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Chapter 11

Chapter 11 Notes


Department
Management (MGH)
Course Code
MGHB02H3
Professor
Julie Mc Carthy
Chapter
11

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Chapter 11 Decision Making Notes
What is Decision Making?
x decision making Æ the process of developing a commitment to some course of action
x three things are noteworthy about this definition(1) decision making involves making a choice among several action
alternatives; (2) decision making is a process that involves more than simply the final choice among alternatives; and (3) the
“commitment” mentioned usually involves some commitment of resources, such as time, money, or personnel
x problem Æ a perceived gap between an existing state and a desired state
Well-Structured Problems
x well-structured problem Æ 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; intuitively, these problems are simple, and their solutions arouse little controversy
x because decision making takes time and is prone to error, firms and persons attempt to program it for well-structured problems
x program Æ a standardized way of solving a problem
x programs short-circuit the decision-making process by enabling the decision maker to go directly from problem id to solution
x programs usually go under labels such as rules, routines, standard operating procedures, or rules of thumb
x many problems encountered in firms are well structured, and programmed decision making provides a useful means of solving
them; however, programs are only as good as the decision-making process that led to the adoption of the program in first place
x these difficulties of programmed decision making are seen in the ineffective hiring procedures that some firms use
Ill-Structured Problems
x ill-structured problem Æ a problem, in the extreme case, for which the existing and desired states are unclear and the method of
getting to the desired state (even if clarified) is unknown; are generally unique and tend to be complex and involve a high degree
of uncertainty as well as arousing controversy and conflict among the people who are interested in the decision
x problems cannot be solved with programmed decisions; rather, decision makers must resort to non-programmed decision making
x ill-structured problems can entail high risk and stimulate strong political considerations
The Complete Decision Maker—A Rational Decision-Making Model
x identify problem Æ search for relevant information Æ develop alternative solutions to the problem Æ evaluate alternative
solutions Æ choose the best solution Æ implement the chosen solution Æ monitor and evaluate chosen solution
Perfect versus Bounded Rationality
x perfect rationality Æ a decision strategy that is completely informed, perfectly logical, and oriented toward economic gain
x bounded rationality Æ a decision strategy that relies on limited info and that reflects time constraints and political considerations
x framing Æ aspects of the presentation of information about a problem that are assumed by decision makers; include assumptions
about boundaries of a problem, possible outcomes of a decision, or reference points used to decide if a decision is successful
x how problems and decision alternatives are famed can have a powerful impact on resulting decisions
x cognitive biases Æ tendencies to acquire and process information in an error-prone way; constitute assumptions and shortcuts
that can improve decision-making efficiency, but they frequently lead to serious errors in judgment
Problem Identification and Framing
x the perfectly rational decision maker, infinitely sensitive and completely informed, should be a great problem identifier
x bounded rationality, however, can lead to the following difficulties in problem identification—perceptual defence; problem
defined in terms of functional speciality; problem defined in terms of solution; problem diagnosed in terms of symptoms
x rational decision makers should try to be very self-conscious about how they have framed problems
x also, they should try out alternative frames
x finally, decision makers should avoid overarching, universal frames
Information Search
x sometimes, decision makers do not acquire enough info to make a good decision, for which there are several cognitive biases
x for one thing, people tend to be mentally lazy and use whatever information is most readily available to them
x another cognitive bias that contributes to an incomplete information search is the well-documented tendency for people to be
overconfident in their decision making, which is aggravated by confirmation bias
x confirmation bias Æ the tendency to seek out information that conforms to one’s own definition of or solution to a problem
x too much information can also damage the quality of decisions
x information overload Æ the reception of more information than is necessary to make effective decisions
x information overload can lead to errors, omissions, delay, and cutting corners; in addition, decision makers facing overload often
attempt to use all the information at hand, then get confused and permit low-quality or irrelevant info to influence their decisions
Alternative Development, Evaluation, and Choice
x maximization Æ the choice of the decision alternative with the greatest expected value
x unfortunately, things do not go so smoothly for the decision maker working under bounded rationality
x the decision maker may not know all alternative solutions, and the decision maker may be ignorant of the ultimate values and
probabilities of success of those solutions that the decision maker knows
x it is possible to reduce some of the basic cognitive biases by making people more accountable for their decisions
x however, it is critical that this accountability be in place before a decision is reached
x satisficing Æ establishing an adequate level of acceptability for a solution to a problem and then screening solutions until one
that exceeds this level is found; this solution is chosen for implementation
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