Principles of Management - Module 4: Decision Making

How does the psychological condition of the manager affect their decision?

In situations of uncertainty, an optimistic manager will follow a maximax choice (maximizing the maximum possible payoff); a pessimistic manager will follow a maximin choice (maximizing the minimum possible payoff); and a manager who desires to minimize regret will opt for a minimax choice (minimizing the maximum regret - the amount of money that could have been made if a difference decision had been made).

What are the six characteristics of an effective decision making process?

1) Focuses on what's important 2) Is logical and consistent 3) Acknowledges both subjective and objective thinking and blends analytical with intuitive thinking 4) Requires only as much information and analysis as is necessary to resolve a particular dilemma 5) Encourages and guides the gathering of relevant information and informed opinion 6) Is straightforward, reliable, easy to use and flexible.

What are the 8 steps in the decision making process?

1) Identify a problem -a discrepancy between an existing and a desired condition. 2) Identifying decision criteria -criteria that define what is relevant/important in making a decision/resolving a problem. 3) Allocating weights to the criteria -order the criteria from most important to least important. 4) Developing alternatives -listing the viable alternatives for resolving a problem. Requires creativity. 5) Analyzing alternatives -Evaluate each alternative with the criteria established in step 2. 6) Selecting an alternative -the best alternative/the one that scored the highest based on the weighted criteria. 7) Implementing the alternative -conveying the decision to those affected by it and obtaining their commitment to it. 8) Evaluating decision effectiveness -assessing the result of the decision to see whether or not the problem has been resolved.

What are the top decision-making biases and errors that occur when managers use heuristics (rules of thumb) to simplify their decision making?

1) Overconfidence 2) Immediate Gratification 3) Anchoring Effect (first impressions carry to much weight) 4) Selective Perception Bias 5) Confirmation Bias -reaffirm past choices 6) Framing bias 7) Availability Bias -recall of only most recent events 8) Representation Bias -judging an event and it's outcomes based on how closely it resembles another. 9) Randomness Bias -creating meaning from random events 10) Sunk Costs Error -dwelling on past mistakes 11) Self-serving bias 12) Hindsight bias -believing they would have accurately predicted the event once it is already known.

What are some guidelines for effective decision making in todays world?

1) Understand cultural differences. 2) Create Standards for good decision making. 3) Know when it's time to call it quits. 4) Use an effective decision-making process. 5) Build an organization that can spot the unexpected and quickly adapt to the changed environment. (HRO's - Highly Reliable Organizations. Karl Weick)

What is a linear thinking style?

A person's preference for sourcing their information through external data and facts, and for processing that information through rational and logical thinking to guide decisions and actions.

What is a non-linear thinking style?

A person's preference for sourcing their information through internal feelings and intuition, and for processing this information with internal insights, feelings, and hunches to guide decisions and actions.

What is a programmed decision?

A repetitive decision that can be handled by a routine approach. There are three possible programmed decisions. 1) A procedure: A series of sequential steps used to respond to a well-structure problem. 2) A rule: an explicit statement that tells managers what can or cannot be done. (These are simple to follow and ensure consistency.) 3) A policy: A guideline for making a decision, establishing parameter for what should be done. (Programmed decisions are usually made by lower-level managers.)

What is a non-programmed decision?

A unique and non-recurring decision that requires a custom-made solution which relies on judgement and creativity. (Non-programmed decisions are usually made by top-level managers.)

What is escalation of commitment?

An increased commitment to a previous decision despite evidence it may have been wrong.

What is design thinking in management?

Approaching management problems as designers approach design problems. i.e. Opening up your perspective and gaining insights by using observation and inquiry skills and not relying simply on rational analysis.

Why is decision making called the essence of management?

Because it is part of all four managerial functions. (Planning, organizing, leading, and controlling all require making decisions.)

What are the three different conditions managers face when making decisions?

Certainty: An ideal situation in which a manger can make accurate decisions because all outcomes are known. Risk: A more common situation. The decision maker is able to estimate the likelihood of certain outcomes. Uncertainty: A situation in which the decision maker has neither certainty nor reasonable probability estimates available. The final decision is influenced by the psychological condition of the manager (ex. is he/she pessimistic or optimistic?).

What is bounded rationality?

Decision making that is rational but limited (bounded) by an individuals ability to process information. As a result of this, managers satisfice, rather than maximize. (which is accepting solutions that are good enough.)

What are the assumptions of rationality?

Decisions are made in the best economic interests of the organization, not in the manager's interests, the problem is clear and unambiguous, a well-defined goal is to be achieved, all alternatives and consequences are known, (preferences are clear, constant and stable, no time or cost constraints exist), final choice will maximize payoff.

What is rational decision making?

Describes choices that are fully objective, logical, and consistent and maximize value.

What are the four different styles of decision making?

Directive Style, Analytic Style, Conceptual Style, Behavioral Style.

What are the two types of decisions managers can make when faced with problems?

Programmed decisions, (in response to structured problems), and Non-programmed decisions, (in response to unstructured problems).

What is the difference between structured problems and unstructured problems?

Structured problems are straightforward and involve clear goals, are familiar (have occurred before), and are easily and completely defined. Information about the problem is available and complete. Unstructured problems are new or unusual problems in which information is ambiguous or incomplete.

What four factors affect the decision making process?

The decision-making approach (rationality, bounded rationality, or intuition), the type of problem (well structured and programmed or unstructured and non-programmed), the decision-making conditions (certainty, risk, or uncertainty), and the decision-making style (linear or non-linear).

What is the behavioral style of decision making?

The management style is characterized by a low tolerance for ambiguity and an intuitive way of thinking.

What is the conceptual style of decision making?

The management style is characterized by an intuitive way of thinking and a high tolerance for ambiguity.

What is intuitive decision making?

The subconscious process of making decisions on the basis of values or ethics, experience, judgement, feelings or emotions (affect-initiated), skills, knowledge, and training (cognitive-based).

What is Evidence-based management? (EBMgt)

The systematic use of the best available evidence to improve management practice. Four essential elements are: 1) the decision maker's expertise and judgement, 2) external evidence that's been evaluated by the decision maker, 3) opinions preferences, and values of those who have a stake in the decision, 4) and relevant organizational (internal) factors such as context, circumstances, and organizational members.

What is the analytic style of decision making?

This management style is characterized by a high tolerance for ambiguity and a rational way of thinking.

What is the directive style of decision making?

This management style is characterized by low tolerance for ambiguity and a rational way of thinking