THE DECISION-MAKING PROCESS
A decision is a choice made from two or more alternatives. The decision- making process is a set of eight steps that include identifying a problem, selecting an alternative, and evaluating the decision’s effectiveness.
Step 1: Identify a Problem. A problem is a discrepancy between an existing and a desired condition. In order to identify a problem, you, as a manager, should recognize and understand the three characteristics of problems:
Step 2: Identify Decision Criteria. Decision criteria are criteria that define what is relevant in a decision.
Step 3: Allocate Weights to the Criteria. The criteria identified in Step 2 of the decision-making process do not have equal importance, so the decision-maker must assign a weight to each of the items in order to give each item accurate priority in the decision.
Step 4: Develop Alternatives. The decision-maker must now identify viable alternatives that could resolve the problem.
Step 5: Analyze Alternatives. Each of the alternatives must now be critically analyzed by evaluating it against the criteria established in Steps 2 and 3.
Step 6: Select an Alternative. This step to select the best alternative from among those identified and assessed is critical. If criteria weights have been used, the decision-maker simply selects the alternative that received the highest score in Step 5.
Step 7: Implement the Alternative. The selected alternative must be implemented by effectively communicating the decision to the individuals who will be affected by it and winning their commitment to the decision.
Step 8: Evaluate Decision Effectiveness. This last step in the decision- making process assesses the result of the decision to determine whether or not the problem has been resolved.
DECISION MAKING APPROACHES
A. Rationality. Managerial decision-making is assumed to be rational—that is, making choices that are consistent and value-maximizing within specified constraints. If a manager could be perfectly rational, he or she would be completely logical and objective.
1. Rational decision-making assumes that the manager is making decisions in the best interests of the organization, not in his or her own interests.
2. The assumptions of rationality can be met if the manager is faced with a simple problem in which (1) goals are clear and alternatives limited, (2) time pressures are minimal and the cost of finding and evaluating alternatives is low, (3) the organizational culture supports innovation and risk taking, and (4) outcomes are concrete and measurable.
B. Bounded Rationality. In spite of these limits to perfect rationality,managers are expected to be rational as they make decisions. Because the perfectly rational model of decision-making isn’t realistic, managers tend to operate under assumptions of bounded rationality, which is decision-making behavior that is rational, but limited (bounded) by an individual’s ability to process information.
1. Under bounded rationality, managers make satisficing decisions, in which they accept solutions that are “good enough.”
2. Managers’ decision-making may be strongly influenced by the organization’s culture, internal politics, power considerations, and by a phenomenon called escalation of commitment—an increased commitment to a previous decision despite evidence that it may have been wrong.
C. Intuition. Managers also regularly use their intuition. Intuitive decision-making is a subconscious process of making decisions on the basis of experience and accumulated judgment.
1. Making decisions on the basis of gut feeling doesn’t necessarily happen independently of rational analysis; the two complement each other.
2. Although intuitive decision-making will not replace the rational decision-making process, it does play an important role in managerial decision-making.
TYPES OF DECISIONS AND DECISION-MAKING CONDITIONS
A. Types of Decisions
1. Structured problems are straightforward, familiar, and easily defined. In dealing with structured problems, a manager may use a programmed decision, which is a repetitive decision that can be handled by a routine approach. Managers rely on three types of programmed decisions:
a. A procedure is a series of interrelated sequential steps that can be used to respond to a structured problem.
b. A rule is an explicit statement that tells managers what they can or cannot do.
c. A policy is a guideline for making decisions.
2. Unstructured problems are problems that are new or unusual and for which information is ambiguous or incomplete. These problems are best handled by a nonprogrammed decision that is a unique decision that requires a custom-made solution.
B. Decision-Making Conditions
1. Certainty is a situation in which a manager can make accurate decisions because all outcomes are known. Few managerial decisions are made under the condition of certainty.
2.Uncertainty is a situation in which the decision-maker is not certain and cannot even make reasonable probability estimates concerning outcomes of alternatives.
3) Risk is a situation in which the manager is able to estimate the likelihood of outcomes that result from the choice of particular alternatives.
DECISION - MAKING BIASES AND ERRORS
Managers use different styles and “rules of thumb” (heuristics) to simplify their decision-making.
1. Overconfidence bias occurs when decision-makers tend to think that they know more than they do or hold unrealistically positive views of themselves and their performance.
2. Immediate gratification bias describes decision-makers who tend to want immediate rewards and avoid immediate costs.
3. The anchoring effect describes when decision-makers fixate on initial information as a starting point and then, once set, fail to adequately adjust for subsequent information.
4. Selective perception bias occurs when decision-makers selectively organize and interpret events based on their biased perceptions.
5. Confirmation bias occurs when decision-makers seek out information that reaffirms their past choices and discount information that contradicts their past judgments.
6. Framing bias occurs when decision-makers select and highlight certain aspects of a situation while excluding others.
7. Availability bias is seen when decision-makers tend to remember events that are the most recent and vivid in their memory.
8. Decision-makers who show representation bias assess the likelihood of an event based on how closely it resembles other events or sets of events.
9. Randomness bias describes the effect when decision-makers try to create meaning out of random events.
10. The sunk costs error is when a decision-maker forgets that current choices cannot correct the past. Instead of ignoring sunk costs, the decision-maker cannot forget them. In assessing choices, the individual fixates on past expenditures rather than on future consequences.
11. Self-serving bias is exhibited by decision-makers who are quick to take credit for their successes and blame failure on outside factors.
12. Hindsight bias is the tendency for decision-makers to falsely believe, once the outcome is known, that they would have accurately predicted the outcome