Decision Making

Rational decision making •Also called the classical model •Explains how managers should make ___ (prescriptive) •Assumes managers will make logical and optimal decisions that will maximize ____

-decisions -utility

Assumptions and Explanations of Rational decision making: Assumption: Complete ___, no uncertainty Explanation: you should obtain complete, error free info about all alternative courses of action and the consequences that would follow from each choice. Assumption: Logical, une____ analysis Explanation: Having no prejudices or emotional blind spots, you can logically ___ the alternatives, ranking them from best to worst according to your personal preference. Assumption: Best ____ for the organization Explanation: confident of the best future course of action, you choose the alternative that you believe will most benefit the organization.

-info -unemotional, evaluate -decision

Agree or Disagree: Decision making processes easily follow the rational model because its assumptions are usually met. (Main assumptions: complete information, no uncertainty, logical analysis, best interest for the org)

1. Disagree • These assumptions are very rarely met in the world. As human beings, we have to make decisions with most or all of these assumptions not being met.

Stages of rational decision making: Stage 1: Identify the ___ or opportunity. Stage 2: Think of alternative ____ Stage 3: Evaluate alternatives and select a ____ Stage 4: I___ and evaluate the solution chosen.

1. problem 2. solutions 3. solution 4. Implement

What are the two kinds of decision making processes?

Rational and non rational

Decision making biases: 1. The availability bias 2. The representativeness bias 3. The confirmation bias 4. The sunk cost bias (or escalation of commitment). 5. The anchoring and adjustment bias. 6. The overconfidence bias. 7. The hindsight bias 8. The framing bias.

1. a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision 2. involves estimating the likelihood of an event by comparing it to an existing prototype that already exists in our minds. 3. the tendency to process information by looking for, or interpreting, information that is consistent with one's existing beliefs. 4. we are making decisions that are irrational and lead to suboptimal outcomes. We are focused on our past investments instead of our present and future costs and benefits, meaning that we commit ourselves to decisions that are no longer in our best interests. 5. a cognitive heuristic where a person starts off with an initial idea and adjusts their beliefs based on this starting point 6. a person's subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high 7. a psychological phenomenon that allows people to convince themselves after an event that they accurately predicted it before it happened. 8. a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain

Some limits to perfectly rational decision making •C____: problems beyond understanding •T___ and money constraints: limits to gathering information •Different c____ capacity: (Values, skills, habits, and unconscious reflexes): everyone has limitations and biases that affect judgement. •Imperfect i___: about alternatives and their consequences. •Information ____:too much to process •Different p____: facts and data can be prioritized/ignored. •Conflicting ____: among decision makers.

1. complexity 2. time 3. cognitive 4. information 5. overload 6. priorities 7. goals

Intuition Model Benefit: - helps you when resources (ex: time and money) to gather information are limited. Drawback: - convincing others about your ___ may be difficult - It is also subject to your ___ and your hunch can be entirely wrong.

1. limited 2. hunch 3. biases

Intuition model: -making a choice without the use of conscious thought or ____ inference. -going with your ___ stems from: •_____: a person's explicit and tacit knowledge about a person, situation, object, or a decision opportunity-is known as a holistic hunch. •_____: (or automated experience): The involuntary emotional response to those same matters.

1. logical 2. gut 3. expertise 4. feelings

Word bank: satisficing, optimal, intuition 1. Find the right number of workers to complete a production task. (___ decision making) 2. Selecting the new product that will have the greatest impact on the market. (____ decision making) 3. Selecting a compensation program that will increase employee motivation and productivity. (_____ decision making) 4. Determining the numbers of trucks needed to deliver the product in a large city. (_____ decision making.) 5. Choosing a specialist to help with a massive water leak in the production plant. (____ decision making.)

1. optimal 2. satisficing 3. satisficing 4. optimal 5. intuition

Rational vs Non rational models The use of rational and nonrational models typically depends on the situation. -In some cases, it is possible to gather all information and find the optimal, ____ solution. -In most cases, you should do your best to find good information and evidence to reduce uncertainty and find a ____ alternative. -When time and information are very limited and there is absolutely no way to gather more evidence, you will have to use your ____. You should always try to make sure that your own biases are not limiting your judgement of available alternatives, especially in the case of satisficing and intuition.

1. rational 2. satisficing 3. intuition

Satisficing model -proposed by Herbert Simon in the 1950s, who argued that mangers have bounded rationality: their rationality is bounded by restrictions and constraints. -Proposes that managers do not make an exhaustive search for the optimal alternative, but rather seek alternatives until they find one that is ______. (basically aim for a satisfactory result rather than the optimal solution)

1. restrictions and constraints 2. satisfactory

Decision making biases •It is common to use rules of ____ to make decisions. -These rules help us make a decision quickly. However, they are not always ____. -They may lead to huge ____ and impede high quality decision making. •These are called decision making biases or heuristics

1. thumb 2. reliable 3. errors

What is decision making? -The process for identifying alternative courses of action and choosing one. -This process is at the heart of what managers and leaders do.

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Non rational decision making •Explains how managers make decisions (descriptive). •Assumes that decision making is nearly always uncertain and risky making it difficult to make o___ decisions. • Two main non rational models: 1. S___ 2. I___

optimal 1. satisficing 2. Intuition