Fundamentals of
Decision Making
Chapter 08
 Learning Goals
1. Explain certainty, risk, and uncertainty and
how they affect decision making
2. Describe the characteristics of routine,
adaptive, and innovative decisions
3. Discuss the rational and bounded rationality
models of managerial decision making
4. Explain the features of political managerial
decision making
1.
2.
3.
4.
defining problems,
gathering information,
generating alternatives, and
choosing a course of action
We’ve got lots of challenges ahead of us. I spend about 75%
of my time solving problems of one sort or another. The
other 25% is really wonderful, though. Watching people
grow, develop, achieve, and do good things and seeing the
company succeed is very rewarding and lots of fun.
David Hoover
Chairman, CEO and President
Ball Corporation
Certainty
Objective
probabilities
Clear
Uncertainty
Risk
Subjective
probabilities
Intuition and judgment
 The condition under which individuals are:
1. fully informed about a problem,
2. alternative solutions are known, and
3. the results of each solution are known
 Both the problem and alternative solutions are
totally known and well defined
 Exception for most managers
What is Risk?
 The condition under which individuals can:
1.
2.
3.
4.
define a problem,
specify the probability of certain events,
identify alternative solutions, and
state the probability of each solution leading
to a result
 Probability: the percentage of times that a
specific result would occur if an individual were to
make the same decision a large number of times
What is Risk? (cont’d)
 Objective probability: the likelihood that a
specific result will occur, based on hard facts
and numbers
 Subjective probability: the likelihood that a
specific result will occur, based on personal
judgment
 What is Uncertainty?
 Condition under which individuals do not
have the necessary information to assign
probabilities to the outcomes of alternative
solutions
 May not even be able to define the problem,
much less identify alternative solutions and
possible outcomes
Examples of Possible Crises as
Sources of Uncertainty and High Risk
Economic Crises
Physical Crises
Recessions
Stock market crashes
Hostile takeovers
Industrial accidents
Supply breakdowns
Product failures
Natural Disasters
Fires
Floods
Earthquakes
Other
crises
Information Crises
Theft of proprietary information
Tampering with company records
Cyberattacks
Problem Types
Unusual and Innovative
ambiguous
Decisions
Uncertainty
Adaptive
Decisions
Routine
Decisions
Risk
Certainty
Known and
well defined
Solution Types
(Alternative Solutions)
Untried and
ambiguous
 Relatively common and well defined
 Unusual and ambiguous
 Firefighting
1. Solutions are incomplete
2. Problems recur and cascade
3. Urgency supersedes importance
4. Some problems become crises
 Standard choices made in response to
relatively well-defined and common
problems and alternative solutions
 Typically made under certainty and
objective probability
 Standards often used to set the framework
for making routine decisions
Reservations
Hotel Arrival
Phone service will be highly
The doorman (or first-contact
efficient, including: answered
employee) will actively greet
before the fourth ring; no hold
guests, smile, make eye contact,
longer than 15 seconds; or, in
and speak clearly in a friendly
case of longer holds, callmanner
Examples of
backs offered, then provided
decision rules
in less than three minutes
at Four
Seasons hotels
Messages and Paging
Hotel Departure
and resorts
Phone service will be highly
No guest will wait longer
efficient, including: answered
before the fourth ring; no
longer than 15 seconds
than five minutes for baggage
assistance, once the bellman
is called (eight minutes in
resorts)
 Adaptive Decisions
 Choices made in response to a combination of
moderately unusual problems and alternative solutions
 Convergence—a business shift in which two
connections with the customer that were
previously viewed as competing or separate
(e.g., brick-and-mortar bookstores and Internet
bookstores) come to be seen as complementary
 Continuous improvement—a management
philosophy that approaches the challenge of
product and process enhancements as an ongoing
effort to increase the levels of quality and excellence
 Choices based on the discovery, identification, and
diagnosis of unusual and ambiguous problems and/or the
development of unique or creative alternative solutions
 Three forms of innovation for economic progress:
1. Institutional innovation: includes the legal and
institutional framework for business, such as
deregulation
2. Technological innovation: creates the possibility of new
products, services, and production methods
3. Management innovation: major changes in the way
organizations are structured and how managers
perform their functions
 Prescribes a set of phases that individuals or
teams should follow to increase the likelihood
that their decisions will be logical and optimal
 Rational decision: results in the maximum
achievement of a goal in a situation
 Usually focuses on means—how best to achieve
one or more goals
Rational Decision-Making Model
(adapted from Figure 8.3)
Environmental forces
1
Define and
diagnose
problem
2
Set
goals
3
Search for
alternative
solutions
4
Compare and
evaluate
alternative solutions
7
Follow-up
and control
results
6
Implement
the solution
selected
Environmental forces
5
Choose among
alternative
solutions
Rational Model: Define and
Diagnose the Problem
 Noticing skill: identifying and monitoring numerous
external and internal environmental factors and
deciding which ones are contributing to the problem(s)
 Interpreting skill: assessing the factors noticed and
determining which are causes, not merely symptoms, of
the real problem(s)
 Incorporating skill: relating those interpretations to the
current or desired goals
 Need to ask probing questions
 Goals: results to be attained and indicate the
direction
toward which decisions and actions
should be aimed
 General goals: provide broad direction for
decision making in qualitative terms
 Operational goals: state what is to be achieved
in quantitative terms, for whom, and within what
time period
 Hierarchy of goals: represents the formal
linking
of goals between organizational
levels
Rational Model: Search for
Alternative Solutions
…I think many people in a rush to make a decision do not
have enough of the alternatives out in the open. So, they
have two of the alternatives and say, “Okay, I’m going this
way” but they didn’t think through it enough when there
were possibly three or four alternatives. One of the
hidden ones might have been the best, and so the issue is
making sure that either all or enough of the alternatives
are out in the open to allow you to make the best decision.
Gary Tooker
Former CEO & Chairman of Board of Directors
Motorola
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing
Bounded Rationality Model
(adapted from Figure 8.5)
 Contends that the capacity of the human mind for formulating
and solving complex problems is small compared with what is
needed for objectively rational behavior
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing
Bounded Rationality Model:
Decision Biases
Selective perception
bias
Gambler’s
fallacy bias
Concrete information
bias
Availability
bias
Law of small
numbers bias
…When someone comes to you, you often have
a bias about what they are talking about. If you have
been in business for 20 to 30 years, chances are you’ve
been there and done that. Their idea is generally not
so new or innovative as they think. You have a strong
prejudice about outcomes. That is a dangerous thing.
One of the things you have to do very cognitively to be
a good leader is not let your biases or your filters
totally cloud the message someone’s
trying to deliver.
Jeffrey McKeever
Chairman and CEO
MicroAge
 Inadequate problem definition
 New problems often are viewed as being like old
problems
 Too much focus on symptoms as problems
 Laziness
 Limited search for alternatives
 Options considered until one that seems adequate
 Limited information
 Ignorance: the lack of relevant information or the
incorrect interpretation of the information that is
available
Satisficing is intended to be used in contrast to the classical
economist’s idea that in making decisions in business or
anywhere in real life, you somehow pick, or somebody gives
you, a set of alternatives from which you select the best one—
maximize. The satisficing idea is that first of all, you don’t
have the alternatives, you’ve got to go out and scratch for
them—and that you have mighty shaky ways of evaluating
them when you do find them. So you look for alternatives
until you get one from which, in terms of your experience and
in terms of what you have reason to expect, you will get a
reasonable result.
Herbert Simon
Recipient of Nobel Prize in Economics
Bounded Rationality Model
Level of Satisficing Can be Raised By:
1. Personal determination
2. Setting higher individual or organization
standards (goals)
3. Use of management science and computerbased decision-making and problem-solving
techniques
4. Following the seven steps in the rational
model
Political Model of Decision Making
(adapted from Figure 8.6)
Multiple Stakeholders with power such as:
Customers
Investors
Employees
Divergence in problem definition
Divergence in goals
Divergence in solutions
Unions
Suppliers
Political decision
making
Regulatory Agencies
Competitors
Legislative Bodies