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Chapter 11

Chapter 11 - Decision Making


Department
Management (MGH)
Course Code
MGHB02H3
Professor
Joanna Heathcote
Chapter
11

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Chapter 11 – Decision Making
What is Decision Making?
-Decision making – the process of developing a commitment to some course of action
-Problem – a perceived gap between an existing state and a desired state
-Well-structured problems – a problem for which the existing state is clear and the desired state
is clear and how to get from one state to the other is fairly obvious
-Program – a standardized way of solving a problem
- Programmed decision making is effective as long as the program is developed rationally and
conditions do not change
-Ill-structured problem – a problem for which the existing and desired states are unclear and the
method of getting to the desired state is unknown
- They are unique and recurrent, requires nonprogrammed decision making
The Complete Decision Maker-a Rational Decision Making Model
-Identify problem search for relevant informationdevelop alternative solutions to the
problemevaluate alternative solutionschoose best solutionimplement chosen
solutionmonitor and evaluate chosen solution
Perfect vs. Bounded Rationality
-Perfect rationality – a decision strategy that is completely informed, perfectly logical and
oriented toward economic gain
- The decision maker get gather info about problems and solutions w/o cost and is completely
informed
- Is perfectly logical, has only one criterion for decision making: economic gain
-Bounded rationality – a decision strategy that relies on limited info and that reflects time
constraints and political consideration
-framing – aspects of the presentation of information about a problem that are assumed by
decision makers
-cognitive biases – tendencies to acquire and process information in a particular way that is prone
to error
Problem Identification and Framing
- bounded rationality lead to difficulties in identifying problems such as:
-perceptual defense – defend perceive against unpleasant perceptions
-problem defined in terms of functional specialty – selective perception cause decision makers to
view problem as being in the domain of their own specialty even when some other perspective
might be warranted
-problem defined in terms of solution – jumping to conclusions
-problem diagnosed in terms of symptoms – concentration on surface symptoms will provide the
decision maker with few clues about an adequate solution
- the real problem involves the cause of the problem
Information search
-too little information – we tend to remember vivid recent events and tendency to be overconfident
in decision making
-confirmation bias –the tendency to seek out info that conforms to one’s own definition of or
solution to a problem
-too much information – information overload – the reception of more information than is
necessary to make effective decisions
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- decision makers tend to think more is better, more satisfied than those who did not experience
overload, even If decisions were of low quality and did not improve with additional info,
confidence in decisions may increase
-managers gather much that has little decision relevance
-use info that they collected an fathered after a decision to justify decision
-request info they do not use
-request more info regardless of what is already available
-complain that here is not enough info to make decision ignoring available info
Alternatives Development, Evaluation and Choice
-maximization – the choice of the decision alternative with the greatest expected value
- expected value = ultimate value x probability
- may not know all alternative solutions
-people avoid incorporating known existing data about the likelihood of events (base rates) into
their decisions
-large samples warrant more confidence than small samples
-decision makers often overestimate the odds of complex chain of events occurring, scenario
sounds sensible despite being less likely with every added link in the chain
-people are poor at revising estimates of probabilities and values as they acquire additional
information
-anchoring effect – the inadequate adjustment of subsequent estimates from an initial estimate
that serves as an anchor
- Decision maker might have to consider political acceptability, will the boss like it?
-Satisficing – establishing an adequate level of acceptability for a solution to a problem and then
screening solutions until one that exceeds this level is found
-When this occurs, evaluation of alternatives cease, solution is chosen for implementation
Risky Business
- When choices framed negatively or in terms of losses, tend to choose riskier that if exposes the
firm to a potential for grater loss
- If framed positively of in terms of savings, choose the less risky option
-Framing refers to the aspects of the presentation of information about a problem that are assumed
by decision makers
- A frame could include assumptions about the boundaries of a problem, the possible outcomes of a
decision or the reference points used to decide if a decision is successful
- Problems that are framed as investment vs. cost or as a potential gain vs. potential loss can affect
decision making processes
-Cognitive biases are tendencies to acquire and process information in a particular way that is
prone to error
- These biases constitute assumptions and shortcuts that can improve decision-making efficiency
but they frequently lead to serious errors in judgment
- i.e. overemphasizing recent info, overconfidence based on past cusses, perceptual defense and
faulty hindsight
Solution Implementation
- When decision is made to choose solution to a problem, solution is implemented
- For bounded decision maker, often dependent on others to implement decisions
Solution Evaluation
-Justificationsunk costs – permanent losses of resources incurred as the result of a decision,
should not enter future decisions
-Escalation of commitment – the tendency to invest additional resources in an apparently failing
course of action
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