Decision-Making

Chapter 6 Decision-Making What Would You Do?     Low gas prices lead to lower profits Lower profits lead to employee layoffs Exploration needs continue How will you convince top management to approve the risky deepwater drilling? Learning Objectives: What is Rational Decision-Making? After reading these next two sections, you should be able to: 1. explain the steps to rational decisionmaking 2. discuss the limits to rational decisionmaking Steps to Rational Decision-Making 1. 2. 3. 4. 5. 6. Define the problem Identify the decision criteria Weight the criteria Generate alternative courses of action Evaluate each alternative Compute the optimal decision Define the Problem A problem is a gap between a desired state and an existing state  To make decision to solve problems, managers must:    be aware of the gap be motivated to reduce the gap have the knowledge, skills, abilities, and resources to fix the problem Identify Decision Criteria Decision criteria are standards used to guide judgments and decisions  generally, the more criteria a solution meets, the better that solution will be Weight the Criteria Which criteria are more or less important?  Absolute comparisons   each criterion is compared to a standard or ranked on its own merits Relative Comparisons  each criterion is compared directly to every other criterion Absolute Weighting of Decision Criteria for a Car Purchase Performance Criteria       Starting/acceleration Fuel efficiency Handling/steering Transmission Ride quality braking Design Criteria       Overall look Interior Seats Accessories Cargo space Fit and finish Criteria Used to Evaluate Best Company Locations       Commuting distance Operating costs Tax rates Education level Labour costs Housing costs Rankings of Cities by Selection Criteria Regina Saskatoon Saint John Halifax Winnipeg Edmonton Calgary Ottawa Values 6.10 5.40 5.35 5.05 4.25 3.75 3.40 2.75 Limits to Rational Decision-Making Bounded Rationality Risk and Decision-Making Under Risky Conditions Common Decision-making Mistakes Bounded Rationality Managers try to take a rational approach to decision-making. Constrained by:     limited resources attention problems memory problems expertise problems Choosing Solutions  Maximizing decisions    choosing the best solution this is impossible to do Satisficing decisions   choosing the “good enough” solution fits with bounded rationality Risk and Decision-Making under Risky Conditions  Rationality assumes decision making under a condition of certainty   complete information and knowledge of all possible outcomes Most decisions are made under a condition of risk  there exists a real possibility of losing Effects of Framing on Decision Making  Positive frame    a problem presented as a gain become more risk-averse Negative frame   a problem presented as a loss become more risk-seeking Conditions of Uncertainty The odds or winning or losing are unknown. Risk propensity:   a person’s tendency to take or avoid risks a high risk propensity needed to take risks under conditions of uncertainty Common DecisionMaking Mistakes     Over-reliance on intuition Availability bias Representative bias Anchoring and adjustment bias Over-Reliance on Intuition    Intuition plays a part in many managerial decisions Intuition works bets for experienced managers Over-reliance can cause people to become over confident, careless, and inconsistent Availability Bias   Tendency of decision makers to give preference to recent information, vivid images that evoke emotions, and specific acts and behaviours that they personally observe May overlook data Representative Bias  Unrecognized tendency of decision makers to judge the likelihood of an event’s occurrence based on its similarity to previous events Anchoring and Adjustment Bias   Judgment (good-bad, large-small, yesno) is “anchored” by an initial value Once the anchor is “dropped”, two things happen   all subsequent experiences are judged by their similarity to the anchor all possible decision alternatives tend to cluster around the anchor Learning Objectives: Improving Decision-Making After reading these next two sections, you should be able to: 3. describe how individual decisionmaking can be improved 4. explain how group decisions and group decision-making techniques can improve decision-making Improving Individual Decision Making     Decision rules Multivariable testing Decision software Escalation of commitment Decision Rules A set of criteria that alternative solutions must meet to be acceptable to the decision maker Two types:   dictionary rule minimum threshold rule Multivariable Testing A systematic approach of experimentation used to analyze and evaluate potential solutions Improves decision making by:   relying on data encouraging simultaneous evaluation of several potential solutions Multivariable Testing to Increase Amusement Park Attendance on Tuesdays Test Test 1 Test 2 Test 3 Test 4 Free Free 2-for-1 Lunch Parking Profits $4,000 X X $2,000 X X $9,000 X X $5,000 Decision Software   Most decision makers satisfice Most decisions are intuitive and done in an unstructured manner Avoiding Escalation of Commitment    The tendency to stick with a “wrong” decision Usually involves an increased commitment of resources To avoid escalation:     require progress reports use outside auditors change managers label decisions as experimental projects Using Groups to Improve Decision-Making       Advantages and pitfalls Structured conflict Nominal group technique Delphi technique Stepladder technique Electronic brainstorming Advantages of Group Decision-Making Improved problem definition and increased alternative generation    groups view problems form several perspectives groups can find and access more information than individuals greater information and knowledge allows for more alternative solutions to be generated Pitfalls of Group Decision-Making    Groupthink It takes considerable time One or two people dominate discussions Groupthink A barrier to good decision-making caused by pressure within the group for members to agree with each other. Occurs when:     group is insulated from different perspectives leader expresses a strong preference for one solution no established procedure for defining and exploring alternatives group members are similar in background Structured Conflict  C-type conflict    cognitive conflict focuses on problem- and issue-related differences of opinion A-type conflict   affective conflict emotional reactions to disagreements Devil’s Advocacy 1. Generate a potential solution 2. Assign a devil’s advocate to criticize and question the solution 3. Present the critique of the potential solution to decision makers 4. Gather additional relevant information 5. Decide whether to use, change, or not use the originally proposed solution Dialectical Inquiry 1. Generate a potential solution 2. Identify the assumptions underlying the potential solution 3. Generate a conflicting counterproposal based on the opposite assumptions 4. Have advocates of each position present their arguments and debate them 5. Decide whether to use, change, or not use the originally proposed solution What Really Works Devil’s Advocacy and Dialectical Inquiry Nominal Group Technique      Group members independently write down as many problem definitions and alternative solutions as possible Ideas are then shared one at a time Advantages and disadvantages are discussed Ideas independently ranked Idea with the highest average rank is selected Delphi Technique      Assemble a panel of experts Create a questionnaire of open-ended questions Analyze, summarize and feedback members’ responses in a report Experts list reasons for agreeing or disagreeing with the report Repeat steps 3 and 4 until consensus is reached Stepladder Technique  Group members are added to a group discussion one at a time, existing group members listen to each new member’s ideas, and then the group shares ideas it had already discussed, discusses the old and new ideas and then makes a decision   requires time to consider the problem and present ideas new members must be unaware of previous group discussion Electronic Brainstorming Four brainstorming rules: 1. 2. 3. 4.  the more ideas, the better all ideas are acceptable use others’ ideas to create more ideas criticism or evaluation of ideas is not allowed Use computers to manage the process Advantages of Electronic Brainstorming  Overcomes production blocking   technology allows everyone to record their ideas as they are created Overcomes evaluation apprehension  anonymous process creates free expression Disadvantages of Electronic Brainstorming     Greater expense Anonymity may bother people who are used to having their ideas by virtue of their position Some find it difficult to express themselves in writing Lack of typing skills can frustrate participants What Really Happened?    Deepwater drilling was a risky unproven method at the time Management’s high risk propensity led them to begin deepwater drilling The decision was a profitable one