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Lecture

Textbook notes-Chapter 11-Decision Making


Department
Management (MGH)
Course Code
MGHD27H3
Professor
Andrew Davidson

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CHAPTER 11 ± DECISION MAKING
WHAT IS DECISION MAKING
Decision making: the process of developing a commitment to some course of action
1) involves making a choice among several action alternatives
2) a process that involves more than simply the final choice among alternative
3) the commitment of resources
problem: a perceived gap b/w an existing state and a desired state
- decision making process involves the perception of exiting state, the conception of the desired state, and
the steps that the chairperson takes to move from one state to the other
Well structured problems
Æ a problem for which the existing state is clear, the desired state is clear, the desired state is clear, and
how to get from one state to the other is fairly obvious
program: a standardized way of solving a problem
- programs usually go by rules, routines, standard operating procedures, rules of thumb
- sometimes they come from experience and only exist in the head
Ill structured problem
Æ problem for which the existing and desired states are unclear, and the method of getting to the
desired state is unknown
- usually unique, unusually and have not been encountered before
- decision makers must resort to non-programmed decision making, they are likely to try to gather more
info and be more self consciously analytical in their approach
- can entail high risk and stimulate strong political consideration
THE COMPLEAT DECISION MAKER-A RATIONAL DECISION-MAKING MODEL
Perfect vs bounded rationality
perfect rationality: a decision strategy that is completely informed, perfectly logical, and oriented
toward economic gain
- economic person is:
1) an father info about problems and solutions without cost and is thus completely informed
2) is perfectly logical,
3) has only one criterion for decision making ± economic gain
- while economic person is useful for theoretical purpose, the perfectly rational characteristics embodied
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The Rational decision making process
identify problemÆ search for relevant informationÆ develop alternative solutions to the problem Æ
evaluate alternative solutions Æ choose best solution Æ implement chosen solution Æ monitor and
evaluate chosen solution
Bounded rationality: a decision strategy that relies unlimited info and that reflects time constraints and
political considerations
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- framing and cognitive biases both illustrate the operation of bounded rationality as does the impact of
emotions and mood on decisions
framing: aspects of the presentation of info about a problem that are assumed by decision makers
- could include assumptions about the boundaries of a problem, and possible outcomes of a decisions, or
the reference points used to decide if a decision is successful
cognitive biases: tendencies to acquire and process info in an error ±prone way
- these biases constitute assumptions and shortcuts that can improve decision making efficiency, but
they frequently lead to serious errors in judgement
Problem identification and framing
bounded rationality, can lead to the following difficulties in problem identification
1) perceptual defence
- act to defend the perceiver against unpleasant perception
2) problem defined in terms of functional speciality
- selective perception can cause decision makers to view a problem as being in the domain of their own
specialty even when some other perspective might be warranted
3) problem defined in terms of solution
-this form of jumping to conclusion effectively short-circuits the rational decision making process
4) problem diagnosed in terms of symptoms
- a concentration on surface symptoms will provide the decision maker with few clues about an adequate
solution
- rational decision makers should try to be very self conscious about how they have framed problems
- they should try out alternative frames
- should avoid overarching , universal frames
Information search
too little information
- ppl tend to be mentally lazy and use w/e info is most readily available to them
- another cognitive bias that contributes to an incomplete info search is the well documented tendency
for ppl to be overconfident in their decision making
confirmation bias: the tendency to seek out information that conforms to ones definition of or solution
to a problem
Too much information
information overload: the reception of more info that s necessary to make effective decisions
- can lead errors, omissions, delays, and cutting corners
- tend to use all the info on hand and get confused and permit low quality info or irrelevant info to
influence their decisions
- decision makers tend to think more info is better
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2) may fear being kept in the dark and associate the possession of info with power
[rmb pnts pag 380]
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Alternative development, evaluation and choice
maximization: the choice of the decision alternative with the greatest expected value
- WKLQJVGRQ¶WDOZD\VJRZHOOIRUGHFLVLRQPDNHUZRUNLQJXQGHUERXQGHGUDWLRQality
- he may not know all alternative solutions, and he might be ignorant of the ultimate values and
probabilities of success of those solutions that he knows
- ppl are weak intuitive statisticians, and they frequently violate standard statistical principles
1) ppl avoid incorporating known existing data about the likelihood of events into their decisions
2) large samples warrant more confidence than small samples. Still, data from a couple of vivid focus
groups might be given more weight than data from a large but anonymous national survey
3) decision makers often overestimate the odds of complex chains of events occurring - the scenario
sounds sensible despite being less likely with every added link in the chain
4) ppl are poor at revising estimating the probability and values as they acquire additional info
anchoring effect: the inadequate adjustment of subsequent estimates from an initial estimate that serves
as an anchor
- GHFLVLRQPDNHUZRUNLQJXQGHUERXQGHGUDWLRQDOLW\IUHTXHQWO\³VDWLVILHV´Uather than maximizes
satisficing: establishing an adequate level of acceptability for a solution to a problem and then screening
solutions until one that exceeds this level is found
- when this occurs, evaluation of alternatives ceases, and the solution is chosen for implementation
Risky business
- choosing b/w decision alternatives involves an element of risk
- when ppl view a problem as a choice b/w losses, they tend to make risky decisions, rolling the dice in
the face of a sure loss
- when ppl frame the alternatives as a choice b/w gains they tend to make conservative decisions,
protecting the sure win
- learning history can modify these general preferences for or against risks
Solution implementation
- in organizations, decision makers are often dependent on others to implement their decisions, and its
difficult to anticipate their ability or motivation to do so
Solution evaluation
- bounded decision maker might encounter the following problems
1) justification
- ppl tend to be overconfident, so substantial dissonance(conflict) occur when decisions go wrong
- to prevent: avoid careful tests of the adequacy of the decision
- justification of faulty decisions is best seen in the irrational treatment of sunk costs
sunk cost: permanent losses of resources incurred as a result of a decision
escalation of commitment: the tendency to invest additional resources in an apparently failing course
of action
- escalation of commitment sometimes happens when the current decisions maker is not responsible for
previous sunken costs
Æ could also due to the way in which decisions makers frame the problem once some resources have
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