Chapter 3 - Jan 25th
Managers make decisions in view of the commitments they have agreed to or envisioned as important for their department or
organization. Commitments, therefore, frame the context within which managers make decisions. To the best of their ability, managers
align their decisions with the end-result in mind: their commitments.
Every time a manager acts to plan, organize, direct or control organizational activities, he/she makes a stream of decisions
Decision making is the process by which managers analyze the options facing them and make determinations or decisions about
specific organizational goals and courses of action.
PROGRAMMED decisions making
• A routine, virtually automatic process.
• These are decisions that have been made so many times in the past that managers have been able to develop rules or
• These take place in day-to-day running of an organization. Like when storage shelves are 3/4 empty, you have to order more
inventoy. And when you order more inventory, make sure it's enough to fil the shelves.
• It's called programmed because the manager doesn't need to make judgements about what should be done.
NONPROGRAMMED decision making
• Occurs when there are no ready-made decision rules that managers can apply to a situation.
• The situations are unexpected. That's why there are no rules
• Like decisions to invest in a new tech, product, new campaign, enter new market or to expand.
"Head" and "heart" decisions - "the more socially responsible my company becomes, the more motivated/loyal an employee I become."
"Head" decision making is not, therefore, the only way to run a business. The "heart" must also be involved.
The Rational Model
• Rational model (or the classical model), is prescriptive, which means that it specifies how decisions should be made.
• Rational model - a prescriptive approach to decision making based on the idea that the decision maker can identify and
evaluate all possible alternatives and their consequences and rationally choose the most suitable course of action.
• The idea behind the rational model is that once managers recognize the need to make a decision, they should be able to
make a complete list of all alternatives. Each alternative should be list all its consequences too.
• This model assumes that managers have access to all the information they need to make the optimum decision, best decision
• Because managers don't always have all the information at their fingertips, additional tools such as "social software" are now
starting to show up in organizaitons.
• Jon Husband created "wirearchy", this concept is a two-way flow of power and authority based on knowledge, credibility, trust,
and results enabled by interconnected people and technology.
• The rational model of decision making
o List all the alternative courses of action possible and the consequences of the different alternatives assumes all
information about alternatives is available to managers o Rank each alternative from least preferred to most preferred according to personal preferences assumes managers
possess the mental ability to process this information.
o Select the alternatives that lead to desired future consequences assumes what managers know what future course
of action is best for organization.
The administrative model
• Managers don't have access to all the information they need to make a decision. If all information were readily available, many
managers would lack the mental or psychological ability to absorb and evaluate it correctly.
• This model is based on three important concepts:
o Bounded rationality human decision-making capabilities are bounded by people's limitations in their ability to
interpret, process and act on information. The amount of information are so great that it is difficult for the manager to
evaluate everything before making a decision.
o Incomplete information managers will always have incomplete information. Because of uncertainty, the probabilities
of alternative outcomes cannot be determined and future outcomes are unknown. They would have ambiguous
information - its meaning is not clear and can be interpreted in many ways.
o Satisficing searching for and choosing acceptable or satisfactory, ways to respond to problems and opportunities,
rather than trying to make the best decision. When managers satisfice, they search for and choose acceptable, or
satisfactory, ways to respond to problems and opportunities. Managerial dcision making is often more art than
science. Managers must rely on their intuition and judgement to make what seems to them the best decision.
Intuition, of course, has a long history, with its relationship to wisdom and, in turm, wisdom's relationship to ethics.
Steps in the decision making process
• Recognize the need for a decision
• Generate alternatives - so that you have diff responses for opportunities and threats
• Assess alternatives (according to weighted criteria) - use four criteria
o Economic feasibility
• Choose among alternatives
• Implement the chosen alternative - top managers must let middle managers participate in decisions and then give them the
responsibility to make the follow-up decisions necessasry to achieve the goal. They must hold the middle managers
accountable for their performance.
• Learn from feedback - compare what happened and what was expected to happen. Explore why any expectation for the
decision were not met. Develop guidelines that will help in future decision making.
Biases in Decision Making
• 10 most common mistakes in decision making - many of them are related to cognitive bias.
o Plunging in - reaching conclusions too early. o Frame blindness - creating a mental framework for your decision
o Lack of frame control - failing to define the problem in more than one way
o Overconfidence in your judgement
o Shortsighted shortcuts
o Shooting from the hip - failing to follow systematic procedure when making the final decision
o Group failure
o Fooling yourself about feedback
o Not keeping track
o Failure to audit decision process
• Daniel Kahneman and Amos Tversky, suggested that because all decision makers are subject to bounded rationality, they tend
to use heuristics, rules of thumb that simplify the process of making decisions. But heuristics can lead to systematic errors.
Systematic errors are errors that people make over and over again and that results in poor decision making. Cognitive biases
are caused by systematic errors.
• Four sources of bias that can negatively affect the way managers make decisions are prior hypotheses, representativeness,
the illusion of control and escalating commitment.
o Prior hypotheses bias: decision makers who have strong prior beliefs tend to make decisions based on those beliefs
even when presented with evidence that their beliefs are wrong. This is when they fall victim to prior hypothesis bias.
Decision makers use information that is consistent with their prior beliefs and ignore information that contradicts with
their beliefs. Like...parents.
o Representativeness Bias: a cognitive bias resulting from the tendency to generalize inappropriately from a small
sample or from a single vivid case or episode. Like...the investors made the mistake of thinking that marketing on the
internet would be good for any new company.
o Illusion of control: top level managers are prone to this bias. They tend to have