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Lecture

OB - Chapter 11.docx

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Department
Commerce
Course
COMM 151
Professor
Christopher Miners
Semester
Winter

Description
Chapter 11 – Decision Making What Is Decision Making?  Decision making – process of developing commitment to some course of action  3 noteworthy things about decision making o Choice – making a choice among alternatives o Process – involving final choice and how decision reached o Resources – committed to carry out decision  Process of problem solving  Problem – perceived gap between existing state and desired state o Perception of existing state o Conception of desired state o Gap between two above Well-Structured Problems  Existing state clear  Desired state clear  How to get from e to d is clear  Problems are repetitive and familiar  Program decision making for well-structured problems o Because decision making takes time and is prone to error  Program – standardized way of solving a problem o Enables decision maker to go from problem identification to solution directly o Aka. Rules, routines, standard operating procedures, rules of thumb, application forms Ill-Structured Problems  Existing state unclear  Desired state unclear  How to get from e to d unknown  Generally unique problems (have not been encountered before)  Non-programmed decision making The Compleat Decision Maker – A Rational Decision-Making Model  Problem identified -> search for information -> alternative solutions -> evaluate solutions -> best chosen for implementation -> implemented solution monitored Perfect vs. Bounded Rationality  Perfect rationality – decision strategy completely informed, perfectly logical, and oriented toward economic gain  Economic Person – perfect, cool, calculating decision maker o Can gather information about problems and solutions without cost ; completely informed o Perfectly logical – if A > B, and B > C, then A > C o Has one criterion – economic gain Recycle Identify problem Search for information Alternative solutions Evaluate solutions Choose best solution Implement solution Monitor and evaluate solution  Bounded rationality – decision strategy relying on limited information and reflecting time constraints and political considerations  Framing – aspects of presentation of information about problem that are assumed by decision makers  Cognitive biases – tendencies to acquire and process information in an error-prone way Problem Identification and Framing  Problem exists when gap occurs between existing and desired state  Gaps signalled by o Dissatisfied customers o Vigilant employees o Press  Bounded rationality lead to difficulties in problem identification o Perceptual defence – perceptual system defend perceiver against unpleasant perceptions o Problem defined in terms of functional specialty – selective perception cause you to view problem as being in domain of their own specialty when other perspective is warranted  Marketing guy focus on marketing solution to poor sales o Problem defined in terms of solution – jumping to conclusions o Problem diagnosed in terms of symptoms – concentration on surface symptoms, real problem or cause of problem not diagnosed  Problem identified -> framed o Different decision frames lead to different decisions o Eg. Can I have a Tube? vs. Hey man, how are the Tubes? Information Search  Search might be slow and costly  Too little information – damage quality of decision o Information overload – reception of more information than is necessary to make effective decisions o Lead to – errors, omissions, delays, and cutting corners o Attempt to use all information o More is not necessarily better o Think more is better  More information – decisions don’t improve, but confidence does  Associate information with power o Managers  Gather information that has little relevance  Use information after decision to justify decision  Request information they don’t use  Request more information, despite what’s available  Complain there’s not enough information even though they ignore available information Alternative Development, Evaluation, and Choice  Maximization – choice of decision alternative with greatest expected value  Bounded rationality o Not know all alternative solutions o Ignorant of the ultimate values and probabilities of success  Violations of standard statistic principles o People avoid incorporating known existing data about likelihood of events o Large samples warrant more confidence than small samples o Overestimate odds of complex chain of events occurring (final destination) o Poor at changing estimates of probabilities and values as they get new information  Not adjust estimates from initial estimate (anchor)  Can reduce basic cognitive biases o People more accountable for decision  Accountability in place before decision  After-the-fact accountability – people try to protect their identity  Satisficing – decision maker establishes adequate level of acceptability for solution and then screening solutions until one that exceeds level is found o When solution found, evaluation of alternatives cease Risky Business  Power of framing o Alternative A – settle out of court and accept sure loss of $25 million o Alternative B – go to court expecting 50% probability of $50 million loss (potential for greater loss)  As opposed to o Alternative C – settle out of court and save $25 million that could be lost in court (less risky) o Alternative D – go to court expecting 50% probability of saving $50 million  Choice between losses o Make riskier decision o Rolling dice in face of sure loss  Choice between gains o Make conservative decision o Protecting sure win Solution Implementation  Rational decision maker factor in implementation problems  Decision makers are often dependent on others to implement their decisions Solution Evaluation  Possibility that new problem occurred o Does the (new) existing state match the desired state?  Justification – bad news cannot be avoided, decision maker spend energy to justify faulty decision o Sunk costs – permanent losses of resources incurred as result of decision o Escalation of commitment – tendency to invest additional resources in apparently failing course of action  Devoting more and more resources to apparently failing course of action  Happens even when current decision maker is not responsible for previous sunk costs  Motivated to not appear wasteful  Auction like situation prompt escalation because of time and pressure o Social norm – favouring consistent behaviour by manager o Changing one’s mind perceived as a sign of weakness o Ways to prevent escalation of commitment  Reframing problem to avoid decision trap of feeling that more resources have to be invested; saving vs. spending  Specific goals set in advance to be met if more resources are to be invested  Emphasis evaluating managers on how they make decision and less on outcomes  Separate initial and subsequent decision making  Initial decision maker assisted or replaced by others o Groups more prone to escalate commitment  Hindsight – tendency to review decision making process to find what was done right or wrong o Right – in case of success o Wrong – in case of failure o Knew-it-all-along effect – assume, after the fact, we knew all along what the outcome was going to be o Take personal responsibility for successful outcomes while denying responsibility for unsuccessful outcomes  Things work out well – we made awesome decision  Things go poorly – unexpected external factor messed up How Emotion and Mood Affect Decision Making  People don’t like to be wrong  Emotionally attached to failing course of action – escalation of commitment  No feeling because of brain damage o Unable to properly evaluate impact of decisions and make poor life choices  Strong emotions o Correct ethical errors o Whistle-blowers motivated by emotion  Strong (positive) emotions o Creative decision making o Proper use of intuition  Strong emotions as hindrance o People experiencing emotion are self-focused and distracted from actual demands of problem  Mood on decision making o Mood affects what and how people think when making decisions o Has greatest impact on uncertain, ambiguous decisions Positive Mood Negative Mood  Remember positive information  Remember negative information  Overestimate likelihood of good events  Underestimate occurrence of bad events  Simplified, shortcut decision-making strategies,  Deliberate, systematic, detailed way more likely to violate rational model  Promote creative, intuitive decision making o Excess of optimism controlled – good mood can make creative decisions o Excess of pessimism controlled – process information more carefully and effectively o Eg. Foreign currency trading  Good mood – performed poorly (losing money)  Bad mood – performed better, but conservative  Neutral mood – did best o Mood is contagious Rational Decision Making – A Summary  Agree about goals – people use rational model  Biases – lead to short-circuiting rational model  Failures – due to poor tactics by manager o Limit search for alternatives o
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