MGT 291 Lecture Notes - Lecture 9: Status Quo Bias, Satisficing, Bounded Rationality
Chapter 9: Making Decisions
Types of Decisions
- Programmed decisions: routine decisions that address specific problems and result in
relatively structured solutions; follow a set of policies, procedures or rules developed
through past experience with similar decisions
- Nonprogrammed decisions: novel decisions that require unique solutions; unstructured,
require managers to use creativity rather than experience to find good solutions
- Strategic decisions: address the long-term direction and focus of the organization; usually
made by executive-level management
- Operational decisions: focus on the day-to-day running of the company; usually bade my
lower-level management
- Top down decisions: directive decisions made solely by managers who then pass them
down to lower-level employees for implementation
- Decentralized decisions: when employees, not managers, make decisions about their
work
Rational Decision Making Process
1. Define the problem or opportunity
a. What will we be making a decision about?
i. Status quo bias: our tendency to not change what we are doing unless the
incentive to change is compelling
2. Set goals and identify evaluation criteria
a. Determine our goals for the decision outcome and identify the characteristics a
good solution must have
3. Identify alternatives
a. Determine if the opportunity is worth pursuing
4. Evaluate alternatives based on the evaluation criteria
a. Escalation of commitment: persisting with a failing course of action
b. Framing: describing or framing a decision as a loss or gain influence our
evaluation of alternatives
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c. Overconfidence: the tendency to be overoptimistic
d. Availability bias: when we can readily remember past instances of an event, we
tend to over estimate that likelihood that an event will occur again
e. Representativeness: overestimate what we are familiar with, and understaimate
things with which we are not familiar or that we do not remember as well
f. Anchoring and adjustment: making assessments by starting with, or anchoring
onto, a familiar starting value and then adjusting it based on other elements of the
decision problem to arrive at a final decision
g. Halo bias: drawing a general impression about something or someone based on a
single (typically good) characteristic
5. Choose the best alternative
a. The decision that best meets all of the criteria
6. Implement the decision and monitor the result
a. Post decisional justification: remembering our decision as better than they
actually were
b. Hindsight bias: how our impression of how we acted or would have acted changes
when we learn the outcome of an event
How are decisions really made in organizations?
The rational decision making model is very logical, and seems easy enough to follow. However,
real decision making rarely resembles this process
- Bounded rationality: our rationality is limited by the amount of information, time, and
resources available
- Satisficing: making a satisfactory rather than optimal decision
- Intuition: knowing something instinctively based on expertise and experience solving
similar problems
- Emotions often interfere with optimal decision making
- Cultural differences may influence decisions; problems are defined and framed
differently, different alternatives may be identified, or evaluation may be differentially
weighted
Group Decision making
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Document Summary
Programmed decisions: routine decisions that address specific problems and result in relatively structured solutions; follow a set of policies, procedures or rules developed through past experience with similar decisions. Nonprogrammed decisions: novel decisions that require unique solutions; unstructured, require managers to use creativity rather than experience to find good solutions. Strategic decisions: address the long-term direction and focus of the organization; usually made by executive-level management. Operational decisions: focus on the day-to-day running of the company; usually bade my lower-level management. Top down decisions: directive decisions made solely by managers who then pass them down to lower-level employees for implementation. Decentralized decisions: when employees, not managers, make decisions about their work. The rational decision making model is very logical, and seems easy enough to follow. However, real decision making rarely resembles this process. Bounded rationality: our rationality is limited by the amount of information, time, and resources available. Satisficing: making a satisfactory rather than optimal decision.
