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Chapter 11

MGTB23 Chapter 11 Study Guide

Management (MGH)
Course Code
Hugh Mac Donald

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I. What is Decision Making?
Decision making is the process of developing a commitment to some course of action. This is a process
that involves making a choice, and it also involves making a commitment of resources such as time,
money or personnel.
A problem exists when a gap is perceived between some existing state and some desired state. Decision
making is also a process of problem solving.
A. Well-Structured Problems
In a well-structured problem, the existing state is clear, the desired state is clear, and how to get from
one state to the other is fairly obvious. Organizations prefer a program or standardized way of solving a
problem when dealing with well-structured problems. Programs short-circuit the decision-making process
by enabling the decision-maker to go directly from problem identification to solution. Many of the
problems encountered in organizations are well structured and programmed. Decision making is a useful
means of solving these problems.
B. Ill-Structured Problems
In an ill-structured problem, the existing and desired states are unclear, and the method of getting to the
desired state is unknown. These problems are usually unique, complex, and have not been encountered
before. Ill-structured problems cannot be solved with programmed decisions. In dealing with these
problems, organizations use non-programmed decision making which means that they will gather more
information and be more self-consciously analytical in their approach. Ill-structured problems can entail
high risk and stimulate political considerations.
II. The Complete Decision MakerA Rational Decision-Making Model
When a rational decision maker identifies a problem, he or she is likely to search for information to
clarify the problem and suggest alternatives; evaluate the alternatives and choose the best for
implementation. The implemented solution is then monitored over time to ensure its immediate and
continued effectiveness. If difficulties occur at any point in the process, repetition or recycling may be
A. Perfect versus Bounded Rationality
Perfect rationality involves a decision strategy that is completely informed, perfectly logical, and oriented
toward economic gain. While useful for theoretical purposes, these characteristics do not exist in real
decision makers. According to Herbert Simon, administrators use bounded rationality rather than perfect
rationality. While they try to act rationally, they are limited in their capacity to acquire and process
information, and time constraints and political considerations also act as bounds to rationality. Framing
and cognitive biases illustrate the operation of bounded rationality.
Framing refers to aspects of the presentation of information about a problem that are assumed by
decision makers. How problems and decisions are framed can have a powerful impact on resulting
Cognitive biases are tendencies to acquire and process information in an error-prone way. They involve
assumptions and shortcuts that can improve decision making efficiency but frequently lead to serious
errors in judgment.
B. Problem Identification and Framing

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The perfectly rational decision maker, infinitely sensitive and completely informed, should be a great
problem identifier. Bounded rationality, however, can lead to several difficulties in problem
· Perceptual defense. The perceptual system may act to defend the perceiver against
unpleasant perceptions.
· Problem defined in terms of functional specialty. Selective perception can cause decision
makers to view a problem as being in the domain of their own specialty.
· Problem defined in terms of solution. This form of jumping to conclusions short-circuits
the rational decision-making process.
· Problem diagnosed in terms of symptoms. A consideration on surface symptoms will
provide the decision maker with few clues about an adequate solution.
C. Information Search
Once a problem has been identified, a search for information is instigated. The perfectly rational
Economic Person has free and instantaneous access to all information necessary to clarify the problem
and develop alternative solutions. Bounded rationality, however, suggests that information search might
be slow and costly.
Too little information. Decision makers may collect insufficient information to make a good decision
because people are mentally lazy and tend to use whatever information is available in memory.
Unfortunately, our memory is more selective then representativewe remember vivid, recent events.
Overconfidence in decision making is also a problem and it is reinforced by confirmation bias - the
tendency to seek out information that conforms to one's own definition of or solution to a problem. These
biases lead people to shirk the acquisition of additional information.
Too much information. Information overload is the reception of more information than is necessary to
make effective decisions. Information overload can lead to errors, omissions, delays, and cutting corners.
Decision makers often attempt to use all of the information and get confused and permit low quality
information or irrelevant information to influence their decisions. While information overload causes
decision quality to deteriorate, decision makers become more confident of their decisions.
D. Alternative Development, Evaluation, and Choice
At times a decision maker may exhibit maximization which is the choice of a decision alternative with
the greatest expected value. Unfortunately, the decision maker operating under bounded rationality may
not know all alternative solutions and may be ignorant of the ultimate values and probabilities of success
for known alternatives.
People are weak intuitive statisticians. They have trouble with base rates, sample size, probability
estimates of multiple event scenarios, and the revision of estimates. An example of this last problem is the
anchoring effect which is the inadequate adjustment of subsequent estimates from an initial estimate that
serves as an anchor. This occurs even when subsequent estimates are far more sophisticated than the
original, naive estimate.
The perfectly rational decision maker can evaluate alternative solutions against a single criterion –
economic gain. The decision maker who is bounded by reality might have to factor in other criteria as
well, such as the political acceptability of the solution to other organizational members. This increases the
complexity of the decision-making task.
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