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Lecture 12

BUS 272 Lecture Notes - Lecture 12: Brainstorming, Bounded Rationality, Nominal Group Technique

Business Administration
Course Code
BUS 272
Lieketen Brummelhuis

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Chapter 12: Decision Making, Creativity, and Ethics
A Decision is the choice made from two or more alternatives
Refers to choices that are consistent and value-maximizing within specified constraints. These choices are made following a six-step
rational decision making model.
1. Define the problem.
2. Identify the criteria
a. This step rigs the deisio aker’s iterests, values and similar personal preferences into the process because
not all individuals will consider the same factors relevant for any particular decision
3. Allocate weights to the criteria
4. Develop alternatives
5. Evaluate the alternatives
6. Select the best alternative by evaluating each alternative against the weighted criteria and selecting the alternative with
the highest total score
Assumptions of the Model
Problem Clarity: The problem is clear and unambiguous and complete information is available
Known options: It’s assued that the deisio aker a idetif all releat riteria, all orkale alteraties, ad their
Clear preferences: The criteria and alternatives can be ranked and weighted to reflect their importance
Constant preferences: The specific decision criteria are constant and the weights assigned to them are stable over time
No time or cost constraints: The decision maker can obtain full information about criteria and alternatives because there
are no time or cost constraints
Maximum payoff: The decision maker will choose the alternative that yields the highest perceived value
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Most deisios i the real orld do’t atuall follo the ratioal odel. People are usuall otet to fid a aeptale or
reasonable solution to their problem rather than an optimal one.
It is difficult for individuals to identify ad consider every possible alternative available for them. Realistically speaking, people are
limited by their ability to interpret, process, and act on information. This is called bounded rationality.
Ho this orks for a tpial perso…
Once we have identified a problem, we being to search for criteria and alternatives. But the list of criteria is likely to be far from
exhaustive. We identify a limited list of the most obvious choices, which usually represent familiar criteria and tried and true
solutions. Next, we begin reviewing them, but our review will not be comprehensive. Instead, we focus on alternatives that differ
only in a relatively small degree from the choice currently in effect. Following familiar and well-worn paths, we review alternatives
ol util e idetif oe that is good eough that meets an acceptable level of performance. So the solution represents a
satisficing choice the first acceptable one we encounter rather than the optimal one.
Intuitive decision making: A oosious proess reated out of a perso’s a eperiees. Perhaps the least ratioal a of
making decisions. Its defining qualities are that it occurs outside conscious thought; it relies on holistic associations, or links between
disparate piees of iforatio; it’s fast; ad it’s affetiel harged, eaig that is usuall egages the eotios. The key is not to
either abandon or rely solely on intuition, but to supplement it evidence and good judgement.
Overconfidence bias: Error i judgeet that arises fro eig far too optiisti aout oe’s o perforae. As aagers ad
employees become more knowledgeable about an issue, they become less likely to display overconfidence. Overconfidence is most
likely to surface when organizational members are considering issues or problems that are outside their area of expertise.
Anchoring bias: A tendency to fixate on initial information, from which one then fails to adequately adjust for subsequent
Confirmation bias: The tendency to seek out information that reaffirms past choices and to discount information that contradicts
past judgements
Availability bias: The tendency for people to base their judgments on information that readily available to them rather than
complete data. Events that evoke emotion, that are particularly vivid, or that have occurred more recently tend to be more available
in memory.
Randomness error: The tendency of individuals to believe that they can predict the outcome of random events. Humans have a lot
of difficulty. Most of us like to believe we have some control over our world and our destiny.
Risk aversion: The tendency to prefer a sure gain of a moderate amount over a riskier outcome, even if the riskier outcome might
have a higher expected payoff.
Hindsight bias: The tendency to believe falsely, after an outcome of an event is actually known, that one could have accurately
predicted that outcome.
The process of organizing ad distriutig a orgaizatio’s olletie isdo so the right iforatio gets to the right people at the
right time is called Knowledge Management (KM). When done properly, KM provides an organization with both a competitive edge
and improved organizational performance because it makes its employees smarter.
KM is increasingly important today for at least three reasons:
Organizations that can quickly ad effiietl tap ito their eploees’ olletie eperiee ad isdo are ore likel to
outsart their opetitio
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