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DECISION MAKING
Module-2/ Unit-4

Module Unit Content

Decision Making: Meaning – Importance –
Techniques of Decision Making – Bounded
2 4 Rationality and Influences on Decision Making

Renju chandran
[Email address]
DECISION MAKING
Introduction
Consciously or sub-consciously, we make a number of decisions (important and routine) in our
daily lives. Sometimes, decisions are taken without analysing their impact on our behaviour. In
the business world, however, decision-making is done in a scientific and rational manner as
decisions affect the efficiency of business operations and interests of a large number of
stakeholders (consumers, financiers, Government etc.) who interact with the business.

Meaning & Definitions

Decision making is the process of choosing actions that are directed towards the resolution. It can
be defined as "the selection from among alternatives of a course of action: it is at the core of
planning". The decision making process can be carried out either by individuals acting alone or by
groups. There are several models and theories which are developed to explain decision making
and how effectively you can make a decision.
The word ‘decides’ means to come to a conclusion or resolution as to what one is expected to do
at some later time. According to Manely H. Jones, “It is a solution selected after examining
several alternatives chosen because the decider foresees that the course of action he selects will
do more than the others to further his goals and will be accompanied by the fewest possible
objectionable consequences”.
When we talk of teachers it can be seen that a teacher is continuously involved in decision making
whether it is regarding school activities or related student centered activities etc. Knowingly or
unknowingly a teacher is always at decision making. Decision making involves thinking and
deciding before doing and so is inherent in every activity. That is the reason decision making is
often called the "essence" of managing.
Following are the definitions given by some famous management thinkers:
"A decision is conscious choice to behave or to think in a particular way in a given set of
circumtances. When a choice has been made, a decision has been made." — J.W. Duncan
Decision-making is "the selection of a course of action from among alternatives; it is the core
of planning". — Koontz and Weihric
Decision-making is an indispensable part of life. Innumerable decisions are taken by human beings
in day-to-day life. In business undertakings, decisions are taken at every step. All managerial
functions viz., planning, organizing, staffing, directing, coordinating and controlling are carried
through decisions. Decision-making is thus the core of managerial activities in an organisation.
 Elements of Decision Making

 In decision making only the best possible alternative is chosen out of many alternatives
available. If there is only one way to do the task, there is no decision making. The best
choice can be made only by evaluation of alternatives.
 Decision making is the application of intellectual abilities to a great extent.
 Decision making is the process followed by deliberation and reasoning. Managers have
to take decisions on various policies and administrative matters.
 Decision making is the end process. It is preceded by detailed discussion and selection
of alternatives.
 Decisions are usually made to achieve some purpose or goal or objectives. Decision is
taken to achieve the objective of organization.
 Decision making requires knowledge, skills, experience and maturity on the part of
decision-maker.
 Decision making is situational. An individual takes decision according to the situation
prevailing.
 Decision making invariably based on rational thinking. Since the human brain with its
ability to learn, remember and relate many complex factors, makes the rationality
possible. It not only involves intellectual abilities but also of intuition, subjective
values and judgment.
 Decision making is a time-consuming activity. Any decision requires careful study
and consideration before finalize any decision.
 Although every decision is usually positive. Sometimes certain decisions may be
negative and may just be a decision not to decide.
 Decision making involves a certain commitment. Every decision is based on the
concept of commitment. Each decision results into the commitment of resources and
reputation of the organization.

Importance of Decision Making

1. Decision making is crucial for organizational effectiveness as it guides the behavior of
organizational members.
2. It encompasses various aspects such as goal setting, strategic planning, organizational
design, and personnel actions.
3. The quality of decisions directly impacts an individual's professional success and
satisfaction.
4. Studying decision making is important from both organizational and individual
perspectives.
5. Understanding the decision-making process is essential for improving effectiveness.
6. Decision making is closely linked with planning and involves determining objectives,
policies, programs, and strategies.
Techniques of Decision-Making
A wide range of techniques are available to enrich the decision-making process. These can be
broadly classified as:
1. Traditional Techniques
2. Modern Techniques

Traditional Techniques: These techniques are divided into two groups:

1. Traditional techniques for making programmed decisions.
2. Traditional techniques for making non-programmed decisions.
Traditional Techniques

1. Habits: This technique involves solving problems based on established routines or habits
without applying scientific methods. It is a simple and quick approach but may not always
lead to optimal solutions.
2. Operating Procedures: These are formal, predefined methods that guide decision-makers
in solving organizational problems in a structured manner. They are more formal than
habits and can be adjusted as needed.
3. Organization Structure: This technique relies on the well-defined structure of authority-
responsibility relationships within an organization. Each person knows their position,
authority, and reporting relationships, which helps in solving programmed problems.

Modern Techniques
Modern techniques use mathematical models to solve business problems. They apply scientific
and rational decision-making process to arrive at the optimum solution. They use quantifiable
variables and establish relationships through mathematical equations and operations research
techniques. They make use of computers for data processing and storage to solve complex
management problems. These techniques can be classified as follows:

1. Break-Even Analysis: This technique helps managers determine the level of output at
which total costs equal total revenue, resulting in zero profit. It aids in assessing the
economic feasibility of a proposal.
2. Inventory Models: These models help firms manage inventory levels to minimize costs
associated with carrying and ordering inventory. They determine the optimal order quantity
to balance these costs.
3. Linear Programming: This technique optimizes resource allocation to maximize output
or minimize costs. It involves setting up a mathematical model to represent the problem
and finding the optimal solution.
4. Simulation: This technique creates artificial models of real-life situations to study the
impact of different variables on a decision. It helps in predicting outcomes under various
conditions.
5. Probability Theory: This technique assesses the likelihood of outcomes based on past
experience and quantifiable data. It helps in making decisions under uncertainty.
 6. Decision Trees: These are diagrammatic representations of future events and their
outcomes, evaluating risks and results. They help in selecting the best course of action
among alternative options.
7. Queuing Theory: This technique describes queuing situations to minimize waiting time
and costs. It is commonly used in service industries like banks and ticket counters.
8. Gaming Theory: This technique helps businesses face competitors by planning counter-
strategies based on competitors' actions. It is a tool for strategic decision-making in
competitive environments.
9. Network Techniques: These techniques, such as PERT and CPM, help in planning and
controlling projects in terms of time and cost. They break down projects into smaller
activities and determine the critical path.
10. Creative Techniques: These include brainstorming and other creative methods to generate
alternative solutions to problems. They help in finding innovative solutions.
11. Participative Techniques: These involve employees and managers in the decision-making
process to improve the quality of decisions and commitment to implementation.
12. Heuristic Techniques: These are based on a trial-and-error approach to decision-making,
helping decision-makers proceed in a step-wise manner to arrive at a rational decision.
13. Decision Support Systems: These systems use computers to access and analyze
information for decision-making. They help managers test different inputs and analyze
their impact on the desired output.
14. Expert Systems: These systems utilize the knowledge of experts to solve problems in
specific areas, providing a structured approach to decision-making.

Types of Decision
Managers in organizations make various types of decisions, each with distinct characteristics and
implications. These decisions can be categorized as follows:
1. Programmed Decisions and Non-Programmed Decisions:
Programmed Decisions: These are routine, repetitive, and well-structured decisions that
do not require extensive deliberation. They are typically made by middle or lower-level
management based on established policies, rules, and procedures. These decisions are
action-oriented, with minimal risk and resource requirements, and can be easily delegated.
Non-Programmed Decisions: These are non-repetitive decisions made by top-level
management as needed, such as decisions about mergers, acquisitions, new facilities, and
legal issues. They are strategic, basic, or unstructured decisions with a long-term horizon
and require careful analysis and significant resources. These decisions are complex, with
no simple solutions, and rely on judgment, intuition, and creativity.

2. Major and Minor Decisions:

Major Decisions: These are highly important decisions that have a long-term impact on
the company, such as replacing manpower with machinery or diversifying products. They
significantly affect other departments and are prioritized.
Minor Decisions: These are less important decisions with short-term impacts, such as
storing raw materials, and are not highly prioritized.
 3. Routine and Strategic Decisions:
Routine Decisions: These are decisions made for the smooth functioning of the
organization, such as day-to-day operational decisions. They are taken frequently, require
little evaluation, and are made by middle or lower-level management.
Strategic Decisions: These are policy decisions made by top and middle management that
require extensive deliberation and significant funds. They have a long-term impact on the
business and include decisions like plant location and new product development.
4. Organizational and Personal Decisions:
Organizational Decisions: These are decisions made by top executives for the effective
functioning of the organization. They directly affect organizational activities, and the
authority to make these decisions can be delegated.
Personal Decisions: These are decisions concerning an employee's personal matters. They
are made by managers in their individual capacity, not as members of the organization, and
do not reflect the organization's functioning.
5. Individual and Group Decisions:
Individual Decisions: These are decisions made by a single employee who is a member
of the organization and has been delegated the authority to make such decisions. They are
different from personal decisions.
Group Decisions: These are decisions made by two or more individuals, often involving
important and strategic matters that may lead to changes in the organization.
Interdepartmental decisions are also made by groups consisting of managers from affected
departments.

Defining decision-making models

Decision-making models are frameworks designed to help you analyze possible solutions to a
problem so that you can make the best possible decision
The main decision-making models
1. Rational decision-making model

“Rational decision-making is a series of steps that helps the decision-maker make decisions
based on data and logic.”
Such data-driven decisions help managers reduce risks and form an analytical process. The rational
decision-making model mainly has six steps:
1. Problem Identification
The first step of the decision-making process is to identify the problem. It is crucial to analyze the
situation and find the core issue. Failing to do so can derail the entire process and waste the
company's time and other resources.
2. Identification of Decision Criteria
Every organization has a set of values and principles they adhere to. While making a decision,
upholding the organization's values and stakeholder interests is vital.
3. Weigh the Decision Criteria
Once all the decision criteria are identified, prioritize them. This will help make the right decision
quicker.
4. Develop Alternatives
Gather all the necessary information regarding the problem, keeping the decision criteria in mind.
There may be more than one possible solution that you can implement. List all the alternative
solutions based on the data.
5. Evaluate the Alternatives
Although you may have found different alternatives, you will not be able to implement all of them.
Moreover, not all solutions can be optimal. Therefore, you should evaluate the listed alternatives
to filter out the best ones.
6. Select the Best Alternative
The most suitable alternative from the filtered choices is selected. This will be the option that best
resonates with the company's values and stakeholders' interests. It will fit the allocated budget and
generate the desired outcome. It is also possible to develop an entirely new solution during the
evaluation stage that proves to be the most beneficial.

Bounded Rationality Decision Making

Bounded rationality is a concept proposed by Herbert A. Simon, an American political scientist,
in his 1957 book "Models of Man." It states that humans base their decisions on their limited
knowledge and cognitive capacity.
Boundary rationality is a theory in psychology and economics that suggests that people don’t
always make perfectly rational decisions. Instead, use simplified decision-making forms. This
means that we often make suboptimal choices.

Bounded rationality is a concept that suggests that while individuals aim to make rational
decisions, their cognitive limitations and the complexity of the environment often prevent them
from achieving perfect rationality. This concept was introduced by Herbert A. Simon.

Key Characteristics
1. Limited Information: Decision-makers often have access to incomplete and sometimes
unreliable information.
2. Cognitive Limitations: Human minds have a limited capacity to process and evaluate
information.
3. Time Constraints: Decisions often need to be made with a limited time frame.

Influences on Decision-Making
1. Satisficing: Instead of optimizing, individuals settle for a solution that is “good enough”
due to cognitive and time constraints
2. Heuristics: People use mental shortcuts or rules of thumb to make decisions more
efficiently, which can sometimes lead to biases
3. Emotional Factors: Emotions can influence decision-making, leading to deviations from
rationality.