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Decision-Making: The Essence of the Manager’s Job

Chapter�6

ninth edition

STEPHEN P. ROBBINS

PowerPoint Presentation by Charlie Cook�The University of West Alabama

MARY COULTER

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L E A R N I N G O U T L I N E �Follow this Learning Outline as you read and study this chapter.

The Decision-Making Process

Define decision and decision-making process.
Describe the eight steps in the decision-making process.

The Manager as Decision Maker

Discuss the assumptions of rational decision making.
Describe the concepts of bounded rationality, satisficing, and escalation of commitment.
Explain intuitive decision making.
Contrast programmed and nonprogrammed decisions.

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L E A R N I N G O U T L I N E (cont’d) �Follow this Learning Outline as you read and study this chapter.

The Manager as Decision Maker (cont’d)

Contrast the three decision-making conditions.
Explain maximax, maximin, and minimax decision choice approaches.
Describe the four decision making styles.
Discuss the twelve decision-making biases managers may exhibit.
Describe how manager can deal with the negative effects of decision errors and biases.
Explain the managerial decision-making model.

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L E A R N I N G O U T L I N E (cont’d) �Follow this Learning Outline as you read and study this chapter.

Decision Making for Today’s World

Explain how managers can make effective decisions in today’s world.
List six characteristics of an effective decision-making process.
Describe the five habits of highly reliable organizations.

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Decision Making

Decision

Making a choice from two or more alternatives.

The Decision-Making Process

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.

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Exhibit 6–1�The Decision-Making Process

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Step 1: Identifying the Problem

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.

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Step 2: Identifying Decision Criteria

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)

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Step 3: Allocating Weights to the Criteria

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.

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Exhibit 6–2 Criteria and Weights for Computer Replacement Decision

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Criterion Weight

Memory and Storage 10

Battery life 8

Carrying Weight 6

Warranty 4

Display Quality 3

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Step 4: Developing Alternatives

Identifying viable alternatives

Alternatives are listed (without evaluation) that can resolve the problem.

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Step 5: Analyzing Alternatives

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.

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Exhibit 6–3 Assessed Values of Laptop Computers Using Decision Criteria

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Step 6: Selecting an Alternative

Choosing the best alternative

The alternative with the highest total weight is chosen.

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Step 7: Implementing the Alternative

Putting the chosen alternative into action.

Conveying the decision to and gaining commitment from those who will carry out the decision.

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Exhibit 6–4 Evaluation of Laptop Alternatives Against Weighted Criteria

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Step 8: Evaluating the Decision’s Effectiveness

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?

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Exhibit 6–5 Decisions in the Management Functions

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Making Decisions

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 rather than in their personal interests.

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Exhibit 6–6 Assumptions of Rationality

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Making Decisions (cont’d)

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 that satisfactorily solves the problem—rather than maximize the outcome of their decision by considering all alternatives and choosing the best.

Influence on decision making

Escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong.

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The Role of Intuition

Intuitive decision making

Making decisions on the basis of experience, feelings, and accumulated judgment.

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Exhibit 6–7 What is Intuition?

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Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive Decision Making,” Academy of Management Executive, October 1999, pp. 91–99.

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Types of Problems and Decisions

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.

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Types of Programmed Decisions

Policy

A general guideline for making a decision about a structured problem.

Procedure

A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.

Rule

An explicit statement that limits what a manager or employee can or cannot do.

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Policy, Procedure, and Rule Examples

Policy

Accept all customer-returned merchandise.

Procedure

Follow all steps for completing merchandise return documentation.

Rules

Managers must approve all refunds over $50.00.
No credit purchases are refunded for cash.

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Problems and Decisions (cont’d)

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.

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Exhibit 6–8 Programmed versus Nonprogrammed Decisions

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Decision-Making Conditions

Certainty

A 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.

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Exhibit 6–9 Expected Value for Revenues from the Addition of One Ski Lift

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Expected� Expected × Probability = Value of Each�Event Revenues Alternative

Heavy snowfall $850,000 0.3 = $255,000

Normal snowfall 725,000 0.5 = 362,500

Light snowfall 350,000 0.2 = 70,000� $687,500

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Decision-Making Conditions

Uncertainty

Limited 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 maximum regret.

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Exhibit 6–10 Payoff Matrix

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Exhibit 6–11 Regret Matrix

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Decision-Making Styles

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

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Decision-Making Styles (cont’d)

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 decisions.

Behavioral

Avoid conflict by working well with others and being receptive to suggestions.

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Exhibit 6–12 Decision-Making Matrix

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Exhibit 6–13 Common Decision-Making Errors and Biases

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Decision-Making Biases and Errors

Heuristics

Using “rules of thumb” to simplify decision making.

Overconfidence Bias

Holding unrealistically positive views of one’s self and one’s performance.

Immediate Gratification Bias

Choosing alternatives that offer immediate rewards and that to avoid immediate costs.

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Decision-Making Biases and Errors (cont’d)

Anchoring Effect

Fixating on initial information and ignoring subsequent information.

Selective Perception Bias

Selecting organizing and interpreting events based on the decision maker’s biased perceptions.

Confirmation Bias

Seeking out information that reaffirms past choices and discounting contradictory information.

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Decision-Making Biases and Errors (cont’d)

Framing Bias

Selecting and highlighting certain aspects of a situation while ignoring other aspects.

Availability Bias

Losing decision-making objectivity by focusing on the most recent events.

Representation Bias

Drawing analogies and seeing identical situations when none exist.

Randomness Bias

Creating unfounded meaning out of random events.

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Decision-Making Biases and Errors (cont’d)

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).

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Exhibit 6–14 Overview of Managerial Decision Making

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Decision Making for Today’s World

Guidelines for making effective decisions:

Understand cultural differences.
Know when it’s time to call it quits.
Use an effective decision-making process.

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.

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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.
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.

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Terms to Know

decision
decision-making process
problem
decision criteria
rational decision making
bounded rationality
satisficing
escalation of commitment
intuitive decision making
structured problems
programmed decision
procedure
rule

policy
unstructured problems
nonprogrammed decisions
certainty
risk
uncertainty
directive style
analytic style
conceptual style
behavioral style
heuristics
business performance management (BPM) software

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