DECISION MAKING

APARAJITA CHATTERJEE M.B.A. 1st YEAR

MONIRBA

What is a ‘decision’?

Decision is the selection of best course of action out of many available alternatives.

Decision simply means coming to an conclusion.

It can be achieved by careful planning and good managerial skills.

What is decision making?

According to Koontz and O’Donnell –“decision making process is the

determination of objectives, policies, programmes, procedures , strategies etc. of the enterprise. A manager has to take a number of decisions in every field of organisational life from the beginning to the close of the day.”

Decision making is a conscious process by which a person chooses a course of

action from among the alternatives to attain a given objective.

It is an act of confidence and logic of selecting the best course of action for tackling a particular situation.

Decision making is an important function of managers for achieving organizational goals.

Characteristics of decision making Decision making is a human and hence it is a

rational process. It helps the manager to choose the best course

of action from various alternatives. It is an open process i.e. it takes into account

all external and internal factors while making decisions.

Decisions differ with reference to the situation. It is a continuous process. It helps to arrive at an conclusion. It is made at all the three levels.

Key components of decision making Environment of the organization The timing of decision making External environment surrounding the

organisation. Decision taken must be rational. Participative decision making is

important Proper communication is important at all

levels.

Steps in decision making Identifying a problem Seeking the facts and gathering data Identifying the decision criteria Allocating weights to the criteria's Developing alternatives Analyzing alternatives Selecting best alternative Implementing the alternative Follow up.

Decision making Perspective

There are three perspective on which managers make decisions

1) Rational decision making2) bounded rationality3) intuition based

A type of decision making in which choices are logical and consistent and maximize value

A rational decision maker is logical and knows his objectives well.

The problem faced by him will be clear and unambiguous.

His goals are specific and clear and he has perfect and complete information about the problem.

Knows all possible alternatives and consequences Finally making decisions rationally will help him to choose

an alternative that maximizes his chances of achieving his goal. the rationality in decision making provides a structured and sequenced approach to decision making. Using such an approach can help to ensure discipline and a consistency is built into decision making process.

Rational Decision Making

Bounded rationality These managers make decisions rationally

but are limited by their ability to process information.

They possibly analyze all information on all alternatives, and then managers accept the solutions that are good enough rather than taking full benefit of the situation i.e. they satisfice rather than maximize.

They are rational within the limits of their ability to process information.

Intuition based Decision based on experience, feeling and

accumulated judgment. Intuitive decision making can complement

both rational and bounded rational decision making.

Managers uses five different aspects of intuition they are:

1) Experience based decision2) Affect initiated decision3) Cognitive based decision4) Subconscious mental processing5) Values and ethics based decision

Types of decisions Programmed Decisions. Non-Programmed Decisions.  Organisational and personal

Decisions. Research and crisis -intuitive

Decisions. Operational and strategic Decisions

Programmed Decisions

 These are standard decisions which are taken for the problems which are routine and repetitive type in nature.

They are generally taken by lower and middle level managers.

There are preset policies standards and rules to solve the problems.

Non-Programmed Decisions.  These are non-standard and non-

routine. Each decision is not quite the same as any previous decision.

These non programmed decisions are non repetitive and non recurring in nature and require good decision making skills.

The upper level managers takes this decision.

Organisational and personal Decisions. These decisions reflect the use of managers

authority. The decisions taken in interest of organisation are

Organisational decisions. they are subject to delegations. managers are officially authorised to make organisational decisions. firing of a employee for non conformance to rules of the organisation.

The decisions taken for personal interest are personal decisions. they are not subject to delegate these decisions are purely on the personal biases.for eg: firing due to personal enmity.

Research and crisis -intuitive Decisions These decision reflect the urgency of decision

making. The decisions that involve regular survey of

the market and are not made under emergency or risk.for e.g. the decision to improve the product design by R & D department after an exhaustive market survey is a research decision.

The decision made under situation of crisis and emergency are crisis decisions. For e.g. decision to increase the production of medicine during war.

Operational and strategic Decisions These decisions reflect the managers decision

making scope. operational decisions are routine type decisions. they relate to daily operations of a firm normally aims at achieving short term objectives of a firm. these decisions are taken by middle and lower level managers in accordance with companies policies, procedures.

The decisions that are related to important, crucial and non-recurring problems are strategic decisions. managerial skills and judgment is required to take these decisions.

Opportunity and problem solving decisions. These decisions reflect managers

foresightedness in the decision making process.

Managers probe into the future for opportunities that enable the organisation to grow by expansion or by divesification.the decision to grow in the potential market is an opportunity decision.

Problem solving decisions involves taking steps to solve a particular,specific problem that the managers face.

Decision making conditions

There are three conditions that manager may face while making decisions:

Certainty Risk Uncertainty

Certainty This is the ideal situation for decision

making.under this condition manager takes accurate decisions because outcome of every alternative is known.

For e.g. : when finance controller decides where to deposit provident fund monies as he knows exactly the intrest rate offered by each bank and the amount that will be earned on the funds.

Risk A far more common situation than certainty is risk

in which decision maker is able to estimate the likelihood of certain outcomes.

Under risk managers have historical data from past personal experiences or secondary information that lets them assign probablities to different alternatives.

Use of mathematical models can help to minimise the risk to a great extent like use of optimisation techniques, assignment problems, transportation problems, probability, statistics etc can minimizes the chances of risk to a great extent.

Uncertainty

A situation in which a decision maker has neither certainty nor reasonable probability estimates available.

Under this condition choice of alternative is influenced by the limited amount of available information and by the psychological orientation of decision maker.

Decision making styles

Linear thinking style: Is characterized by a person’s

preference for using external data and facts and processing this information through rational, logical thinking to guide decisions and actions.

Non Linear thinking style : Is characterized by a preference

for internal sources of information and processing this information with internal insights, feeling and hunches to guide decisions and actions.

Decision making biases and errors Over confidence bias: When decision maker tend to think that

they know more than they do or hold unrealistically positive views of themselves and their performance they are exhibiting the overconfidence bias.

Immediate gratification bias: Describes decision makers who want

immediate rewards and to avoid immediate cost. for these individuals quick payoffs are more appealing.

Selective perception bias: When decision maker selectively organise

and interpret events based on their biased perception they are using selective perception bias.

Confirmation bias: decision maker who seek out information

that reaffirms their past choices and discount information that contradicts past judgments.

Framing bias: decision maker selects and highlights

certain aspects of situation while excluding others.

Availability bias: Causes decision maker to tend to

remember events that are the most recent and vivid in their memory.

This bias distorts their ability to recall events in an objective manner and results in distorted judgement and probability estimates.

Representation bias: When decision maker assess the

likelihood of an event based on how closely it resembles other events or sets of events that’s the representation bias.

Randomness bias: Occurs when decision makers try to

create meaning out of random events. They do this because most decision

makers have difficult dealings with chance,even though random events happen to everyone and there is nothing that can be done to predict them.

Sunk cost error: When decision maker forget that

current choices can’t correct the past.they in correctly fixate on past expenditure of time,money or effort in assessing choices rather than on future consequences.

Self serving bias: Decision maker who are quick

totake credit of their success and blame failure on outside factors are self serving bias.

Hind sight bias: Is the tendency for decision maker

to falsely believe, after that outcome is actually known that they have accurately predicted the outcome of an event.

Guidelines to effective decision making. Understand cultural difference Use effective decision making process Build an organization that can spot

the unexpected and quickly adapt to the changed environment.

Use the appropriate decision making technique to minimize the risks and make problems easy and simple.

CONCLUSION

Making decisions in today’s fast moving world is not easy. Successful managers need good decision making skills to plan, organize, lead and control.

THANK YOU