Decision Making

“ Decision-making is the process of identifying problems and opportunities and selecting a course of action to deal with a specific problem or take advantage of an opportunity.”

A Decision represents a course of action chosen from a number of possible alternatives.

As per Kreitner, Decision making is a process of identifying and choosing alternative courses of action in a manner appropriate to the demand of situation.

Defining Decision Making

Characteristics of Decision Making Process.

It is a human process involving to a great extent the application of Intellectual abilities.

It is a process of choosing a course of action from among the alternative courses of action.

It is an end process preceded by deliberation and reasoning. It is always related to a situation. Involves a certain commitment of the Organization for

adopting a specific course of action. Decision Making in business is always related to its

Objectives. Help in solving problems, resolving crisis and tackling various

situations.

Interdisciplinary Framework of Decision Making

Behavioral disciplines

Quantitative disciplines

Behavioral/quantitative fusion

The Interdisciplinary Framework of Decision Making

The decision-making process

• Philosophy

• Psychology

• Mathematics

• Sociology• Social psychology

• Economics• Statistics

Values andethics Utility and

probability

Individualbehavior

Groupbehavior

Models andsimulation Environment

• Law • Anthropology • Political science

Decision-making Conditions

The decision makerfaces conditions of …The decision maker

faces conditions of …

Lower Moderate Higher

UncertaintyCertainty Risk

Level of ambiguity and chances of marking bad decision

Certainty: decision making condition in which managers have accurate , measurable and reliable information about the outcome of various alternatives under consideration.

Risk: decision making condition in which managers know the probability a given alternative will lead to a desired goal or outcome.

Uncertainty: decision making condition in which managers face unpredictable external condition or lack the information needed to establish the probability of certain events.

Ambiguity• by far the most difficult decision situation• goals to be achieved or the problem to be solved is

unclear• alternatives are difficult to define• information about outcomes is unavailable

Decision making under certainty

When managers know with reasonable certainty what their alternatives are and what conditions are associated with each alternative, a state of certainty exists.

In organizational settings, few decisions are made under conditions of true certainty. The complexity and turbulence of the contemporary business world make such situations rare. Even the airplane purchase decision we just considered is not completely realistic.

Under a state of risk, the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

Decision Making Under Risk

In the state of uncertainty the decision maker does not know all the alternatives, the risks associated with each, or the consequences each alternative is likely to have. This uncertainty stems from the complexity and dynamism of contemporary organizations and their environments.

The key to effective decision making in these circumstances is to acquire as much relevant information as possible and to approach the situation from a logical and rational perspective. Intuition, judgment, and experience always play major roles in the decision-making process under conditions of uncertainty. Even so, this condition is the most ambiguous for managers and the one most prone to error.

Decision Making Under Uncertainty

Unusual andambiguous

Known andwell defined

Untried andambiguous

Innovative Decisions

Adaptive DecisionsAdaptive Decisions

Routine Decisions

Conditions u

nder which

decisio

ns are

made

Uncertainty

Certainty

Risk

Risk

Solution Types(Alternative Solutions)

Pro

ble

m T

ypes

Selecting a Decision Making Model

Depends on the manager’s personal preference

Whether the decision is programmed or non-programmed

Extent to which the decision is characterized by risk, uncertainty, or ambiguity

Primary Decision-MakingModel Criterion Key Ingredients Key Assumptions

Rational Maximized Objectives; specific states of nature; subjective Fixed objectives; unlimited information; no cog-(classical) outcome probabilities; quantified utilities (payoffs); -nitive limitations; no time and cost constraints;

exhaustive alternatives; disregard of environment; quantifiable and transitive alternatives; controlledcomputational decision-making strategy; short- variables; closed system; quantitatively limitedterm horizon; highly structured process outcomes

Organizational Satisficing Objectives; general states of nature; limited Attainable objectives; limited information; cogni-(neoclassical) outcome subjective probabilities; partially quantified tive limitations; time and cost constraints; par-

utilities (payoffs); no exhaustive alternatives; tially quantifiable and intransitive alternatives;sensitive environment; judgmental decision- open system; qualitatively -- and quantitatively --making strategy; short-term horizon; moderately limited outcomesstructured process0

Decision-Making Models

Rational model (classical)

Organizational model (neoclassical)

Political model (adaptive)

Process model (managerial)

Bounded rationality suggests that decision makers are limited by their values and unconscious reflexes, skills, and habits. They are also limited by information and knowledge that are less than complete.

Satisficing suggests that rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency.

Economic Man Model

The Economic Man Theory is closely related to the concept of organizational rationality. It is a normative theory rather than a descriptive theory because it is concerned with what a decision maker should do rather what he actually does in reaching his conclusion.

Decision making is characterized by the following features –

– The decision making is completely rational in the means ends sense.

– To maximize some desired value Economic man orders his various preferences according to his hierarchy of values.

– There is complete awareness of various alternatives and outcome of each alternative can be identified

Administrative Man Model

Administrative Man Model is descriptive model of decision making. It describes the behavior of decision maker in the context of what he actually does in reaching his conclusion. It provides a more valid prediction of the out come to be expected from a manager’s effort to decide upon a course of action.

According to Herbert Alexander Simon decision makers do not have full knowledge of all alternatives and their consequences. There is a certain amount of limit on rationality that is ‘bounded rationality’.

The Bounded Rational Decision Making Model: a realistic approach

Here the assumption is to operate with bounded rationality rather than perfect rationality.

Under bounded rationality, individuals seek the best solution to a problem, the demands of processing all the information, generating all possible solutions and choosing best alternative are beyond human capability.

Characterized by:-

Use of procedures and rule of thumb ( Heuristics)- These are cognitive guides that people use intuitively.

Sub optimizing- knowingly accepting less than the best outcome.

Satisficing -examining alternatives only until a solution that meets minimal requirements is found and then ceasing to look for more.

Decision making process

Decision making process

Decision Making Steps

Step 1 - Recognize The Need For A Decision

Managers must first realize that a decision must be made.

– Sparked by an event such as environmental changes

Step 2 - Generate Alternatives

Managers must develop feasible alternative courses of action.

– If good alternatives are missed, the resulting decision is poor.

– It is hard to develop creative alternatives, so managers need to look for new ideas.

– Some choice must exist in order to make effective decisions. When there is no choice, there really is no decision to be made

Step 3 - Evaluate the Alternatives:

what are the advantages and disadvantages of each alternative?

– In most decisions, a manager will want to achieve several objectives or satisfy several criteria

– Examples of criteria for buying a car: price, manufacturer, model, warranty, service, reliability, repair record, trade-in allowance

– Measure alternatives against previously determined and weighted criteria

– Involves being able to forecast future events

– Under perfectly rational conditions, a rational decision maker could carefully assess potential consequences of each alternative

Step 4 - Choose Among Alternatives:

managers rank alternatives and decide.

– When ranking, all information needs to be considered

– Under perfect conditions - would be straightforward

Step 5 - Implement the Chosen Alternative:

managers must now carry out the alternative

Step 6 - Evaluate the Decision (Learn from Feedback):

managers should consider what went right and wrong with the decision and learn for the future

– Without feedback, managers never learn from experience and make the same mistake over

Personal Decision Framework

Personal Decision Style:

·Directive·Analytical·Conceptual·Behavioral

Personal Decision Style:

·Directive·Analytical·Conceptual·Behavioral

Situation:·Programmed/non-programmed

·Classical, administrative, political

·Decision steps

Situation:·Programmed/non-programmed

·Classical, administrative, political

·Decision steps

Decision Choice:

·Best Solution to Problem

Intuition

An unconscious process of making decisions on the basis of experience and judgment

Involves gut feeling

May also have rational basis

The “feeling” arises from past experience and knowledge

Involves quicker response

Does not involve systematic analysis

Types of decisions

Strategic and Tactical Decisions.

Programmed and Non Programmed.

Strategic decisions

Strategic decisions is the major choice of actions concerning allocation of resources and contribution to the achievement of organizational objectives.

It may involve major departure from earlier ones concerning some organizational practices. For Example: change in product mix, expansion of business, change in personnel policies etc.

It is normally a non programmed decision made under the condition of partial ignorance.

Tactical decisions

Tactical decisions are derived out of statistical decision that relates to day to day working of organization.

It has to be taken very frequently. The decision is most repetitive. For Example: purchase of raw material, assigning duties to employees etc.

It is mostly a programmed one and its outcome is short term nature.

Programmed and Non-programmed decision

PROGRAMMED DECISION –

A programmed decision is one that is fairly structured or recurs with some frequency.

NONPROGRAMMED DECISIONS –

Non-programmed decisions are relatively unstructured and may occur much less often .They are made in response to situations that are unique , are poorly defined and largely unstructured.

Decisions types in Organization structure

Organizational Levels

Nature ofProblems

Nature ofDecision-making

Programmed vs. Non-programmed Decisions

Characteristics Programmed decisions

Non-programmed decisions

Type of problem Structured Unstructured

Managerial level Lower level Upper level

Frequency Repetitive New,unusual

Information Readily available Ambiguous or incomplete

Time frame for solution

Short Relatively long

Solution relies on Procedures,rules, and policies

Judgment and creativity

Decision-making Conditions

Managers sometimes have an almost perfect understanding of conditions surrounding a decision, but at other times they have few clues about those conditions.

In general, the circumstances that exist for the decision maker are conditions of certainty, risk, or uncertainty.

Decision Making Styles

Different people take decisions differently with respect to how they perceive problems they face.

Not all managers make decisions the same way :

• Directive style

• Analytical style

• Conceptual style

• Behavioral style

Directive style

People who prefer simple, clear-cut solutions to problems

Make decisions quickly

May consider only one or two alternatives

Efficient and rational

Prefer rules or procedures

Analytical Style

Complex solutions based on as much data as they can gather

Carefully consider alternatives Base decision on objective, rational data from

management control systems and other sources Search for best possible decision based on

information available

Conceptual Style

Consider a broad amount of information

More socially oriented than analytical style

Like to talk to others about the problem and possible solutions

Consider many broad alternatives

Relay on information from people and systems

Solve problems creatively

Behavioral Style

Have a deep concern for others as individuals

Like to talk to people one-on-one

Understand their feelings about the problem and the effect of a given decision upon them

Concerned with the personal development of others

May make decisions to help others achieve their goals

Situational Factors for Individual Decision-making

Short time

Unimportant to group

Manager can take decision

Dominate the decision

Destructive conflict

Members hesitant

Confidential data

Incapability of members

Manager’s dominance

Indirect effect on group members

Group Decision-making

The factors requiring group decisions include:

Involving sensitive issues

High cost alternatives

Involving very high risk factor

Strategic impact

Group Decisions: Advantages

Acceptance of group members

Coordination is easier

Communication is easier

Existence of large alternatives

More information can be processed

Diversity of experience and perspectives

Group Decisions: Disadvantages

Take longer time

Group can be indecisive

Groups can compromise

Groups can be dominated

Groups can “play games”

Victim to Groupthink

Situational Factors for Group Decision-making

Risk taking solution needed

Better understanding

Whole responsibility

Feedback required

Individual vs. Group Decision Making

In establishing objectives, groups are probably superior to individuals because of the greater amount of knowledge available to groups.

In identifying alternatives, the individual efforts of group members encourage a broad search in various functional areas of the organization.

In evaluating alternatives, the collective judgment of the group, with its wider range of viewpoints, seems superior to that of the individual decision maker.

In choosing an alternative, group interaction and the achievement of consensus usually result in the acceptance of more risk than would be accepted by an individual decision maker.

Implementing a decision, whether or not it was made by a group, is usually accomplished by individual managers.

Characteristics of an Effective Decision-Making

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 straight forward, reliable, easy to use, and flexible.

Common decision-Making errors and Biases

OverconfidenceImmediate Gratification

Anchoring Effect

Selective Perception

Confirmation

framingAvailability

representation

Randomness

Sunk costs

Self-serving

Hindsight

Decision-Making Errors & Biases

Techniques for improving Decision Making

Traditional Techniques.

Modern Techniques :

– OR Techniques.

– Delphi Technique

– Decision Tree.

Traditional Techniques.

In Unprogrammed Decisions :

Traditionally managers bank on intuition, judgment for making up such decisions. Judgments are based on past experience and intuition about the future.

It is an Economic Technique though the decisions taken may be wrong at times.

In Programmed Decisions :

They are routine and repetitive in nature.

Standard Operating Procedures and Organization Structure are used.

SOPs are Routine Work Procedures already jotted down. Can be altered with due course of time.

In Organization Structure, Responsibility is assigned and adequate authority is delegated to each manager to carry out responsibilities. Necessary Managerial positions are created to solve problems of varying nature.

Modern Techniques of Decision Making

Operational Research Techniques:

OR is the application of Scientific method, tools and techniques to Operations of system with Optimum solution to the problem.

It forms an Analytical, Objective and Quantitative basis for arriving at a decision.

It puts emphasis on defining the problem with compilation and evaluation of data, development and testing of hypothesis, establishing relation between various data and taking measures to improve performance.

Linear Programming

Involves Minimization and Maximization of a Linear Function of some Primary Variable subject to certain Restrictions known as Constraints.

LP is applicable in problem areas as Production, Transportation, Warehouse Location, Utilization of Production Units.

Queuing Theory

Applied to any situation that creates a need to balance the Cost of increasing Services against the cost of letting the Units to wait.

In other words, we try to balance the cost of waiting lines as against the cost of preventing waiting lines by increased services.

Example : Additional line opened up to serve customers that should have been in queue.

Games Theory

Applied to situations where the Rational Opponent is involved so that resulting effects are dependent on the specific strategies selected by Decision Maker and Opponent.

While deciding the Business Strategy, an attempt is made to Maximise Profit with Minimum Loss for Self and do other way round for Opponent.

Replacement Theory

Helps in determination of the time when certain items of Machinery need to be replaced.

Replacement involves Investment, but saves Operating Costs that might be high while using Old Machinery.

Problem is that when should be a machinery be replaced so that total costs are minimum.

Network Analysis

Used for Planning and Controlling the Project activities.

Project is broken down to small operations which are engaged in a logical cycle.

Sequence of Operations is drawn and we get a relationship between various activities and it points out which activities should be completed before others are initiated or can some activities be carried out simultaneously.

Examples : PERT, CPM

Delphi Technique

Group Decision Technique and used in Long or Medium Range Forecasting. Steps :

1. Panel of Experts in drawn from within and outside Organization.

2. Each Expert makes anonymous forecasts.

3. Each Expert is provided Composite feedback about various Experts’ answers.

4. Each Expert is free to change his opinion on basis of feed back.

5. Process is reached till Consensus is reached.

Decision Tree

A Graphic method by which a decision maker can readily visualize alternatives together with Risks, possible Outcomes and Information Needs involved in each Chance.

Some decisions involve a series of steps, with each step depending upon the preceding step and so on. Often Uncertainty surrounds each step and so we face lot of Uncertainty in totality.

What is your What is your next step?next step?