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Decision Making Chapter 2, Management by Stephen P. Robbins Atiyeh Bayat & AmirHossein Ahmadi Shamsabadi Table of Content ● ● ● ● ● ● Decision Making Process Approaches to Decision Making Types of Decisions and Decision-Making Conditions Decision Making Biases and Errors Common Decision-Making Biases Overview of Managerial Decision Making Skill Outcome ● ● ● ● ● How to Describe 8 Steps of Decision Making Explain the 4 ways Managers Make Decision Classify Decisions Describe How Bias Affects Decisions Identify Effective Decisions What we are going to learn ● ● ● ● Know, understand, and use the decision-making process Know when and how to use rational or intuitive decision making or both Know your decision-making style. Know, recognize, and understand the biases and errors that may influence your decision making. Decision Making Process Decision Making Process ● ● ● ● ● ● ● ● Step 1: Identify a Problem Step 2: Identify Decision Criteria Step 3: Allocate Weights to the Criteria Step 4: Develop Alternatives Step 5: Analyze Alternatives Step 6: Select an Alternative Step 7: Implement the Alternative Step 8: Evaluate Decision Effectiveness Decision Making Process Approaches to Decision Making Approaches to decision making ● ● ● ● Rationality Bounded Rationality Intuition Evidence-Based Management Rationality Rational decision making; that is, they’ll make logical and consistent choices to maximize value. Bounded Rationality They understand that “good” decision makers are supposed to do certain things and exhibit good decision-making behaviors as they identify problems, consider alternatives, gather information, and act decisively but prudently. keep in mind that their decision making is also likely in uenced 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.1 Intuition What is intuitive decision making? It’s making decisions on the basis of experience, feelings, and accumulated judgment. Researchers studying managers’ use of intuitive decision making have identied ve dierent aspects of intuition, which are described in Exhibit 2-6.1. One survey found that almost half of the executives surveyed “used intuition more often than formal analysis to run their companies. Intuitive decision making can complement both rational and bounded rational decision making. First of all, a manager who has had experience with a similar type of problem or situation often can act quickly with what appears to be limited information because of that past experience. Evidence-Based Management evidence-based management (EBMgt) The systematic use of the best available evidence to improve management practice. EBMgt is quite relevant to managerial decision making. The four essential elements of EBMgt are (1) the decision maker’s expertise and judgment; (2) external evidence that’s been evaluated by the decision maker; (3) opinions, preferences, and values of those who have a stake in the decision; and (4) relevant organizational (internal) factors such as context, circumstances, and organizational members. The strength or inuence of each of these elements on a decision will vary with each decision. 4 Managerial Function Types of Decisions and Decision-making Conditions Types of Decisions Types of Decisions ● STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS ● UNSTRUCTURED PROBLEMS AND NONPROGRAMMED DECISIONS Structured Problems and Programmed Decisions Structured problems Straightforward, familiar, and easily defined problems. Programmed decision A repetitive decision that can be handled by a routine approach. This is what we call a programmed decision, a repetitive decision that can be handled by a routine approach Structured Problems and Programmed Decisions ● A Procedure ● A Rule ● A Policy Unstructured Problems and Nonprogrammed Decisions Unstructured problems Problems that are new or unusual and for which information is ambiguous or incomplete Nonprogrammed decisions are unique and nonrecurring and involve custommade solutions Programmed Vs Non Programmed Decision-Making Conditions Decision-Making Conditions ● Certainty ● Risk ● Uncertainty Certainty A situation in which a manager can make accurate decisions because all outcomes are known Risk A situation in which the decision maker is able to estimate the likelihood of certain outcomes Uncertainty A situation in which a decision maker has neither certainty nor reasonable probability estimates available Section 2 DECISION-MAKING Biases And Errors Rules of thumb Or Heuristics can be useful because they help make sense of complex, uncertain, and ambiguous information Heuristics A heuristic is a rule-of-thumb, or a guide toward what behavior is appropriate for a certain situation. Heuristics are also known as “mental shortcuts” (Kahneman, 2011). Such shortcuts can aid us when we face time pressure to decide, or when conditions are complex and our attention is divideed. Tversky and Kahneman’s 1974 work, Judgment under Uncertainty: Heuristics and Biases, introduced three key characteristics: representativeness, anchoring and adjustment, and availability. Common Decision-Making Biases Common Decision-Making Biases Sunk costs errors Overconfident 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. Anchoring effect : fixating on initial information and ignoring subsequence 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. Farming 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. Sunk cost errors : forgetting that current actions cannot influence past events and relate 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) research shows that training can successfully engage employees to recognize particular decision-making biases and reduce subsequent biased decision making with a long-lasting effect. managers might want to ask trusted individuals to help them identify weaknesses in their decision-making style and try to improve on those weaknesses. When managers reduced the effects of bias in their decision making, their organizations’ performance returns were 7 percent higher. Overview of Managerial Decision Making Decision making approach Overview of Managerial Decision Making ● ● ● Rationality Bounded rationality Intuition Types of problems and decisions ● ● Well structured - programmed Unstructured - nonprogrammed Decision making conditions ● ● ● Certainty Risk Uncertainty Decision maker’s style ● ● Linear thinking style Nonlinear thinking style Nondecision Decisions!!!! Nondecision Decisions!!!! you can’t avoid tough decisions by ignoring them The decision to do nothing is still a decision. It’s a decision to maintain the status quo You can maintain the status quo by following either of two paths—one active and the other passive How do you counter the nondecision decision? ➔ The first step is awareness. You can’t opt out of decisions by ignoring them ➔ You also need to occasionally justify why you shouldn’t pursue another path that’s different from the one you’re currently following ➔ consider the costs of inaction Effective Decision Making in Today’s World Effective Decision Making in Today’s World Making good business decisions in today’s rapid-paced and messy world isn’t easy. Things happen too fast. Customers come and go in the click of a mouse or the swipe of a screen. Market landscapes can shift dramatically overnight along several dimensions. Competitors can enter a market and exit it just as quickly as they entered Most managers make one decision after another; and as if that weren’t challenging enough, more is at stake than ever before. Bad decisions can cost millions. Guidelines for Effective Decision Making ➔ Understand cultural differences. ➔ Create standards for good decision making. ➔ Know when it’s time to call it quits. ➔ Develop your ability to think clearly ➔ Use an effective decision-making process. Use an effective decision-making process. ● it focuses on what’s important ● it’s 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’s straightforward, reliable, easy to use, and flexible Design Thinking and Decision Making Design thinking says that managers should look not only at the rational aspects, but also at the emotional elements. A traditional manager (educated in a business school, of course) would take the options that have been presented and analyze them based on deductive reasoning and then select the one with the highest net present value. However, using design thinking, a manager would say, ‘What is something completely new that would be lovely if it existed but doesn’t now? Design thinking means opening up your perspective and gaining insights by using observation and inquiry skills and not relying simply on rational analysis. Big Data and Decision Making ● Amazon.com, Earth’s biggest online retailer, earns billions of dollars of revenue each year from its “personalization technologies” such as product recommendations and computer-generated e-mails.50 ● At AutoZone, decision makers are using new software that gleans information from a variety of databases and allows its 5,000-plus local stores to target deals and, they hope, reduce the chance that customers will walk away without making a purchase. ● Pittsburgh Health Data Alliance is working toward developing comprehensive patient profiles using social media, wearable sensors, and genetic information with the goal of offering tailored health care packages what is big data? It’s the vast amount of quantifiable information that can be analyzed by highly sophisticated data processing. One IT expert described big data with “3V’s: high volume, high velocity, and/or high variety information assets.” Thanks