PART II: Planning

4
Chapter 4

Foundations of Decision Making

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 Learning Outcomes
After reading this chapter, I will be able to:
1. Describe the steps in the decision-making process.
2. Identify the assumptions of the rational decision-
making model.
3. Explain the limits to rationality.
4. Define certainty, risk, and uncertainty as they relate
to decision making.
5. Describe the actions of the bounded-rational
decision maker.

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 Learning Outcomes (cont’d)
After reading this chapter, I will be able to:
6. Identify the two types of decision problems and the
two types of decisions that are used to solve them.
7. Define heuristics and explain how they affect the
decision-making process.
8. Identify four decision-making styles.
9. Describe the advantages and disadvantages of
group decisions.
10. Explain three techniques for improving group
decision making.

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 Decision-making
• Decision-making process
 A set of eight steps that includes identifying a
problem, selecting a solution, and evaluating the
effectiveness of the solution
• Problem
 A discrepancy between an existing and a desired
state of affairs
• Decision criteria
 Factors that are relevant in a decision

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 Examples of Planning-Function Decisions

 What are the organization’s long-term objectives?

 What strategies will best achieve those objectives?
 What should the organization’s short-term objectives be?
 What is the most efficient means of completing tasks?
 What might the competition be considering?
 What budgets are needed to complete department
tasks?
 How difficult should individual goals be?

Exhibit 4.1

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 The Decision-Making Process

Exhibit 4.2

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 Criteria and Weight in Car-Buying Decision
(Scale of 1 to 10)
CRITERION WEIGHT
Price 10
Interior comfort 8
Durability 5
Repair record 5
Performance 3
Handling 1

Exhibit 4.3

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 Assessment of Car Alternatives

Exhibit 4.4

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 Weighting of Vehicles
(Assessment Criteria X Criteria Weight)

Exhibit 4.5

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 Decision-making (cont’d)
• Decision implementation
 Putting a decision into action; includes conveying the
decision to the persons who will be affected by it and
getting their commitment to it.

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 Making Decisions: The Rational Model
• Certainty
 The implication that the outcome of every possible
alternative is known.
• Uncertainty
 A condition under which there is not full knowledge of
the problem and reasonable probabilities for
alternative outcomes cannot be determined.
• Risk
 The probability that a particular outcome will result
from a given decision.

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 Assumptions of Rationality

Exhibit 4.6

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 What Is Creative Potential?
• Expertise
 Understanding, abilities, knowledge, proficiencies,
necessary in the field of creative endeavor.
• Creative-thinking skills
 The personality characteristics associated with
creativity, the ability to use analogies, as well as the
talent to see the familiar in a different light.
• Intrinsic task motivation
 The desire to work on something because it’s
interesting, involving, exciting, satisfying, or
personally challenging.
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 Three Elements
of Creativity

Creativity
The ability to produce
novel and useful ideas

Source: T. M. Amabile. “Motivating Creativity in Organizations,” Califormia Management Review (Fall 1997), p. 43. Exhibit 4.7
Copyright © 1997, by The Regents of the University of California. Reprinted by permission of the Regents.
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 Making Decisions: The Rational Model
• Rational
 Describes choices that are consistent and value-
maximizing within specified constraints.
• Bounded rationality (Herbert Simon)
 Behavior that is rational within the parameters of a
simplified model that captures the essential features
of a problem.
• Satisfice
 Making a “good enough” decision: choosing the first-
identified alternative that satisfactorily and sufficiently
solves the problem.
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 Common Decision-making Errors
• Heuristics: Using judgmental shortcuts
 Availability heuristic
 The tendency to base judgments on information that is
readily available.
 Representative heuristic
 The tendency to base judgments of probability on things
(objects or events) that are familiar
 Escalation of commitment
 An increased commitment to a previous decision
despite negative information about the decision’s
present outcomes.

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 How Do Problems Differ?
• Well-structured problems
 Straightforward, familiar, easily defined problems

• Ill-structured problems
 New problems in which information is ambiguous or incomplete

• Programmed decision
 A repetitive decision that can be handled by a routine approach

• Nonprogrammed decisions
 Decisions that must be custom-made to solve unique and
nonrecurring problems

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 Programmed Decision-Making Aids
• Policy
 A general guide that establishes parameters for
making decisions about recurring problems.
• Procedure
 A series of interrelated sequential steps that can be
used to respond to a well-structured problem (policy
implementation).
• Rule
 An explicit statement that tells managers what they
ought or ought not to do (limits on procedural
actions).
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 Types of Problems, Types of Decisions,
and Level in the Organization

Exhibit 4.8

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 Technology And Decision Making
• Expert systems
 Software that acts like an expert in analyzing and
solving ill-structured problems
 Use specialized knowledge about a particular problem
area rather than general knowledge
 Use qualitative reasoning rather than numerical
calculations
 Perform at a level of competence higher than that of
nonexpert humans.
• Neural networks
 Software that is designed to imitate the structure of
brain cells and connections among them
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 Decision Making: Styles
• Directive style
 Characterizes the low tolerance for ambiguity and a
rational way of thinking of individuals who are logical
and efficient and typically make fast decisions that
focus on the short term.
• Analytic style
 Characterizes the high tolerance for ambiguity
combined with a rational way of thinking of
individuals who prefer to have complete information
before making a decision.

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 Decision Making: Styles (cont’d)
• Conceptual style
 Individuals who tend to be very broad in outlook, to
look at many alternatives, and to focus on the long
run and often look for creative solutions.
• Behavioral style
 Individuals who think intuitively but have a low
tolerance for uncertainty; they work well with others,
are open to suggestions, and are concerned about
the individuals who work for them.

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 Decision-Making Styles

Exhibit 4.9

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 Group Decision Making
• Advantages • Disadvantages
 Make more accurate  Is more time-consuming
decisions and less efficient
 Provides more complete  Minority domination can
information influence decision process
 Offers a greater diversity of  Increased pressures to
experiences and conform to the group’s
perspectives mindset (groupthink)
 Generates more alternatives  Ambiguous responsibility for
 Increases acceptance of a the outcomes of decisions
solution
 Increases the legitimacy of
a decision.

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 When Are Groups Most Effective?
• Creativity
 Groups tend to be more creative than individuals.
• Acceptance of the final solution
 Groups help increase the acceptance of decisions.
• Effectiveness of group decision making
 Groups of five to seven members are optimal for
decision process speed and quality.

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 Improving Group Decision Making
• Brainstorming
 An idea-generating process that encourages
alternatives while withholding criticism.
• Nominal group technique
 A decision-making technique in which group members
are physically present but operate independently.
• Electronic meeting
 A type of nominal group technique in which
participants are linked by computer.

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