Chapter 10- Decision Making
- Decision making: the process of developing a commitment to some course of action
First, Making a choice (carry more or less inventory)
Second, Process of how (why choose this offer)
Third, Commitment of resources (time, money…)
It is a process of problem solving
o Problem: A perceived gap between an existing state and a desired state.
Involves the perception of the existing state, the conception of the
desired state and the steps to get from one to the other.
- Well-structured problems: A problem for which the existing state is clear, the desired
state is clear and how to get from one state to the other is fairly obvious.
o Problems are repetitive and familiar
o Programs implemented to make decision
o Program: A standardized way of solving a problem
Enables the decision maker to go directly from problem identification to
Go under labels as rules, routines, procedures
- Ill structured problems: A problem for which the existing and desired states are
unclear and the method of getting to the desired state is unknown
o Problems are unique and have not been encountered
o Arose controversy or conflict / Complex and involve uncertainty
- The Complete Decision Maker
o Problem identification
o Information search
o Development of alternative solutions
o Evaluation of alternative solutions
o Solution choice
o Solution Implementation
o Solution evaluation
- Perfect Rationality: A decision strategy that is completely informed, perfectly logical
and oriented toward economic gain. (Economic Person)
- Bounded Rationality: A decision strategy that relies on limited information and that
reflects time constraints and political considerations
o Framing: Aspects of the presentation of information that are assumed by
Assumptions of boundaries, outcomes, determining success
o Cognitive Biases: Tendencies to acquire and process information in a particular
way that is prone to error.
o Shortcuts leading to errors in judgment
- Bounded rationality can lead to the following problems:
o Perceptual Defense: Perpetual system, defends against unpleasant perceptions
o Problem defined in terms of functional specialty: Selective perception can cause
decision makers to view a problem as being the domain of their specialty
(marketing for poor sales vs. design) o Problem defined in terms of solution: Jumping to conclusions short circuits
decision making process (New Coke)
o Problem Diagnosed in terms of symptoms: Different causes can require different
solutions (Morale= low pay or boring work)
- Information search
o Too little information:
People are lazy, use info that is available
Remember vivid recent events, even when irrelevant.
People often over confident in decision making
Confirmation bias: The tendency to seek out information that conforms
to ones own definition of, or solution to a problem.
(Decision based evidence making/ Evidence based decision
o Too much Information
Information overload: The reception of more information than is
necessary to make effective decisions
Use all the information at hand and get confused= low quality decision
Confidence that decision will improve with more information
Decision makers fear being left in the dark associating information with
People have a cognitive bias to value paid information over free
info of the same quality
- Alternative development, evaluation and choice
o Perfectly rational it is easy, exhibits;
Maximization: The choice of the decision with the greatest expected
value (100,000 x .8 success=…)
o Bounded rational may not know all alternative solutions, may ignore values of
the probability of success.
People avoid incorporating data about the likelihood of events into
decisions. (Novelty food products)
Large samples warrant more confidence than small samples
Decision makers often overestimate the odds of complex chains of
People are poor at revising estimates of probability once new
information is acquired
Anchoring Effect: The inadequate adjustment of subsequent
estimates from an initial estimate that serves as an anchor
o (Asking price influences professional evaluation)
Reduce by making people more responsible/ accountable
Critical to be done BEFORE decision reached, as after the fact
increases probability of biases as people try to protect their
identity as good decision makers.
Paul Nutt- Firms often invest little money in searching alternatives.
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 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. When people frame the problem as
alternatives between gains, they make more conservative decisions protecting the sure
win. (50 mill law suit) o Learning history can modify these preferences.
- Decision makers are often dependent on others and it is difficult to anticipate their
ability to implement. (Engineers implement decision made by designers)
- Solution Evaluation
o Effectively examining the possibility that a new problem has occurred.
Prevent dissonance by avoiding careful testing of the adequacy of the
If cannot be avoided, energy d