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Chapter 11

Chapter 11 - Decision Making.docx

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Department
Business
Course
BU288
Professor
David Scallen
Semester
Winter

Description
Chapter 11- Decision Making What is Decision Making? • The process of developing a commitment to some course of action  making a choice among several alternatives, a process that involves more than just the choice and a commitment of resources  also a process of problem solving Well-Structured Problems • Problem with a clear existing, desired state and how to transition to states – simple problems with clear solutions (often repetitive and familiar) • To avoid error and too much time, they find a standardized way of solving a prob o Often named as rules, routines, rules of things  go directly to solution Ill-Structured Problems • Existing and desired states are unclear as is method of getting to the desired state  Ex. know sales too low but don’t have precise info about the product’s market share (existing state_ and market share of its most successful competitor (ideal state) • Unique, unusual and haven’t been encountered before  more complex and involve a high degree of uncertainty (often arouse controversy + conflict) – high risk o Cannot be programmed – gather information, analyze • Problem identified, search for info, clarifies nature of the problem, create decision criteria, suggests alternative solutions, evaluate vs. decision criteria and best solution is chosen  implementation + monitored over time (control/measure) The Complete Decision Maker – ARational Decision-Making Model Perfect vs. Bounded Rationality • Perfect: strategy that is completely informed (no cost to gather info), perfectly logical and oriented toward economic gain o Have clear and umambigous problem, have stable criterias, viable alternatives that can be ranked, no time or cost contraints and know/pursue maximum payoff • Bounded: relies on limited info + reflects time and political constraints  limited capacity to acquire/processs/act info and are bounded by constraints o Framing: aspects of the presentation of info about a problem that are assumed by decision makers (assumptions about boundaries of a problem, the possible outcomes of a decision or ref points used to decision if success) o Cognitive biases: tendencies to acquire and process info in an error-prone way  assumptions/shortcuts that make it efficient but lead to errors in judgments Problem Identification and Framing • Perfectly rational DM should be a great problem identifier; bounded have problems like: o Perceptual defence: defend perceiver against unpleasant perceptions o Problem defined in terms of functional specialty: selective = domain POV o Problems defined in terms of solution: shortcuts the rational DM process o Problem diagnosed in terms of symptoms: must have true cause of problem, not just solutions to symptoms • Framing refers to the manner in which objectively equivalent alternatives are presented o Make riskier decisions when framed as a loss vs. gain • Whenever a problem is ID, it is framed  same facts, but different decision frames might lead to very different decisions (DM should be conscious of framing and not use a universal frame  look for alternative) Information Search • Clarifies the nature/extent of problem and begins to suggest alternative solutions  Economic person has free/instantaneous access to all info necessary whereas Bounded undergo a costly/slow information search • Little Info – DM often don’t acquire enough info to make good decisions  mentally lazy so they use whatever information is most readily available to them (vivid recent events) o Confirmation bias: tendency to seek out info that conforms to one’s own def of a solution to a problem (overconfident in DM)  DM-based evidence making • Too Much Info (Information Overload) - reception of more info that is necessary to make effective decisions  leads to confusion, errors, omissions, delays and cutting corners and use of low quality information o More info leads to more confidence in the decision + info = power • People value paid information more than free advice Alternative Development, Evaluation and Choice • Perfectly rational knows the value of each alternative and prob= EV  choose the alternative that produces greatest EV • Bounded rationality suffer due to cognitive biases  ignore likelihood of events, use small but identifiable samples, overestimate the odds of complex chains of events and people are poor at revising prob after acquire additional info o Anchoring bias: inadequate adjustment of subsequent estimates from an initial amount that serves as an anchor  using early/first received info as basis for making judgments o Can reduce these effects by making people accountable before making decision • Satisficing: DM establishes an adequate level of acceptability for a solution and screens solution until one of them meets it  not trying to maximize economic gain (perfect person o Identifying a solution that is good enough (don’t find optimal answer) Risky Business • When people frame the alternatives as a choice between gains, they tend to make less risky decision (want to protect sure gains); losses = more risk (50% prob of 50 million loss) • Risk-tolerance can be affected by past experiences (risky business = more risky decisions) Solution Implementation • Can have implementation problems when dependent on others to implement (for example, cars are designed, engineered and produced in a series of stages) Solution Evaluation • Justification – want to avoid dissonance by avoiding careful tests of adequacy of decision, and when that doesn’t happen, people try to justify their decisions • Sunk costs: permanent losses of resources incurred as the result of a decision o Should not factor in new decisions  escalation of commitment: tendency to invest in additional resources in an apparently failing course of action (recoup sunk costs) o Changing one’s mind/reversing previous decisions is perceived as being weak o Avoid escalation of commitment by: reframing the problem to avoid feeling that more resources HAVE to be invested, set specific goals for the project in advance that must be met if resources are invested, place more emphasis on evaluating HOW decisions are made and less on outcomes, separation of decisions  Active commitments (do something – written contract), public commitments, effortful or freely chosen commitment • Hindsight: tendency to review the DM process to find what was done right/wrong o Have tendency to assume we know all along what the outcome of a decision would be  our brains just readjust probs to correspond to what actually happen o Also tendency to take responsibility for good decision outcomes and vice versa How Emotion and MoodAffect Decision-Making • People do not like to be wrong (and escalation of commitment happens due to emotions) • Emotions should be included in DM (if not, they would not properly evaluate impact of deicsions)  strong emotions help make ethical decisions (whistleblowers) and lead to creative solutions/proper use of intuition o But strong emotions make people self-focused/distracted from problem • Moods (relative mild, unfocused states of positive/negative feeling) affect what/how people thinking when making decisions  greatest impact on uncertain/ambiguous problems o People in a positive mood remember positive info and vice-versa o People in positive modd tend to evaluate positively = positive solutions o Positive mood lead to overestimateion of likelihood that good events will happen o Good mean = simplified/short-cut DM strategies (violation of rational model) o Mor
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