DECISION MAKING. LECTURE 4
What is Decision Making?
Decision making refers to the processes involved in defining problems, gathering information, generating alternatives, and choosing a course of action (Hellriegel et al., 2002).The process of analyzing alternatives and choosing from among them
What is Decision Making?
Decision is a choice made among available alternatives.
Judgement is the cognitive or thinking aspects of the decision-making process.
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Decision-Making Conditions
The conditions under which individuals make decisions are influenced by developments and events that they can’t control but that may in the future influence the results of their decisions.
- The conditions under which decisions are made can be classified as: certainty, risk, uncertainty.
- Risk
- Certainty Uncertainty
(Decision-Making Conditions)Certainty
Certainty
The condition under which individuals are fully informed about a problem, alternative solutions are known, and the results of each solution are totally predictable.
Both the problem and alternative solutions are totally known and well defined. Once an individual has identified alternative solutions and their expected results, making the decision is relatively easy.
The decision maker simply chooses the solution with the best anticipated results.
(Decision-Making Conditions)Risk
Risk
Risk refers to the condition under which individuals can define a problem, specify the probability of certain events, identify alternative solutions, and state the probability of each solution leading to the desired result.
Under risk, managers have historical data from past personal experiences or secondary information that enables them to assign probabilitiesto different alternatives.
(Decision-Making Conditions)Uncertainty
Uncertainty
Uncertainty is the condition under which an individual doesn’t have the necessary information to assign probabilities to the outcomes of alternative solutions.
Here the individual may not even be able to define the problem, much less identify alternative solutions and possible outcomes.
Uncertainty often suggest that the problem and the alternative solutions are both ambiguous and highly unusual.
Types of Decisions
Managers in all kinds of organizations face different types of problems and decisions as they do their jobs. Thus depending on the nature of the problem, a manager can use of two different types of decisions:
1.Structured problems and programmed decisions
2.Unstructured problems and unprogrammed decisions
(Types of Decisions)Structured Problems and Programmed Decisions
1.Structured problems and programmed decisions
Some problems are straightforward. The decision maker’s goal is clear, the problem is familiar, and information about the problem is easily defined and complete.
Problems are structured in the sense that they are straightforward, familiar, and easily defined.
Programmed decisions are repetitive decisions that can be handled by a routine approach.
Programmed decisions are repetitive decisions that can be handled by a routine approach.
Types of programmed decisions:
a.Procedure: Series of sequential steps a manager uses to respond to a structured problem.
b.Rule: An explicit statement that tells a manager what can or cannot be done.
c.Policy: A guideline for making a decision.
Unstructured problems: These are problems that are new or unusual and for which information is ambiguous or incomplete.
When problems are unstructured, managers must rely on non-programmed decision making in order to develop unique solutions. Thus the non-programmed decisions are unique and non-recurring and involve custom-made solutions.
The Decision Making Process
- Identifying a problem
- Developing alternatives
- Analyzing alternatives
- Selecting an alternative
- Implementing the alternative
- Evaluating decision effectiveness
(The Decision Making Process)
Step 1Identifying a Problem
Problem identification could be subjective; what one manager sees as a problem may not be considered a problem by another manager.
In addition, a manager who resolves the wrong problem perfectly is likely to perform just as poorly as the manager who doesn’t even recognize a problem and does nothing.
Effectively identifying problems is very important, but not easy.
Goals must be set after the problem has been carefully identified and diagnosed.
(The Decision Making Process)Step 2:: Developing Alternatives
Developing Alternatives
The decision maker lists viable alternatives that could resolve the problem.
This step involves seeking additional information, thinking creatively, consulting experts, undertaking research, etc.
(The Decision Making Process)Step 3:
Analyzing Alternatives
The alternative solutions are compared and evaluated.
This step emphasizes expected results and determining the relative cost of each alternative.
(The Decision Making Process)Step 4:: Selecting an Alternative
Selecting an Alternative
Decision making is sometimes viewed as having made a final choice. Selecting a solution, as suggested here, is only one step in the rational decision-making process.
Although choosing among alternative solutions might appear to be straightforward, it may prove to be difficult when the problem is complex and ambiguous and involves high degrees of risk or uncertainty.
(The Decision Making Process)Step 5
Implementing the Alternative
A well-chosen solution isn’t always successful. A technically correct decision has to be accepted and supported by those responsible for implementing it if the decision is to be acted on effectively.
If the selected solution can’t be implemented for some reason, another one should be considered.
(The Decision Making Process)Step 6:
Evaluating Decision Effectiveness
The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether the problem was resolved.
Was the problem well defined?
Were errors made when evaluating alternatives?
Was the right alternative selected but poorly implemented?
The answers may lead to a revision of the entire process.
Making Decisions: Rationality & Bounded Rationality
Rational decision making: The assumption that managers will make logical and consistent choices to maximize value. >>>
Bounded rationality: Managers make decisions rationally but are limited by their ability to process information. Managers eventually satisfice, rather than maximize.
Escalation of commitment: Increased commitment to a previous decision despite evidence that it may have been wrong.
Making Decisions: Rationality & Bounded Rationality
Assumptions of Rationality
- A rational decision maker would be fully objective and logical.
- The problem faced would be clear and unambiguous.
- The goals would be specific and all possible alternatives and consequences known.
- Decisions are made in the best interest of the organization.