MGT CH 10 Decision Making

3 benefits of the Rational Model

1. The quality of decisions may be enhanced, in the sense that they follow more logically from available knowledge and expertise. 2. It makes the reasoning behind a decision transparent and available to scrutiny. 3. if made public, it discourages the decider from acting on suspect considerations (such as personal advancement or avoiding bureaucratic embarrassment)

Simons Normative model--Causes for poor decision making

1. poorly defined processes and practices 2. unclear company vision, mission and goals 3. unwilligness of leaders to take the responsibility 4. lack of reliable, timely information

Judgmental heuristics

A decision making bias. Represent rules of thumb or shortcuts that people use reduce information-processing demands. Decision makers use these heuristics to reduce the uncertainty inherent with the decision making process--however they can lead to systematic errors.

The garbage can model.

A nonrational model for decision making. Decisions result from a complex interaction between four independent streams of events-- problems, solutions, participants and choice opportunities. The interaction of these events create a collection of choices looking for problems, issues and feelings looking for decision situations in which they might be aired, solutions looking for issue to which they might be the answer and decisions maker looking for work. --attractive solutions can get matched up with whatever handy problems exists at the given point of time, or people get assigned to projects because their workm load is low at the time.

Nonrational Models of Decision Making

Attempt to explain how decisions are actually made. They are based on the assumption that decision making is uncertain, that decision makers do not possess complete information and that it is difficult fr managers to make optimal decisions. Include herbet simons normative model and the garbage can model.

Escalation of commitment bias

Bias that refers to the tendency to stick to an ineffective course of action when it is unlikely that the bad situation can be reversed. ex: investing money into an old or broken car. waiting for a bus when you could have easily walked. The following actions can be taken to avoid the escalation of commitment: 1. Set minimum targets for performance, and have decision makers compare their performance against those targets. 2. Regularly rotate managers in key positions throughout a project. 3. encourage decision makers to become less ego-involved with a project 4. make decision makers aware of the costs of persistence.

Overconfidence Bias

Bias that related to our tendency of being overconfident about estimates or forecasts. This bias is particularly strong when you are asked moderate to extremely difficult questions rather than easy ones. This greatly influences entrepreneurs when they want to start and sustain new ventures.

Framing Bias

Bias that relates to the manner in which a question is posed--the tendency to consider risks about gains-saving lives--differently than risks pertaining to losses--losing lives. You are encouraged to frame decision questions in alternative ways in order to avoid this bias.

Stage 3 Rational Model

Evaluate alternatives and select a solution--ethics, feasibility and effectiveness. Should consider the following when looking at alternatives besides cost and quality: 1. is it ethical? 2. is it feasible (time issues, costs are high, resources limited etc it is not feasible) 3. will it remove the causes and solve the problem.

Stage 2 Rational Model

Generate alternative solutions--both the obvious and the creative. Managers run into three decision-making blunders during this stage 1. rushing into judgement 2. selecting readily available ideas or solutions and 3. making poor allocation of resources to study alternative solutions. Decision makers are advised to slow down when making decisions, evaluate a broader set of alternatives and to invest in studying a great number of potential solutions.

Confirmation Bias

Has two components. The first is to subconsciously decide something before investigating why it is the right decision. This leads to the 2nd component, which is to seek information that supports our point of view and to discount information that does not.

Stage 1 Rational Model

Identify the problem or opportunity and determining the actual situation versus the desirable situation --a problem exists when an actual situation and a desired situation differ --an opportunity represents a situation in which there are possibilities to do things that lead to results that exceed goals and expectations.

Stage 4 Rational Model

Implement and Evaluate the solution chosen. If the solution is effective, it should reduce the difference between the actual and desired states that created the problem (if the gap is not closed, the solution implementation was not successful, either the problem was incorrectly identified or the solution was)

Anchoring Bias

Occurs when decision makers are influenced by the first information received about a decision, even if it is irrelevant. This bias happens because initial information, impression, data, feedback, stereotypes anchor our judgments/decisions.

Hindsight bias

Occurs when knowledge of an outcome influences our belief about the probability that we could have predicted the outcome earlier. We are affected by this bias when we look back on a decision and try to reconstruct why we decided to do something.

Satisficing

Part of the normative model. Consists of choosing a solution that meets some minimum qualifications, one that is "good enough". Produces solutions that are satisfactory, opposed to optimal.

Bounded rationality

Part of the normative model. The notion that decision makers are "bounded" or restricted by a variety of constraints when making decisions. The constraints include any personal characteristics or internal (human/social capital)/external (employment levels, capital availability)resources that reduce rational decision making. The constraints of bounded rationality cause the decision maker to fail to evaluate all potential alternatives causing them to satisfice

The Rational Model

Proposes that managers use rational, four step sequences when making decisions. Managers are completely objective and possess complete information to make a decision. This model is criticized for being unrealistic, but is instructive because it analytically breaks down the decision making process and serves as a conceptual anchor for newer models.

Availability Heuristic

Tendency to base decisions on information that is readily available in memory. Information is more accessible in memory when it involves an event that recently occurred, when it is salient (plane crash) and when it evokes strong emotion (college shooting). This heuristtic often causes peoples to overestimate the occurrence of unlikely events.

Simons normative model

The process of decision making is guided by a decision makers bounded rationality.

Optimizing

The rational model is based on the premises that managers do this when they make decisions--this involves solving problems by producing the best possible solution.

Integrating Rational and Nonrational models

There are 4 kinds of decision environments and an effective method of decision making for each. These environments include simple, complicated, complex and chaotic.

Complicated environments

There is a clear relationship between cause and effect, but some people may not see it and more than one solution may be effective. The rational model applies here

Complex environments

There is one right answer but there are so many unknowns that decision makers dont understand the cause and effect relationships. Decision makers need to start out by experimenting, testing options and probing to see what might happen if they look for a creative solution.

Representative Heuristic

Used when people estimate the probability of an event occurring. It reflects the tendency to assess the likelihood of an event occurring based on ones impression about similar occurrences. (ex: hiring someone because they went to a particular university)

chaotic

cause and effect relationships are changing so fast that no pattern emerges. Decision makers have to act first to establish order and then find areas where it is possible to identify patters so that aspects of the problem can be managed.

Simple environments

context is stable, and clear cause and effect relationships can be discerned so the best answer can be agreed upon. This calls for the rational model.