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Management Chapter3


Decision Making a choice from two or more alternatives.
The Decision-Making Process(P/D/W/D/A/A/A/E) -Identifying a problem and decision criteria and allocating weights to the criteria. -Developing, analyzing, and selecting an alternative that can resolve the problem. -Implementing the selected alternative. -Evaluating the decision’s effectiveness
PROBLEM A discrepancy between an existing and desired state of affairs.
Characteristics of Problems -A problem becomes a problem when a manager becomes aware of it. -There is pressure to solve the problem. -The manager must have the authority, information, or resources needed to solve the problem.
Decision criteria are factors that are important (relevant) to resolving the problem. -Costs that will be incurred (investments required) -Risks likely to be encountered (chance of failure) -Outcomes that are desired (growth of the firm)
Decision criteria are not of equal importance: Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.
Identifying viable alternatives Alternatives are listed (without evaluation) that can resolve the problem.
Appraising each alternative’s strengths and weaknesses An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3.
Choosing the best alternative The alternative with the highest total weight is chosen.
Putting the chosen alternative into action. Conveying the decision to and gaining commitment from those who will carry out the decision.
The soundness of the decision is judged by its outcomes. -How effectively was the problem resolved by outcomes resulting from the chosen alternatives? -If the problem was not resolved, what went wrong?
Rationality Managers make consistent, value-maximizing choices with specified constraints.
Assumptions are that decision makers -Are perfectly rational, fully objective, and logical. -Have carefully defined the problem and identified all viable alternatives. -Have a clear and specific goal -Will select the alternative that maximizes outcomes in the organization’s interests rath
Bounded Rationality Managers make decisions rationally, but are limited (bounded) by their ability to process information. Assumptions are that decision makers: Will not seek out or have knowledge of all alternatives Will satisfice—choose the first alternative encountered
The Role of Intuition Intuitive decision making Making decisions on the basis of experience, feelings, and accumulated judgement.
Structured Problems Involve goals that clear. Are familiar (have occurred before). Are easily and completely defined—information about the problem is available and complete
Programmed Decision A repetitive decision that can be handled by a routine approach.
Types of Programmed Decisions A Policy A general guideline for making a decision about a structured problem.
Types of Programmed Decisions A Procedure A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.
Types of Programmed Decisions A Rule An explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure.
Unstructured Problems -Problems that are new or unusual and for which information is ambiguous or incomplete. -Problems that will require custom-made solutions.
Nonprogrammed Decisions -Decisions that are unique and nonrecurring. -Decisions that generate unique responses.
Certainty A ideal situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.
Risk A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.
Uncertainty Limited or information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”.
Maximax the optimistic manager’s choice to maximize the maximum payoff
Maximin the pessimistic manager’s choice to maximize the minimum payoff
Minimax: the manager’s choice to minimize his maximum regret.
Dimensions of Decision-Making Styles -Ways of thinking *Rational, orderly, and consistent *Intuitive, creative, and unique -Tolerance for ambiguity *Low tolerance: require consistency and order *High tolerance: multiple thoughts simultaneously
Types of Decision Makers -Directive *Use minimal information and consider few alternatives. -Analytic *Make careful decisions in unique situations. -Conceptual *Maintain a broad outlook and consider many alternatives in making long-term decisions. -Behavioral *Avoid confli
Decision-Making Biases and Errors Heuristics Using “rules of thumb” to simplify decision making.
Decision-Making Biases and Errors Overconfidence Bias Holding unrealistically positive views of one’s self and one’s performance.
Decision-Making Biases and Errors Immediate Gratification Bias Choosing alternatives that offer immediate rewards and that to avoid immediate costs
Decision-Making Biases and Errors Anchoring Effect Fixating on initial information and ignoring subsequent information.
Decision-Making Biases and Errors Selective Perception Selecting organizing and interpreting events based on the decision maker’s biased perceptions.
Decision-Making Biases and Errors Confirmation Bias Seeking out information that reaffirms past choices and discounting contradictory information.
Decision-Making Biases and Errors Framing Bias Selecting and highlighting certain aspects of a situation while ignoring other aspects.
Decision-Making Biases and Errors Availability Bias Losing decision-making objectivity by focusing on the most recent events.
Decision-Making Biases and Errors Representation Bias Drawing analogies and seeing identical situations when none exist.
Randomness Bias Creating unfounded meaning out of random events.
Sunk Costs Errors Forgetting that current actions cannot influence past events and relate only to future consequences.
Self-Serving Bias Taking quick credit for successes and blaming outside factors for failures.
Hindsight Bias Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact
Guidelines for making effective decisions: -Know when it’s time to call it quits. -Practice the five “whys”. -Be an effective decision maker.
Habits of highly reliable organizations (HROs) -Are not tricked by their success. -Defer to the experts on the front line. -Let unexpected circumstances provide the solution. -Embrace complexity. -Anticipate, but also anticipate their limits.
Characteristics of an Effective Decision-Making Process -It focuses on what is important. -It is logical and consistent. -It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking.
Characteristics of an Effective Decision-Making Process -It requires only as much information and analysis as is necessary to resolve a particular dilemma. -It encourages and guides the gathering of relevant information and informed opinion. -It is straightforward, reliable, easy to use, and flexible.
Error and bias... Overconfidence b,Immediate gratification b, Anchoring effect,Selective perception b, Confirmation b,Framing b,Availability b, Representative b, Randomness b,Sunk cost error, self serving b,hindsight b.
How to avoid error and bias? -being aware of them and try not to exhibit them -pay attention to how they make decision -try to identify the heuristics they typically use
Created by: Strango
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