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Lecture

Chapter 11.docx

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Rotman Commerce
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RSM260H1
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J.Heathcote

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Chapter11 Decision Making I. What is Decision Making?  Decision making -the process of developing a commitment to some course of action  process that involves making a choice, a process and it also involves making a commitment of resources such as time, money or personnel  Decision making involves making a choice between alternatives; a process; how the decision is reached, and the commitment of resources  A problem exists when a gap is perceived between some existing state and some desired state  Decision making is also a process of problem solving A. Well-Structured Problems  Well-structured problem-the existing state is clear, the desired state is clear, and how to get from one state to the other is fairly obvious o Usually problems are repetitive and familiar  Program- a standardized way of solving a problem when dealing with well-structured problems o Programs short-circuit the decision-making process by enabling the decision-maker to go directly from problem identification to solution  Many of the problems encountered in organizations are well structured and programmed  Decision making is a useful means of solving these problems  Programs are only as good as the decision making process that led to the adoption of the program in the first place  CONS: decision program si has tendency to persist even when problem conditions change o Seen in ineffective hiring: filling out forms B. Ill-Structured Problems  Ill-structured problem-A problem for which the existing and desired states are unclear, and the method of getting to the desired state is unknown o ie: marketing manager suspects that sales are going down, but does not have a exact figure; want to know where the competitors stand, but not sure of the figure, and have no plan of increasing sales  These problems are usually unique, complex, and have not been encountered before  Cannot be solved with programmed decisions  organizations use non-programmed decision making which means that they will gather more information and be more self-consciously analytical in their approach  can entail high risk and stimulate political considerations  problems tend to be complex and involve a high degree of uncertainty arose controversy, and conflicts among the ppl who a are interested in the decision II. The Complete Decision Maker — A Rational Decision-Making Model 1  when problem is id, search for info begins, info clarifies the nature of the problem and suggests alternative solutions, solutions are evaluated and solution chosen, implementation monitored over time to ensure effectiveness o if difficulties result, repetition or recycling A. Perfect versus Bounded Rationality  Perfect rationality- a decision strategy that is completely informed, perfectly logical, and oriented toward economic gain  While useful for theoretical purposes, these characteristics do not exist in real decision makers.  According to Herbert Simon, administrators use bounded rationality rather than perfect rationality  Bounded rationality- a decision strategy that relies on limited info and that reflects time constraints and political considerations o While they try to act rationally, they are limited in their capacity to acquire and process information, and time constraints and political considerations also act as bounds to rationality o Framing and cognitive biases illustrate the operation of bounded rationality.  Framing- refers to aspects of the presentation of information about a problem that are assumed by decision makers o How problems and decisions are framed can have a powerful impact on resulting decisions  Cognitive biases- are tendencies to acquire and process information in an error-prone way although more effective, higher chance for error  They involve assumptions and shortcuts that can improve decision making efficiency but frequently lead to serious errors in judgment. B. Problem Identification and Framing  Problem exists when a gap occurs b/t existing and desired conditions  The perfectly rational decision maker, infinitely sensitive and completely informed, should be a great problem identifier  Bounded rationality, however, can lead to several difficulties in problem identification: 1. Perceptual defense-The perceptual system may act to defend the perceiver against unpleasant perceptions. 2. Problem defined in terms of functional specialty-Selective perception can cause decision makers to view a problem as being in the domain of their own specialty 3. Problem defined in terms of solution- This form of jumping to conclusions short-circuits the rational decision-making process. 4. Problem diagnosed in terms of symptoms- A consideration on surface symptoms will provide the decision maker with few clues about an adequate solution.  When problems are id, need FRAMING o Even if the facts of the matter might be the same, different decision frames lead to very different decision  Rational decision makers self conscious about how they frame problems, but do no overarching and over framing C. Information Search  Once a problem has been identified, a search for information is instigated  The perfectly rational Economic Person has free and instantaneous access to all information necessary to clarify the problem and develop alternative solutions  Bounded rationality, however, suggests that information search might be slow and costly. Too little information  Decision makers may collect insufficient information to make a good decision because people are mentally lazy and tend to use whatever information is available in memory  Unfortunately, our memory is more selective then representative — we remember vivid, recent events 2  Overconfidence in decision making is also a problem and it is reinforced by confirmation bias - the tendency to seek out information that conforms to one's own definition of or solution to a problem  These biases lead people to shirk the acquisition of additional information Too much information  Information overload- the reception of more information than is necessary to make effective decisions  Information overload can lead to errors, omissions, delays, stress, and cutting corners  Decision makers often attempt to use all of the information and get confused and permit low quality information or irrelevant information to influence their decisions  While information overload causes decision quality to deteriorate, decision makers become more confident of their decisions  Decision makers are more satisfied than those who did not experience overload increase in confidence  Also decision makers fear of being kept in the dark and associate info with power D. Alternative Development, Evaluation, and Choice  At times a decision maker may exhibit maximization which is the choice of a decision alternative with the greatest expected value  Unfortunately, the decision maker operating under bounded rationality may not know all alternative solutions and may be ignorant of the ultimate values and probabilities of success for known alternatives  People are weak intuitive statisticians have trouble with base rates, sample size, probability estimates of multiple event scenarios, and the revision of estimates o An example of this last problem is the anchoring effect which is the inadequate adjustment of subsequent estimates from an initial estimate that serves as an anchorThis occurs even when subsequent estimates are far more sophisticated than the original, naive estimate  The perfectly rational decision maker can evaluate alternative solutions against a single criterion – economic gain  The decision maker who is bounded by reality might have to factor in other criteria as well, such as the political acceptability of the solution to other organizational membersincreases the complexity of the decision-making task  as a consequence of the overwhelming complexity of rational decision making, the decision maker operating under bounded rationality frequently “satisfices” rather than maximizes  Satisficing the decision maker establishes an adequate level of acceptability for a solution to a problem and then screens solutions until one that exceeds this level is found, does not achieve maximization E. Risky Business (choose best solution) 1. The role of risk in decision making is also fertile ground for the issue of framing 2. Research by Kahneman and Tversky shows that o when people view a problem as a choice between losses, they tend to make risky decisions, rolling the dice in the face of a sure loss A. Settle out of court, sure LOSS of $25 M B. Go to court, accept 50% probability loss of $50 M  Most ppl would choose this option, RISKY o When people frame the alternatives as a choice between gains, they tend to make conservative decisions, protecting the sure win C. Setting out of court and SAVE $25 M most ppl would choose this option, CONSERVATIVE D. Go to court and expect 50% probability of saving $50 M o Related to FRAMMING, the alternatives are the same, but in different working and different framing F. Solution Implementation  Once a decision is reached, the solution must be implemented  Decision makers are often dependent on others to implement decisions, and it might be difficult to anticipate their ability or motivation to do so use CROSS FUNCTIONAL TEAMS! 3 G. Solution Evaluation  Examine that the existing state matches the desired state  The perfectly rational decision maker should be able to evaluate the effectiveness of decisions with calm, objective detachment  Bounded decision maker might encounter problems at this stage of the process Justification  People tend to be overconfident about the adequacy of their decisions  Many organizations are lax when it comes to evaluating the effectiveness of expensive programs  If bad news cannot be avoided, erring decision makers might devote energy to trying to justify a faulty decision  The justification of faulty decisions is best seen in the irrational treatment of sunk costs  Sunk costs- permanent losses of resources incurred as the result of a decision key word here is “permanent.”  Since these resources have been lost (sunk) due to a past decision, they should not enter into future decisions however, people often do “throw good resources after bad,” acting as if they can recoup sunk costs. This process is escalation of commitment to an apparently failing course of action, in which the escalation involves devoting more and more resources to actions implied by the decision  Escalation of Commitment- the tendency to invest additional resources in an apparently failing course of action o One reason for this is dissonance reduction o changing one's mind is often perceived as a weakness, many wrong decisions continue to be endorsed in the name of consistency o due to the way in which decision makers frame the problem once some resources have been sunk  escalation of commitment also occurs when the current decision maker is not responsible for previous sunk costs  politicians that do not want to appear wasteful or admit wrong  Attempts to prevent the escalation of commitment might include the following: o Reframe the problem from one of spending to one of saving. o Set specific goals that must be met before additional resources are invested. o Evaluate managers on how decisions are made instead of outcomes. o Separate initial and subsequent decision making Hindsight  The careful evaluation of decisions is also inhibited by faulty hindsight  Hindsight -the tendency to review a decision-making process to find out what was done right or wrong  People practicing hindsight are exhibiting the knew-it-all-along effect which assumes after the fact that we knew all along what the outcome of a decision would be  Another form of faulty hindsight is the tendency to take personal responsibility for successful decision outcomes while denying responsibility for unsuccessful outcomes H. How Emotion and Mood Affect Decision Making  Emotions also play a role in decision making  Strong emotions frequently figure in the decision-making process that corrects ethical errors (Chapter 12) and strong (positive) emotion has also been implicated in creative decision making and the proper use of intuition to solve problems  Such intuition (Chapter 1) can lead to the successful short-circuiting of the steps in the rational model when speed is of the essence  many cases in which strong emotions are a hindrance such as when people experiencing strong emotions are often self-focused and distracted from the actual demands of the problem at hand.  Mood affects what and how people think when making decisions and it has the greatest impact on uncertain, ambiguous decisions of the type that are especially crucial for organizations.  Research on mood and decision making has found that: 1. People in a positive mood tend to remember positive information. 4 2. People in a positive mood tend to evaluate objects, people, and events more positively. 3. People in a good mood tend to overestimate the likelihood that good events will occur and underestimate the occurrence of bad events. 4. People in a good mood adopt simplified, short-cut decision-making strategies, more likely violating the rational model. People in a negative mood are prone to approach decisions in a more deliberate, systematic, detailed way. 5. Positive mood promotes more creative, intuitive decision making.  The impact of mood on decision making is not necessarily dysfunctional  If the excesses of optimism can be controlled, those in a good mood can make creative decisions. If the excesses of pessimism can be controlled, those in a negative mood can actually process information more carefully and effectively I. Rational Decision Making — A Summary  Research shows that for complex, unfamiliar decisions the rational model provides a pretty good picture of how people actually make decisions  there is plenty of case evidence that in organizations the rational decision-making process is often short- circuited in part because of the biases discussed above  about half of the decisions made in organizations have been found to be failures Stage Perfect Rationality Bounded Rationality Problem Identification  easy, accurate perception of  perceptual defence gaps that constitute problems  jump to solutions  attention symptoms rather than problems  mood affects memory Info Search  fast  slow  free  costly  right amount obtained  reliance of flawed memory  obtain too little or too much Development of Alternative  can conceive of all  not all known Solutions Evaluation of Alternative Solutions  ultimate value of ea
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