CHAPTER 4

FOUNDATIONS OF DECISION
MAKING
DECISION MAKING PROCESS
 WHAT IS A PROBLEM?
• Problem
– Discrepancy between an existing and a desired
state of affairs.
• How do managers become aware of the
discrepancy?
– They have to make a comparison between past
performance, previously set goals, or the
performance of some other unit within the
organization or in other organizations.
 WHAT IS DECISION CRITERIA?
• Factors that are relevant in a decision.
WHAT IS DECISION IMPLEMENTATION?

• Decision implementation
– Putting a decision into action.
 ERRORS AND BIASES
• Overconfidence bias
– When they tend to think they know more than they do
or hold unrealistically positive views of themselves and
their performance.
• Immediate gratification bias
– People who tend to want immediate rewards and to
avoid immediate costs.
• Anchoring effect
– People who fixated on initial information as a starting
point and ignore additional information.
 ERRORS AND BIASES (cont…)
• Selective Perception
– Selectively organize and interpret events based on their
biased perceptions.
• Confirmation
– Only seek out information that reaffirms their past
choices and ignore information that contradicts past
judgment.
• Framing
– Select and highlight certain aspects of situation while
excluding others.
 ERRORS AND BIASES (cont…)
• Availability
– Tend to remember events that are the most recent
and vivid in their memory.
• Representation
– Assess the likelihood of an event based on how
closely it resembles other events or sets of events.
• Randomness
– Try to create meaning out of random events.
 ERRORS AND BIASES (cont…)
• Sunk costs error
– People who tends to forget that current choices can’t
correct the past.
• Self serving
– Who are quick to take credit for their successes and to
blame failure on outside factors.
• Hindsight
– Who falsely believe that they would have accurately
predicted the outcome of an event once that outcome
is actually known.
 THREE PERSPECTIVES ON HOW MANAGERS
MAKE DECISIONS
1. Rational decision making
• They’ll make logical and consistent choices to
maximize value.
• Would be fully objective and logical.
• Problem faced would be clear and unambiguous.
• Decision maker would have a clear and specific goal
and know all possible alternatives and
consequences.
• Decisions are made in the best interests of the
organization.
 THREE PERSPECTIVES ON HOW MANAGERS
MAKE DECISIONS (cont…)
2. Bounded rationality
• Making decisions that are rational within the limits
of a manager’s ability to process information.
• Managers accept solutions that are “good enough”.
• Decision making is also likely influenced by the
organization’s culture, internal politics, power
considerations, and escalation of commitment.
• An increased commitment to a previous decision despite
evidence that it may have been wrong.
WHAT IS INTUITIVE DECISION MAKING?

• Making decisions based on experience,

feelings, and accumulated judgment.
• Also described as “unconscious reasoning”.
INTUITION ROLE IN DECISION MAKING
 TYPES OF DECISIONS
• Structured problem
– A straightforward, familiar, and easily defined
problem.
– Eg: student applying for financial aids.
• Unstructured problem
– A problem that is new or unusual for which
information is ambiguous or incomplete.
– Eg: entering new market segment.
 TYPES OF SOLUTIONS
• Programmed decision
– A repetition decision that can be handled using
routine approach.
– To solve the problem, manager refers to
systematic procedure, rule or policy.
– Procedures: series of interrelated sequential steps
that a manager can use when responding to a
well-structured problem.
 TYPES OF SOLUTIONS (cont…)
• Programmed decision
– Rules: an explicit statement that tells a manager
what he or she ought or ought not to do.
– Policies: Provides guidelines to channel manager’s
thinking in a specific direction.
 TYPES OF SOLUTIONS (cont…)
• Non programmed decision
– Include deciding whether to acquire another
organization, deciding which global markets offer
the most potential, or deciding whether to sell off
an unprofitable division.
– A custom-made, non programmed respond is
required.
 HOW PROBLEMS, TYPES OF DECISIONS, AND
ORGANIZATIONAL LEVEL INTEGRATED?
• Lower level managers always confront familiar and
repetitive problems, so they rely on programmed
decisions.
• Problems faced by managers are likely to become less
structured as they move up.
• Programmed decisions minimize the need for
managers to exercise discretion.
• The more nonprogrammed decision making a
manager required to do, the greater the judgment
needed.
 DECISION-MAKING CONDITIONS
• Certainty
– A situation in which decision maker can make accurate
decisions because all outcomes are known.
• Uncertainty
– A situation in which decision maker has neither
certainty nor reasonable probability estimates
available.
• Risk
– A situation in which decision maker is able to estimate
the likelihood of certain outcomes.
 CONTEMPORARY ISSUES IN MANAGERIAL
DECISION-MAKING
• National culture
– Swedish push the decisions to their employees,
Italian managers rely on tried and proven
alternatives to solve problems.
– Decision making in Japan is group oriented and
focus on long term perspectives which are different
than the Americans.
– France managers are more autocratic in decision
making while Germans focus on structure and order.
 CONTEMPORARY ISSUES IN MANAGERIAL
DECISION-MAKING (cont…)
• Creativity
– The ability to produce novel and useful ideas.
– Important because it allows the decision maker to
appraise and understand the problem more fully,
and think outside of the box.
– Studies confirm that the higher the 3 components,
the higher the creativity.
 CONTEMPORARY ISSUES IN MANAGERIAL
DECISION-MAKING (cont…)
• Creativity
– 3 components are:
– Expertise: foundation of all creative work.
– Creative-thinking skills: personality characteristics such as
intelligence, independence, self-confidence, risk-taking,
internal locus of control, tolerance for ambiguity and
perseverance; ability to use analogies; and the talent to
see the familiar in a different light.
– Intrinsic task motivation: the desire to work on something
because it’s interesting, involving, exciting, satisfying, or
personally challenging.