Chapter 5: Decision Making

Managment Science

* Management Science -Application of quantitative techniques such as linear programming and statistics to managerial decision making Origins • Probably around 1940 • England (WW II) - P.M.S. Blackett (U. of Manchester) - His research group = Blackett's Circus -- 3 physiologists -- 2 mathematical physicists -- 1 astrophysicist --1 Army Officer -- 1 Surveyor -- 1 general physicist -- 2 mathematicians -Started in the 1940's -The British (P.M.S. Blackett) -Blackett along with 11 others formed what is now know as Operations Research -Radar -Optimal depth charging -Supply -logistics especially for D-Day -Convoy management -Radio signals to guide night time bombing -pathfinders

Decision Making

-In its simplest sense: 'Decision Making is the act of choosing between two or more courses of action'. - However, it must always be remembered that there may not always be a 'correct' decision among the available choices.

Objective vs. Bounded Reality

* Objective rational decision making - It is correct behavior for maximizing given values for the situation - Form of optimizing an outcome - Choice - among alternatives - Select and execute the best alternative • For a perfect world! Not so! •Optimizing •Maximizing •Single best alternative from all possible alternatives * Bounded Rationality - Taking into account only those few factors that the manager is aware of, understands, and finds relevant •Considers available factors •Requires decision maker understanding & assessment of relevance •"Good enough" rather than "one best way"

Expert Systems (ES) -Artificial Intelligence (AI)

*ES -computerized knowledge based - Reduction of steps to an inference engine -- Combines with a knowledge base of facts and rules for the user interface

Reasoning

- Armed with knowledge and facts - Analytical assessments - Synthesis of the analysis - Form the decision@

Responsibility For The Decision

- Before making a decision, it needs to be clear who is going to take responsibility for the decision. - Remember that it is not always those making the decision who have to assume responsibility for it. BUT they are accountable in the long run. - Is it an individual, a group or an organization? - This is a key question because the degree to which responsibility for a decision is shared can greatly influence how much risk people are willing to take. - If the decision making is for work then it is helpful to consider the structure of the organization that you are in. - Is the individual responsible for the decisions he or she makes or does the organization hold ultimate responsibility? - Who has to carry out the course of action decided? Who will it affect if something goes wrong? - Are you willing to take responsibility for a mistake? - Finally, you need to know who can actually make the decision? - When helping a friend, colleague or client to reach a decision, in most circumstances the final decision and responsibility will be taken by them. - Whenever possible, and if it is not obvious, it is better to make a formal decision as to who is responsible for a decision. - This idea of responsibility also highlights the need to keep a record of how any decision was made, what information it was based on and who was involved. - Enough information needs to be kept to justify that decision in the future so that, if something does go wrong, it is possible to show that your decision was reasonable in the circumstance and given the knowledge you held at the time. - But you are still accountable in the long run!

Non-routine Decisions

- Deal with unstructured situations - Nonrecurring mostly - unique attributes -- Incomplete knowledge -- High uncertainty even risky! --- More involves subjective judgments - Challenge new engineering managers -- Used to structure and facts - Challenge for new engineering managers... -- Develop a tolerance for ambiguity -- Fuzzy situations -- No textbook answer or a solutions manual ~ 10% Top Management Level •Un-Structured •Novel, non-recurring •Judgment / intuition •High uncertainty e.g. life-support, marriage •Requires tolerance for ambiguity

Intuition

- GUT FEEL, unique to each decision maker

1. Listing Possible Solutions/Options

- In order to come up with a list of all the possible solutions and/or options available it is usually appropriate to work on a group (or individual) problem-solving process. - This process, could include brainstorming or some other 'idea generating' process. - This stage is important to the overall decision making processes as a decision will be made from a selection of fixed choices. - Always remember to consider the possibility of not making a decision or doing nothing and be aware that both options are actually potential solutions in themselves.

Computer Information Systems (CIS)

- In the past, each functional area of an organization maintained their own data bases in some form or another. - Expensive and redundant! -Costly --Numerous computer systems maintained --Separate ownership! INTEGRATED DATABASES -Networking computers started -Common databases -Shared information -One time data entry --Updated once and then shared --Problems with access and security TODAY-THE CLOUD - One need not have a full blown laptop and desk top.. - Can employ a tablet and access large number of applications via the cloud and the web - Faster, more mobile, more versatile -Access is massive today. -Security and breeches into cloud based systems -massive problem -Decision makers have access to incredible amounts of knowledge and data.

DSS

- Interactive - Access to a variety of models and software - Work for structured and unstructured type problems. - Problem: The manager must have the technical background to model and comprehend the results then act! All managers have to make decisions -some are more important than others...that's what compensation is all about!

The True test -- Barnard

- Make the important decisions! -- When they cannot be delegated -- And decline to make some decisions - Making the tough calls is the true test of the technical manager!

Decision Making Under Uncertainty

- Risk -variability of outcome; measured by variance or standard deviation -Greater variability is associated with greater risk -Different set of terminology used o"maximax" -optimist; highest possible outcome o"maximin" -pessimist; least bad outcome o"Hurwicz" -between optimism & pessimism o"Expected Value" -expected value o"minimax regret" -smallest difference between best & worst outcome

Delegation

- Some decision can be and are delegated to subordinates. - Delegation of Authority -- Empowered to act on behalf of the higher ranking executive - For the most part the higher ranked executive is accountable for the decisions rendered by delegation!

costs

- lowest unwanted consequences

Management Information Systems (MIS)

-In the past, top managers relied on: --Oral information --Charts, graphs, ...visual --Meetings --Social situations --Just walking around! - With shorter times to make critical decisions, the "old ways" are not cutting it. - Enter MIS and Decision Support Systems (DSS) MIS FOCUS: -Generating improved decisions -Especially for structured problems -Critical data and information is made available almost immediately

Linear Programming (Decision Making Certainty)

-Linear Programming is One of best known tools of Management Science -Used to determine optimal allocation of an organization's limited resources -Computer Solution -Simplex method (George Danzig) -Small problems now solve with a few thousand variables and constraints!

Nature of Decision Making Relation to Planning

-Managerial decision making is the process of making a conscious choice between two or more rational alternatives - Most desirable consequences (benefits) & lowest unwanted consequences (costs) - An essential part of plannin

Benefits

-Most desirable consequences

Pressures of Decision Making

-One is under pressure to make a decision --Equates to stress --Lack of time perhaps --Deal with bounded rationality

Decisions and Implementation

-People make decisions! -A decision is no good or of little value until that decision is put to practice **Leadership is to know that decisions are merely the start, not the end. Next comes the higher-level decisions to sustain and to implement the original decision, and that requires courage.

Management ScienceDistinguishing Characteristics

-Systems view of the problem -all significant interrelated variables -Team approach-heterogeneous backgrounds & training -Emphasis on use of formal mathematical models and statistical and quantitative techniques

Analysis and the manager

-Technical managers MUST have a working knowledge of OR, Statictics, and Simulation methods! -Why? --To define objectives --Explain the system and its operation --A sense of ownership -use the results!

Three Levels of Certainty

1. Certainty -The results of decision alternatives are known 2.Risk -The outcome that will occur after a choice is unknown 3. Uncertainty -The outcome that will occur after a choice is unknown

Management Science Process"Real World" to "Model World" to "Real World"

1. Formulate the Problem (Real World) 2. Construct a Mathematical Model (Model World) 3. Test the Model (Model World) 4. Derive a Solution from the Model (Model World) 5. Apply the Model's Solution to the Real System (Real World)

2 Approaches to Decision Making

1. Intuition 2. Reasoning - Although decisions can be made using either intuition or reasoning, a combination of both approaches is often used. Whatever approach is used, it is usually helpful to structure decision making in order to: -- Reduce more complicated decisions down to simpler steps. -- See how any decisions are arrived at. -- Plan decision making to meet deadlines

7-Step Process Decision Making Stages

1. Listing all possible solutions/options. 2. Setting a time scale and deciding who is responsible for the decision. 3. Information gathering. 4. Weighing up the risks involved. 5. Deciding on values, or in other words what is important. 6. Weighing up the pros and cons of each course of action. 7. Making the decision.

Tools for calculating Decision Making Risk

1. Payoff Table 2. Decision Tree 3. Software Simulation

Types of Decisions

1. Routine 2. Nonroutine

Routine Decisions

1. Routine - from structured situations 1. Decisions that occur frequently 2. Standard situations... 3. Rely on policies, rules, procedures 2. About 90% of all decisions are routine! 1. Some can be delegated downward 3. Engineers face these type most of the time - textbook solutions ~ 90% 1st line management level •Well Structured •Occur frequently •Standard procedures •Low uncertainty e.g. payroll, inventory • Easily delegated • Computer processing

Systems Engineering

An interdisciplinary approach in order to enable the realization of successful systems

Decision Making Risk

Decisions under conditions of Risk: - More than one possible future state of nature - Each state of nature has a known or assumed probability of occurrence - There may not be one future state that yields the best outcome for all alternatives Probabilities can be assumed or based on historical data *The solution to decision making under risk is the alternative that provides the highest expected value 1. The sum of all possible values for a variable, where each value is multiplied by its probability of occurrence. 2. The integral of the probability density function and a continuous random variable over its range of values. Tools 1. "Payoff Table -shows alternatives, states of nature, and payoffs 2. Decision Trees -graphical representation of decisions (squares) and chances (circles) 3. Software simulation: C, C++, Arena

Decision Making is Part of Planning

Planning: - Setting Objectives (requires vision) - Deciding in advance what to do, - How to do it - When to do it - Who is to do it Is making decisions!

Nature of Decision Making Chester Barnard says .......

What requires decision making? - Authoritative communications from superiors - Situations referred from subordinates - Situations developed by the decision maker The most important test of the executive is: - Decisions coming from situations initiated by the decision maker -- No one has asked for a decision -- Can't be criticized for not making a decision - 1. authoritative communications from superiors (cannot be avoided!) - 2. Cases referred for decisions from subordinates - 3. cases originating from the initiative of the managers