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Chapter 11

BUS 2090 - Chapter 11.docx

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Department
Business
Course
BUS 2090
Professor
c
Semester
Summer

Description
Chapter 11- Decision Making * items marked by a italicize and bold may be found in “key terms” Introduction What is “Decision Making?”  The process of developing a commitment to some course of action o Involves making a choice among several action alternatives o A process that involves more than simply the final choice among alternatives o Involves some commitment of resources; time, money or personnel  A process of problem solving (alternate definition) o Involves the perception of the existing state, the conception of the desired state, and the steps required to move from one state to the other Well-Structured Problems:  A problem for which the existing state is clear, the desired state is clear, and the steps required to switch from state to state are clear o Simple solutions; may be repetitive and familiar o Ex. Assistant Bank Manager – which of these 10 loan applications should I approve? o Organizations attempt to program decision-making for Well-Structured Problems- rules, routines, standard operation procedures, rules of thumb 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 Unique; unusual and have not been encountered before o Ex. The Vice President of Marketing may have a vague feeling that the sales of a particular product are too low o Can entail high risk and stimulate strong political considerations 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 o Perfectly rational characteristics do not exist in real decision makers and therefore bounded rationality is suggested  Bounded Rationality – a decision strategy that relies on limited information and that reflects time constraints and political considerations o Framing and cognitive biases illustrate the operation of bounded rationality, as does the impact of emotions and mood on decisions Problem Identification and Framing:  Perceptual Defense o Perceptual system may act to defend the perceiver against unpleasant perceptions  Problem defined in terms of functional specialty o Selective perception can cause decision makers to view a problem as being in the domain of their own specialty even when some other perspective may be warranted  Problem defined in terms of solution o Form of “jumping to conclusions”  Problem diagnosed in terms of symptoms o Concentration on surface symptoms will provide little clue to an adequate solution o Real problem involves the cause of the problem  When a problem is identified it is usually framed in some way o Ex. A $10,000 expenditure can be framed as a cost (something to be avoided) or an investment (something to be pursued) o Decision makers should be self-conscious about how they have framed problems and consider alternative frames Information Search:  Too little information – sometimes decision makers do not acquire enough information to make a good decision o Several cognitive biases contribute to this, particularly confirmation bias  Too much information – can also damage the quality of decisions o Information overload can lead to errors, omissions, delays, and “cutting corners” Alternative Development, Evaluation and Choice:  A perfectly rational decision maker may can exhibit maximization  A decision maker working under bounded rationality frequently satisfices rather than maximizes o Ex. A Human Resources Manager who feels that absenteeism becomes too high may choose an arbitrary acceptable level, then accept the first solution that seems likely to achieve this level; organizations rarely seek to “maximize” attendance Risky Business:  When a problem is framed as a choice between losses, people tend to make risky decisions; gambling on a sure loss  When a problem is framed as a choice between gains, people tend to make conservative decisions; protecting the sure win  Learning history can modify the general preferences for or against risk o Ex. Suppose a firm has become very successful from a series of past risky decisions, when sitting in a win-win scenario which would normally provoke conservatism, the firm may choose the risky course of action Solution Implementation:  The perfectly rational decision maker will have factored any implementation problems into his or her solution  A decision maker facing bounded rationality tries to do the same but encounter problems when decisions must be implemented by another party o Ex. Engineering may have to implement decisions made by designers Solution Evaluation:  Perfectly rational decision maker should be able to evaluate the effectiveness of the decision with a calm, objective detachment  A bounded rational decision maker may encounter justification o If bad news cannot be avoided, the erring decision maker may devote his or her energy to trying to justify the fault decision; best seen in the irrational treatment of sunk costs o Leads to escalation of commitment; more often seen in groups than individuals  A bounded rational decision maker may be inhibited by faulty hindsight o Another form being the tendency to take responsibility for successful outcomes while denying responsibility for unsuccessful ones How Emotion and Mood Effect Decision Making:  Strong emotions can include the decision-making process that corrects ethical errors, lead to creative decision-making, and allow for the proper intuition to solve problems  Strong emotions can also lead to self-focused decision-makers that are distracted from the demands o
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