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4Chapter
Foundations of Decision Making
Copyright ©2013 Pearson Education 4-1
Learning Objectives
• Describe the decision making process.• Explain the three approaches managers can
use to make decisions.• Describe the types of decisions and decision-
making conditions managers face.• Discuss group decision making.• Discuss contemporary issues in managerial
decision making.
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How Do Managers Make Decisions?
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What Defines a Decision Problem?
Problem – A discrepancy between an existing and a desired state of affairs.
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Factors in the Decision-Making Process
Relevant decision criteria:• Price• Model (two-or four-door)• Size • Manufacturer • Optional equipment• Fuel economy, or• Repair records.
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Weighing Criteria and Analyzing AlternativesTo weigh criteria:
1. Give the most important criterion a weight of 10.
2. Compare remaining criteria against that standard to indicate their relative degrees of importance.
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Weighing Criteria and Analyzing Alternatives (cont.)
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Weighing Criteria and Analyzing Alternatives (cont.)
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Determining the Best Choice
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Implementing Decisions
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The Last Step in the Decision Process
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Common Errors
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Three Approaches
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The Rational Model
• Rational decision making – Choices that are consistent and maximize value within specified constraints
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IT can enhance an org’s decision-making capabilities.
Bounded Rationality
• Bounded rationality – Decisions that are rational within the limits of a manager’s ability to process information
• Satisfice – Accepting solutions that are “good enough”
• Escalation of commitment – An increased commitment to a previous decision despite evidence that it may have been a poor one
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Intuition in Decision Making
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Types of Problems
• Structured problem – A straightforward, familiar, and easily defined problem
• Unstructured problem – A problem that is new or unusual for which information is ambiguous or incomplete
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Types of Decisions: Programmed
Programmed decisions – Repetitive decisions that can be handled using a routine approach
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Types of Decisions: Nonprogrammed
Nonprogrammed decisions – Unique and nonrecurring decisions; require a custom-made solution
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Problems, Decision Types, and Organizational Levels
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Decision-Making Conditions
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• Risk – A situation where a decision maker estimates the likelihood of certain outcomes
• Certainty – A situation where a manager can make accurate decisions because the outcome of every alternative is known
• Uncertainty – A situation where a decision maker has neither certainty nor reasonable probability estimates available
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How Do Groups Make Decisions?
Important decisions are often made by groups who will be most affected by those decisions:• Committees• Task forces• Review panels• Work teams
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Group Decision Making: Benefits
• Provides more information
• Generates more alternatives
• Increases acceptance of a solution
• Increases legitimacy of the decision
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Group Decision Making: Drawbacks
• Time-consuming• Infrequent and often inefficient interaction• Minority domination• Groupthink• Ambiguous responsibility
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When Are Groups Most Effective?
Individual• Faster decision making• More efficient use of
work hours
Group• More accurate decisions• More heterogeneous
representation• More time-consuming• More creative• More effective in
accepting final solution
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Improving Group Decision Making
Three ways of making group decisions more creative:• Brainstorming• Nominal group technique• Electronic meetings
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Contemporary Issues
• National culture – Influences the way in which decisions are made and the degree of risk a decision maker will take
• Creativity – The ability to produce novel and useful ideas
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Creativity in Decision Making
Creativity allows the decision maker to:• Appraise and understand a problem more fully• “See” problems others can’t see • Identify all viable alternatives
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Quantitative Module
Quantitative Decision-Making Aids
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Payoff Matrices
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Payoff Matrices: Regret Matrix
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Decision Trees
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Break-Even Analysis
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Ratio Analysis
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Linear Programming
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Linear Programming (cont.)
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Queuing Theory
n = 3 customers arrival rate = 2 per minuteservice rate = 4 minutes per customer
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Economic Order Quantity Model
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