Textbook Notes - Chapter 11

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10 Nov 2010

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MGTB27 / 01 Week 10
- The economic downturn in 2008 ± 2009 is a result of decisions supported by President
Clinton and Bush about making purchasing more affordable and making it more as a right
rather than a privilege
- Result, people took out large sums of loans that they are not able to afford or pay off
What is Decision Making?
- Decision making is the process of developing a commitment to some course of action
- Three factors to consider:
o Choice ± involves making a choice among several action alternatives
o Process/How ± the process and how a decision is made
o Resources ± committing resources such as time, money, or personnel in decision
- Decision making can also be seen as a process of problem solving
- Problem is a perceived gap between an existing state and a desired state
- Decision-making process involves the perception of the existing state, the conception of the
desired state, and the steps needed to move from one state to the other
Well-Structured Problems
- A well-structured problem is when the existing state is clear, the desired state is clear, and
how to get from one state to the other is fairly obvious (problems are repetitive/familiar)
- Organizations would like to program (a standardized way of solving a problem) decision to
make it a well-structured problem since decision making takes time & is prone to error
- Programs can go under: rules, routines, standard operating procedures, or rules of thumb
o E.g. loan application at bank: takes into account income, debt, previous credit and so
- Programs are only as good as the decision-making process that led to the adoption of the
program in the first place (programs may help solve a particular problem but will not
guarantee success on other problems)
Ill-Structured Problems
- A ill-structured problem is when the existing and desired states are unclear and the method
of getting to the desired state are unknown (even when clarified)
- These problems are generally unique, unusual and have not been encountered before
- Involves high degree of uncertainty, tend to be complex, and entail high risk
- Ill-structured problems cannot be solved with programmed decisions but rather un-
programmed decision making (collecting more information and being more self-consciously
analytical in their approach)
The Compleat Decision Maker ± A Rational Decision-Making Model
- The decision making process:
o Identify problem, search for relevant information, develop alternative solutions to the
problem, evaluate alternative solutions, choose best solution, implement chosen
solution, and monitor and evaluate chosen solution
- If difficulties occur at any point in the process, repetition or recycling may be affected
Chapter 11 ± Decision Making (pg. 357 ± 383)
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MGTB27 / 02 Week 10
Perfect versus Bounded Rationality
- Perfect rationality is a decision strategy that is completely informed, perfectly logical, and
oriented toward economic gain (seen as a Economic Person and unrealistic)
- Bounded rationality is a decision strategy that relies on limited information and that reflects
time constraints and political considerations (need to please others)
- Framing, cognitive biases, emotions and mood illustrate the operation of bounded rationality
- Framing refers to the aspects of the presentation of information about a problem that are
assumed by decision makers (can have a powerful impact on resulting decisions)
- Cognitive biases are tendencies to acquire and process information in an error-prone way
(biases can be shortcuts to improve decision making efficiency but can lead to serious errors
in judgment)
Problem Identification and Framing
- A perfectly rational decision maker is infinitely sensitive and completely informed so they
would be a great problem identifier
- A bounded rational person may encounter difficulties in problem identification:
o Perceptual defence
The perceptual system may act to defend the perceiver against unpleasant
perceptions (e.g. people sign low interest loans despite their poor credit scores
since their perceptual system avoids considering disaster scenarios)
o Problem defined in terms of functional specialty
Selective perception can cause decision makers to view a problem that can be
fixed in the domain of their specialty without thinking outside of others
x E.g. employee with marketing background may try to fix poor sales
with focusing on a marketing solution rather than the problem being
due to bad product designs
o Problem defined in terms of solution
Form of jumping to conclusions effectively short-circuits the rational decision-
making process
x E.g. subprime loans were not an appropriate solution for discrimination
in the mortgage market
o Problem diagnosed in terms of symptoms
Real problem involves the cause of the morale problem not only concentrating
on surface symptoms which provides little clues
x E.g. low morale due to poor pay has different solutions compared to
low morale due to boring work
- After a problem is identified, it is necessary to frame it in some way
- Rational decision makers should be very self-conscious about how they frame problems and
try out alterative frames
- Decision makers should avoid overarching, universal frames and it is a good idea to ³SXW
Information Search
- Information search may clarify the nature or extent of the problem and begin to suggest
alternative solutions
- For bounded rationality, the information search might be slow and costly whereas the perfect
rationality has free and instantaneous access to all information
- Too Little Information
o When decision makers do not acquire enough information to make a good decision,
they may rely on several cognitive biases
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MGTB27 / 03 Week 10
o People may be mentally lazy and use whatever information is most readily available to
them which is resides in the memory and curtails the information to make it useful
E.g. manager who experienced a bad experience with a supplier may decide
not to outsource or contracting another order
o Another cognitive bias is overconfidence in their decision making or confirmation
definition or solution to a problem
- Too Much Information
o The bounds of rationality force us to sometimes make decisions with incomplete or
imperfect information, too much information can damage the quality of the decision
o Information overload is the reception of more information than is necessary to make
effective decisions
o Too much information can lead to errors, omissions, delays, cutting corners and
permit low-quality information or irrelevant information to influence a decision
o Some decision makers think that more information is better
confidence in their decisions may increase
If decision maker is afraid RIEHLQJ³NHSWLQWKHGDUN´WKH\PD\DVVRFLDWHWKH
possession of information as power
Research shows that people have a cognitive bias to value advice for which
they have paid for over free advice of equal quality
Alternative Development, Evaluation, and Choice
- For a perfectly rational person, they are totally informed, and ideal decision making is easy
since they conceives all the alternatives and know which has the ultimate value & probability
- Maximization is the choice of the decision alternative with the greatest expected value
- For the bounded rational individual, they may not know all alternative solutions and is unable
to calculate the ultimate values and probabilities of success
- Cognitive biases come into play again here
o People ignore incorporating known existing data in their decisions (base rate)
o Large samples warrant more confidence than small samples
o Decision makers often overestimate the odds of complex events occurring
o The anchoring effect is the inadequate adjustment of subsequent estimates from an
initial estimate that serves as an anchor (e.g. real estate agent allowed the asking price
[anchor] of a house to influence their professional evaluation of the house)
- Possible to reduce some of the basic cognitive biases by making people more accountable for
their decisions by requiring reasoned reports/formal presentations of how decisions are made
- The perfectly rational person will base their decisions on one criterion ± economic gain
- The bounded rational person will have to take in additional criteria such as the acceptability
of a solution to other organizational members (decision making process is more complex)
- Satisficing is establishing an adequate level of acceptability for a solution to a problem and
then screening solutions until one that exceeds this level is found
Risky Business
- Research by Daniel Kahneman and Amos Tversky found:
o When choices are framed by losses, people tend to make risky decisions
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