able to:
3.
4.
describe how rules and testing can improve
decision making
explain how group decisions and group
decision making techniques can improve
decision making
27
Improving Individual Decision
Making
Decision
Multivariable
Rules
Testing
Decision
Escalation
Software
Of
Commitment
28
Decision Rules


A set of criteria that alternative solutions must
meet to be acceptable
Two types:


dictionary
minimum threshold
29
Multivariable Testing


A much more systematic approach to
analyzing and evaluating potential solutions
Improves decision making by:


forces decisions made based on data
encouraging the simultaneous evaluation of
several potential solutions
30
Multivariable Testing to Increase
Amusement Park Attendance on
Tuesdays
Test
Test 1
Test 2
Test 3
Test 4
Adapted from Exhibit 6.8
Free Free
2-for-1 Lunch Parking Profits
$4,000
X
$2,000
X
$9,000
X
X
$5,000
X
X
31
Decision Software


Most decisions made in an unstructured
manner
PC software can help “walk” decision makers
through decision process
32
Avoiding Escalation of Commitment


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The tendency to stick with a “wrong”
decision
Usually commit greater resources to this
decision.
Protecting against escalation

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Progress reports
Outside auditors
Change managers
“Experimental” projects.
33
Using Groups to Improve Decision
Making
Advantages
Structured
and
Pitfalls
Nominal Group
Technique
Stepladder
Technique
Conflict
Delphi
Technique
Electronic
Brainstorming
34
Advantages of Group Decision
Making

Improved problem definition



view problems from multiple perspectives
find the cause of the problem
Generate more alternative solutions


have access to greater information than
individuals
involvement leads to greater decision commitment
35
Pitfalls of Group Decision Making



Groupthink
It takes more time
One or two people dominate discussions
36
Groupthink


Internal pressures prevent the group from
openly evaluating all alternatives
Most likely:




the group is insulated from different ideas
the group leader stifles discussions
there is no established procedure for defining
and exploring alternatives
group members have similar backgrounds and
experiences
37
Structured Conflict

C-type conflict



cognitive conflict
focuses on problem-related differences of opinion
A-type conflict


affective conflict
emotional reactions to disagreements
38
Devil’s Advocacy - 5 Steps
Generate a
potential solution
Assign a devil’s advocate
to criticize and question
the solution
Present the critique of
the potential solution to
key decision makers
Gather additional
relevant information
Decide whether to use, change
or not use the original
proposed solution
39
Dialectical Inquiry
Generate a
potential solution
Identify the assumptions
underlying the
potential solution
Generate a conflicting
counterproposal based
on the opposite
assumptions
Have advocates of each
position present their
arguments and debate
them
Decide whether to use, change
or not use the original
proposed solution
40
What Really Works?
Devil’s Advocacy & Dialectical Inquiry
Devil’s Advocacy
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Probability of success 58%
Dialectical Inquiry
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Probability of success 55%
41
Nominal Group Technique

Decreases negative group behaviors by
having group members work individually






begin with “quiet time”
members write out ideas
Ideas are then posted to the group
Advantages/disadvantages are discussed
Members individually reflect on discussion
Ideas are then ranked by the group
42
Delphi Technique
Create a questionnaire
of open-ended
questions
Select a panel
of experts
Compile and summarize
expert responses into
written report
Experts list their reasons
agreeing/disagreeing
with report
Repeat steps 3 & 4 until
consensus is reached
43
Stepladder Technique
Step 3
Group Member 4 Joins
Group - Shares
thoughts, ideas,
recommendations
Group Members 1, 2,
& 3 Share previous
thoughts, ideas,
recommendations
Discussion is Held and
Tentative Group
Decision is Made
Step 2
Group Member 3 Joins
Group - Shares
thoughts, ideas,
recommendations
Group Members 1 & 2
Share previous
thoughts, ideas,
recommendations
Discussion is Held and
Tentative Group
Decision is Made
Step 1
Group Member 1
Shares thoughts,
ideas,
recommendations
Group Member 2
Shares thoughts,
ideas,
recommendations
Discussion is Held and
Tentative Group
Decision is Made
Adapted From Exhibit 6.9
44
Electronic Brainstorming

Four brainstorming rules:





the more ideas, the better
all ideas are acceptable
use others’ ideas to create more ideas
criticism or evaluation of ideas is not allowed
A modification of traditional brainstorming

use computers to manage the process
45
Advantages of Electronic
Brainstorming

Overcomes production blocking



technology allows everyone to record their ideas
as they are created
no ideas lost “waiting your turn” to speak
Overcomes evaluation apprehension

anonymity creates free expression
46
Disadvantages of Electronic
Brainstorming




Greater expense
No automatic acceptance of ideas because of
one’s position
Some find it difficult to express themselves in
writing
Lack of typing skills can frustrate participants
47
What Really Happened?



Deepwater drilling was a risky, unproven
method at the time
Management’s high risk propensity led them
to begin deepwater drilling
The decision was a profitable one
48