Engineering Management Decision Making

Rational Decision Making 8-step Process

1. 2. 3. 4. 5. 6. 7. 8.

Identification of problem Identification of Decision Criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Decide on an alternative Implementation of decision Evaluation of decision
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The Decision-Making Process

Problem Identification
My salespeople need new computers

Identification of Decision Criteria

Price Weight Warranty Screen type Reliability Screen size

Allocation of Weights to Criteria

Reliability 10 Screen size 8 Warranty 5 Weight 5 Price 4 Screen type 3

Development of Alternatives
Acer Compaq Gateway HP Micromedia NEC Sony Toshiba

Analysis of Alternatives
RSWWPS Acer 4 3 4 3 2 6 Compaq 3 4 5 2 6 7 Gateway 9 6 7 7 8 2 HP 3 5 6 7 6 5 Micromedia 2 2 3 4 5 4 NEC 3 45 6 7 2 Sony 7 56 4 2 8 Toshiba 3 45 6 7 3

Selection of an Alternative

Implementation of an Alternative

Acer 125 Compaq 142 Gateway 246 HP 174 Micromedia 103 NEC 151 Sony 192 Toshiba 154

Gateway

Evaluation of Decision Effectiveness

Decisions in the Management Functions

About Rational Decision Making

Is it always possible to make rational decisions?

Single, welldefined goal is to be achieved All alternatives and consequences are known Problem is clear and unambiguous

Preferences are clear

Rational Decision Making

Final choice will maximize payoff

Preferences are constant and stable

No time or cost constraints exist

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Bounded Rationality
behave rationally within the parameters of a simplified decision-making process that is limited by an individuals ability to process information

satisfice - accept solutions that are good

enough

Intuitive decision making

Based on gut feeling

subconscious process of making decisions on the basis of experience, values, and emotions
does not rely on a systematic or thorough analysis of the problem generally complements a rational analysis
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Types of Problems & Decisions

Well-Structured Problems - straightforward,

familiar, and easily defined

Programmed Decisions - used to address

structured problems

minimize the need for managers to use discretion facilitate organizational efficiency

Types of Problems and Decisions

Poorly-Structured Problems - new,

unusual problems for which information is ambiguous or incomplete Nonprogrammed Decisions - used to address poorly- structured problems

produce a custom-made response more frequent among higher-level managers

Procedure, Rule, & Policy

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Types of Problems & Level In the Organization

Ill-structured Top

Type of Problem

Nonprogrammed Decisions

Level in Organization

Programmed Decisions
Well-structured Lower
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Things to consider . . .

Certainty how certain is a particular

outcome? Risk how much risk can you take?

expected value - the conditional return from

each possible outcome

Uncertainty Limited information

prevents estimation of outcome probabilities for alternatives.

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Expected Value for Revenues from the Addition of One Ski Lift

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What to do?
maximax choice optimistic
maximizing the maximum possible payoff taking the best of all possible cases maximin choice pessimistic maximizing the minimum possible payoff taking the best of the worst cases minimax - minimize the maximum regret (difference between what you get and the 14 best case)

Payoff Matrix

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Regret Matrix

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Decision-Making Styles

Dimensions of Decision-Making Styles

Value orientations

Task and technical concerns

People and social concerns

Tolerance for ambiguity

Low tolerance: require consistency and order High tolerance: multiple thoughts simultaneously
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Decision-Making Styles
Directive
Prefer simple, clear solutions Make decisions rapidly Do not consider many alternatives Rely on existing rules

Analytical
Prefer complex problems Carefully analyze alternatives Enjoy solving problems Willing to use innovative methods

Conceptual
Socially oriented Humanistic and artistic approach Solve problems creatively Enjoy new ideas

Behavioral
Concern for their organization Interest in helping others Open to suggestions Rely on meetings

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Decision Making Styles

High

Analytical

Conceptual

Directive
Low Tasks and Technical Concerns

Behavioral
People and Social Concerns

Value Orientation
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Common Errors in Decision Making

Over-confidence Hindsight Self-serving Sunk costs Randomness Representation Availability

Framing Confirmation Selective perception Anchoring Immediate gratification

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Advantages and Disadvantages of GroupAided Decision Making

Advantages
1. Greater pool of knowledge 2. Different perspectives 3. Greater comprehension 4. Increased acceptance 5. Training ground

Disadvantages
1. Social pressure 2. Minority domination 3. Logrolling 4. Goal displacement 5. Groupthink

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Decision-Making Approach Rationality Bounded Rationality Intuition Types of Problems and Decisions Well-structured - programmed Poorly structured - nonprogrammed

Decision-Making Process

Decision-Making Conditions Certainty Risk Uncertainty

Decision Choose best alternative - maximizing - satisficing Implementing Evaluating

Decision Maker Style Directive Analytic Conceptual Behavioral

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