WEEK5:
Decision Making
Decision Making
The process by which managers respond to opportunities
and threats that confront them by analyzing options and
making determinations about specific organizational goals
and courses of
action.
Thus decision making is the process of choosing a course of
action for dealing with a problem or opportunity.
Decisions in response to opportunities

occurs when managers respond to ways to improve organizational
performance to benefit customers, employees, and other
stakeholder groups
Decisions in response to threats

occurs when managers respond to events inside or outside the
organization which are adversely affecting organizational
performance
Types of Managerial Decisions-making
 Programmed Decision
One that recurs often enough for a decision rule to be developed.
That is to say, a statement that tells a decision-maker which
alternative to choose based on the characteristics of the decision
situation
Routine, virtually automatic decision making that follows
established rules or guidelines.
• Managers have made the same decision many times before
• Little ambiguity involved
 Non-programmed decision
One that recurs infrequently and for which there is no previously
established decision rule
Non-routine decision made in response to unusual or novel
opportunities and threats.
The are no rules to follow since the decision is new.
• Decisions are made based on information, and a manager’s
intuition, and judgment.
Management Information Systems
INFORMATION REQUIREMENTS OF KEY DECISION-MAKING GROUPS IN A FIRM
Senior managers, middle managers, operational managers, and employees have different types of decisions
and information requirements.
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© Prentice Hall 2011
Characteristics of Programmed and
Nonprogrammed Decisions
 action
How are decisions made in organizations?
• Steps in systematic decision making.
Recognize and define the problem or opportunity.
Identify and analyze alternative courses of action, and
estimate their effects on the problem or opportunity.
Choose a preferred course of action.
Implement the preferred course of action.
Evaluate the results and follow up as necessary.
Is it always the case that systematic decision making
are followed?
If No, what are the challenges that can influence it?
Answer
• The systematic decision-making process may not be
followed where substantial change occurs and many
new technologies prevail.
• Novel decision techniques may yield superior
performance in certain situations.
• Ethical consequences of decision making must be
considered.
Thus, it all depends on the decision environments
Which include:
– Certain environments.
– Risk environments.
– Uncertain environments.
Decision environments
 Certain environments.
– Exist when information is sufficient to predict the results of each
alternative in advance of implementation.
– Certainty is the ideal problem solving and decision making
environment.
 Risk environments.
– Exist when decision makers lack complete certainty regarding the
outcomes of various courses of action, but they can assign
probabilities of occurrence.
– Probabilities can be assigned through objective statistical
procedures or personal intuition.
 Uncertain environments.
– Exist when managers have so little information that they cannot
even assign probabilities to various alternatives and possible
outcomes.
– Uncertainty forces decision makers to rely on individual and group
creativity to succeed in problem solving.
Uncertain environments — cont’d
• Also characterized by rapidly changing:
– External conditions.
– Information technology requirements.
– Personnel influencing problem and choice
definitions.
• These rapid changes are also called organized
anarchy.
The Decision-Making Approaches
Approaches to
Decision Making
Rational
Approach
Behavioral
Approach
Practical
Approach
Personal
Approach
The Classical Model- Rational
 Rationality – It is a logical, step-by-step approach to
decision making, with a thorough analysis of alternatives
and their consequences
 It is a prescriptive model of decision making that
assumes the decision maker can identify and evaluate all
possible alternatives and their consequences and
rationally choose the most appropriate course of action.
Optimum decision
The most appropriate decision in the light of what
managers believe to be the most desirable future
consequences for their organization.
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The Classical Model of Decision Making
The summary of Classical decision theory
• Classical decision theory. The classical decision
maker:
– Faces a clearly defined problem.
– Knows all possible action alternatives and their
consequences.
– Chooses the optimum alternative.
• Is often used as a model of how managers
should make decisions
• QN: What are the strength and weaknesses
of this model?
The Rational Decision-Making Process
The Rational Approach (cont’d)
Strengths
Forces decision in a logical, sequential manner
In-depth analysis enables choice on the basis of
information rather than emotion or social pressure
Weaknesses
Rigid underlying assumptions often unrealistic
Information limited by time or cost constraints,
manager’s ability to process information
Not all alternatives easily quantified
Outcomes unknown due to unpredictability of
future
Behavioural (Administrative) Model
An approach to decision making that explains
why decision making is inherently uncertain and
risky and why managers can rarely make
decisions in the manner prescribed by the
classical model
Bounded rationality
There is a large number of alternatives and
available information can be so extensive that
managers cannot consider it all.
Decisions are limited by people’s cognitive
limitations.
Incomplete information
Because of risk and uncertainty, ambiguity,
and time constraints
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Why Information Is Incomplete
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Causes of Incomplete Information
 Risk
– Present when managers know the possible outcomes of a
particular course of action and can assign probabilities to them.
 Uncertainty
– Probabilities cannot be given for outcomes and the future is
unknown
 Ambiguous Information
– Information whose meaning is not clear allowing it to be
interpreted in multiple or conflicting ways.
 Time constraints and information costs
– managers have neither the time nor money to search for all
possible alternatives and evaluate potential consequences
 Satisficing
– Searching for and choosing an acceptable, or satisfactory
response to problems and opportunities, rather than trying to
make the best decision.
Summary of Behavioral decision compared
with Classical theory.
• Behavioural decision theory.
– Recognizes that human beings operate with:
• Cognitive limitations.
• Bounded rationality.
– The behavioural decision maker:
• Faces a problem that is not clearly defined.
• Has limited knowledge of possible action alternatives and their
consequences.
• Chooses a satisfactory alternative.
 In comparison, Classical decision theory:
– May not fit well in a chaotic world.
– Can be used toward the bottom of many firms, even most
high-tech firms.
• Behavioral decision theory:
– Fits with a chaotic world of uncertain conditions and
limited information.
– Encourages satisficing decision making.
Garbage can model
• The garbage can model.
– A model of decision making that views problems,
solutions, participants, and choice of situations as
mixed together in the “garbage can” of the
organization.
• In stable settings, behavioral decision theory may be more
appropriate.
• In dynamic settings, the garbage model may be more
appropriate.
• The implications of the garbage can model are:
– Choice making and implementation may be done by
different individuals.
– Because of interpretation, there is a risk that the
actual implementation does not exactly match the
choice.
– Many problems go unsolved.
Summary of Decision making realities
 Managers face complex choice processes.
 Decision making information may not be available.
 Bounded rationality and cognitive limitations affect the
way people define problems, identify alternatives, and
choose preferred solutions.
 Most decision making in organizations goes beyond
step-by-step rational choice.
 Most decision making in organizations falls somewhere
between the highly rational and the highly chaotic.
 Decisions must be made under risk and uncertainty.
 Decisions must be made to solve nonroutine problems.
 Decisions must be made under time pressures and
information limitations.
 Decisions should be ethical.
How do intuition, judgment, and
creativity affect decision making?
• Intuition.
– The ability to know or recognize quickly and readily the
possibilities of a given situation.
– A key element of decision making under risk and
uncertainty.
• Judgmental heuristics.
– Simplifying strategies or “rules of thumb” used to make
decisions.
– Makes it easier to to deal with uncertainty and limited
information.
– Can lead to systematic errors that affect the quality
and/or ethics of decisions.
How do intuition, judgment, and
creativity affect decision making cont’d?
• Types of heuristics.
– Availability heuristic — bases a decision on recent events
relating to the situation at hand.
– Representativeness heuristic — bases a decision on
similarities between the situation at hand and
stereotypes of similar occurrences.
– Anchoring and adjustment heuristic — bases a decision
on incremental adjustments to an initial value
determined by historical precedent or some reference
point.
How do intuition, judgment, and
creativity affect decision making cont’d?
• General judgmental biases in decision making.
– Confirmation trap.
• The tendency to seek confirmation for what is already
thought to be true and not to search for disconfirming
information.
– Hindsight trap.
• The tendency to overestimate the degree to which an
event that has already taken place could have been
predicted.
• Creativity factors. Creativity in decision making involves the
development of unique and novel responses to problems and
opportunities.
• Creativity is especially important in a dynamic environment full of
nonroutine problems
The Practical Approach
Combines the steps of the rational approach with the
conditions in the behavioral approach to create a more
realistic approach.
• Stages in the creative thinking process.
– Preparation.
– Concentration.
– Incubation.
– Illumination
– Verification.
Practical Approach to Decision Making with Behavioral Guidelines

The Personal Approach
 Individual decision making can be viewed as a process of conflict
resolution
 Decisions often based on:
• Values
• Personality- attitudes, beliefs, and intelligence
 With this approach, it is believed:
1. only important life decisions are dealt with
2. Procrastination and rationalization are human
mechanisms for avoiding decision making
3. The fear of making an unsound decision can be a
deterrent to making any decision
4. Decision makers can be ambivalent about
alternatives
Six Steps in Decision Making in general
Figure 7.4
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Six Steps in Decision Making –detailed explanation
Step 1. Recognize Need for a Decision
 Sparked by an event such as environment changes.
 Managers must first realize that a decision must be made.
Step 2. Generate Alternatives
 Managers must develop feasible alternative courses of action.
 If good alternatives are missed, the resulting decision is poor.
 It is hard to develop creative alternatives, so managers need
to look for new ideas.
Step 3. Evaluate Alternatives
 What are the advantages and disadvantages of each
alternative?
 Managers should specify criteria, then evaluate.
Decision Making Steps
Step 3. Evaluate alternatives
Criteria
Legality
Is the alternative legal and will not violate any
domestic and international laws or
government regulations?
Ethicalness
Is the alternative ethical and will not bring
harm stakeholders unnecessarily?
Economic Feasibility Can organization’s performance goals sustain
this alternative?
Practicality
Does the management have the capabilities
and resources required to implement the
alternative?
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General Criteria
for Evaluating
Possible Courses
of Action
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Step 4. Choose Among Alternatives
– Rank the various alternatives and make a decision
– Managers must be sure all the information available is
brought to bear on the problem or issue at hand
Step 5. Implement Chosen Alternative
– Managers must now carry out the alternative.
– Often a decision is made and not implemented.
Step 6. Learn From Feedback
– Managers should consider what went right and wrong with the
decision and learn for the future.
– Without feedback, managers do not learn from experience and
will repeat the same mistake over.
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Feedback Procedure
1. Compare what actually happened to what
was expected to happen as a result of the
decision
2. Explore why any expectations for the
decision were not met
3. Derive guidelines that will help in future
decision making
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How can the decision-making
process be managed?
• Choosing problems to address.
– Ask and answer the following questions:
• Is the problem easy to deal with?
• Might the problem resolve itself?
• Is this my decision to make?
• Is this a solvable problem within the context of the
organization?
Group Decision Making
Groupthink
 Pattern of faulty and biased decision making that occurs in
groups whose members strive for agreement among
themselves at the expense of accurately assessing
information relevant to a decision
 Usually occurs when group members rally around a
central manager’s idea , and become blindly commit to
the idea without considering alternatives.
 The group’s influence tends to convince each member
that the idea must go forward.
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Group Decision Making
This decision making is achieved through commitment,
teams, task forces and others. Advantges include:
• Superior to individual making
• Choices less likely to fall victim to bias
• Able to draw on combined skills of group members
• Improve ability to generate feasible alternatives
• Allows managers to process more information
• Managers affected by decisions agree to cooperate
• Potential Disadvantages
– Can take much longer than individuals to make decisions
– Can be difficult to get two or more managers to agree
because of different interests and preferences
– Can be undermined by biases
Improved Group Decision Making
• Devil’s Advocacy
– Critical analysis of a preferred alternative to ascertain
its strengths and weaknesses before it is
implemented
– One member of the group who acts as the devil’s
advocate by critiquing the way the group identified
alternatives and pointing out problems with the
alternative selection.
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Improved Group Decision Making
• Dialectical Inquiry
– Two different groups are assigned to the problem and each
group is responsible for evaluating alternatives and
selecting one of them
– Top managers then hear each group present their
alternatives and each group can critique the other.
• Promote Diversity
– Increasing the diversity in a group may result in
consideration of a wider set of alternatives.
Devil’s Advocacy and Dialectical Inquiry
Figure 7.7
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Building Group Creativity
• Production Blocking
– Occurs because group members cannot simultaneously
make sense of all the alternatives being generated, think
up additional alternatives, and remember what they
were thinking
Nominal Group Technique
– Provides a more structured way to generate alternatives
in writing and gives each manager more time and
opportunity to come up with potential solutions
– Useful when an issue is controversial and when different
managers might be expected to champion different
courses of action
Decision making Techniques
 Pay off matrix
Decision trees
Marginal or incremental costing
 Cost-benefit analysis
The implications for decision-making practice
 The implications for decision-making practice are that:
(1) the relationship between knowledge and decisionmaking is rarely simple. This means that whenever you
make a decision, you have to worry not simply about
making the right decision in the particular case you are
concerned with, but also in all relevantly similar cases. So
if you grant an exception to a client, saying, for instance,
that the client does not need to list all resources for a
particular form, you have to worry, first, about what has
happened in the past in similar cases and, second, about
what will happen in the future in similar cases.
 (2) good decision-making is critically dependent on how
the decision is framed by the decision-makers in the light
of their situational understanding and therefore (3) the
balance is tilted more towards the personal knowledge of
the decision-maker(s) and less towards any codified
knowledge management system that might be available.
Reasons for decision making failures
• Managers too often copy others’ choices and try to sell
them to subordinates.
• Managers tend to emphasize problems and solutions
rather than successful implementation.
• Managers use participation too infrequently.
It also depends on how decision on who should
participate is made.
– Authority decisions.
• Made by the manager or team leader without involving other
people and by using information that he/she possesses.
– Consultative decisions.
• Made by one individual after seeking input from group
members.
– Group decisions.
• Made by all members of the group.
Ensuring decision making success
• Decision-making method used should fit the problem.
• In choosing among individual, consultative, or group
methods, managers should analyze:
–
–
–
–
Quality requirements.
Availability and location of relevant information.
Commitments required to implement decision.
Available time
• Knowing when to quit — eliminating escalating
commitments
– Escalating commitment reflects the continuation and
renewed efforts on a previously chosen course of action even
when feedback suggests that it is failing.
– Eliminating escalating commitment requires self-discipline to
admit mistakes and change direction.
How do technology, culture, and ethics influence
decision making?
• Increasingly complex problems and opportunities
face decision makers in organizations due to various
workplace trends.
• These workplace trends are changing the who,
when, where, and how of decision making.
• Information technology and decision making.
Artificial intelligence.
– The study of how computers can be programmed to
think like human beings.
– Will allow computers to displace many decision makers.
• Expert systems that support decision making by
following “either-or” rules to make deductions
Information technology and decision making cont’d
• Fuzzy logic and neural networks that reason
inductively.
• Computer support for decision making.
– The Internet.
– Company intranets.
– Decision support software to facilitate virtual teamwork.
• Information technology does not deal with issues
raised by the garbage can model.
Cultural factors and decision making
• Cultural factors and decision making.
– Culture is “the way in which a group of people solves
problems.”
– North American culture stresses decisiveness, speed,
and the individual selection of alternatives.
– Other cultures place less emphasis on individual choice
than on developing implementations that work.
– The most important impact of culture on decision
making concerns which issues are elevated to the status
of problems solvable with the firm.
Ethical issues and decision making.
– Ethical dilemma.
• A situation in which a person must decide whether or not to do
something that, although personally or organizationally beneficial,
may be considered unethical and perhaps illegal.
– Ethical dilemmas are often associated with:
• Risk and uncertainty.
• Nonroutine problem situations.
• Ethical decision-making checklist.
–
–
–
–
–
Is my action legal?
Is it right?
Is it beneficial?
How would I feel if my family found out about this?
How would I feel if my decision were printed in the local
newspaper?
Suggestions for integrating ethical
decision making into the firm.
–
–
–
–
–
–
Develop a code of ethics and follow it.
Establish procedures for reporting violations.
Involve employees in identifying ethical issues.
Monitor ethical performance.
Reward ethical behavior.
Publicize ethical efforts.
• Implications of ethics for decision making.
– Morality is involved in:
•
•
•
•
Choosing problems.
Deciding who should be involved in making decisions.
Estimating the impacts of decision alternatives.
Selecting an alternative for implementation.
– Moral conduct does not arise from after-the-fact humiliation.
Conclusion
Quotation for today:
Goethe once said “Treat people as though they were what they
ought to be and you help them become what they are capable of
being”.
• Thank you for attention!
• Take good care of yourselves, and
have a nice day.
• See you next week