Management

Fourteenth Edition

Chapter 2
Making Decisions

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Learning Objectives
2.1 Describe the eight steps in the decision-making process.
Develop your skill at being creative.
2.2 Explain the four ways managers make decisions.
2.3 Classify decisions and decision-making conditions.
2.4 Describe how biases affect decision making.
Know how to recognize when you’re using decision-
making errors and biases and what to do about it
2.5 Identify effective decision-making techniques.

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Be A Better Decision-Maker
• A key to success in management and in your career is
knowing how to be an effective decision-maker
• Decision making is the essence of management. It’s what
managers do (or try to avoid).
• And all managers would like to make good decisions
because they’re judged on the outcomes of those
decisions.
• Top-level managers make decisions about their
organization’s goals, where to locate manufacturing
facilities, or what new markets to move into.
• Middle-and lower-level managers make decisions about
production schedules, product quality problems, pay
raises, and employee discipline.
• All organizational members make decisions that affect their
jobs and the organization they work for.
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What is a Decision?
• Decision—a choice among two or more alternatives
• Decision-making is (and should be) a process, not just a simple act of
choosing among alternatives.

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Decision-Making Process

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Decision-Making Process
Step 1: Identify a Problem
• Problem: an obstacle that makes it difficult to
achieve a desired goal or purpose.
• Every decision starts with a problem, a
discrepancy between an existing and a desired
condition.
• Problem: gap (difference) between reality and
expectations
• Don’t confuse problem vs. symptoms
• Problem identification is subjective.
• Example: Amanda is a sales manager whose reps
need new laptops.
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Decision-Making Process
Step 2: Identify the Decision Criteria
• Decision criteria are factors that are important to
resolving the problem.
• Every decision-maker has criteria guiding his or
her decisions even if they’re not explicitly stated
• Example: Amanda decides that memory and
storage capabilities, display quality, battery life,
warranty, and carrying weight are the relevant
criteria in her decision

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Decision-Making Process
Step 3: Allocate Weights to the Criteria
• If the relevant criteria aren’t equally important, the
decision maker must weight the items in order to
give them the correct priority in the decision.
• Example: The weighted criteria for Amanda’s
computer purchase are shown in Exhibit 2-2.

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Exhibit 2-2
Important Decision Criteria

Criterion Weight
Memory and storage 10
Battery life 8
Carrying weight 6
Warranty 4
Display quality 3

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Decision-Making Process
Step 4: Develop Alternatives
• List viable alternatives that could solve the
problem.
• Example: Amanda identifies seven laptops as
possible choices (shown in Exhibit 2-3).

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 Exhibit 2-3
Possible Alternatives
Laptop Memory and Battery Life Carrying Warranty Display
Storage Weight Quality

HP ProBook 10 3 10 8 5

Lenovo IdeaPad 8 5 7 10 10

Apple MacBook 8 7 7 8 7

Toshiba Satellite 7 8 7 8 7

Apple MacBook Air 8 3 6 10 8

Dell Inspirion 10 7 8 6 7

HP Pavilion 4 10 4 8 10

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Decision-Making Process
Step 5: Analyze Alternatives
• Evaluate each alternative
• Use the decision criteria in analyzing not the

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 Exhibit 2-4
Evaluation of Alternatives
Laptop Memory Battery Carrying Warranty Display Total
and Storage Life Weight Quality

HP ProBook 100 24 60 32 15 231

Lenovo IdeaPad 80 40 42 40 30 232

Apple MacBook 80 56 42 32 21 231

Toshiba Satellite 70 64 42 32 21 229

Apple MacBook Air 80 24 36 40 24 204

Dell Inspirion 100 56 48 24 21 249

HP Pavilion 40 80 24 32 30 206

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Decision-Making Process
Step 6: Select an Alternative
• Choose the alternative that generates the highest
total in Step 5.

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Decision-Making Process
Step 7: Implement the Alternative
• Put the chosen alternative into action.
• Convey the decision to those affected and get
their commitment to it.
• Reassess the environment for any changes,
especially if it’s a long-term decision.
• Are the criteria, alternatives, and choice still the
best ones, or has the environment changed in
such a way that we need to reevaluate?

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Decision-Making Process
Step 8: Evaluate Decision Effectiveness
• Evaluate the result or outcome of the decision to
see if the problem was resolved.
• If it wasn’t resolved, what went wrong?
• Maybe we need to redo the earlier process or start
over.
• Also lesson learnt

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Decisions Managers May Make

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Rationality
• Rational Decision-Making: choices that are
logical and consistent and maximize value
• Assumptions of rationality:
– Rational decision maker is logical and objective
– Problem faced is clear and unambiguous
– Decision maker would have clear, specific goal and be aware of all
alternatives and consequences
– The alternative that maximizes achieving this goal will be selected
– Decisions are made in the best interest of the organization

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Bounded Rationality
• Bounded rationality: decision making that’s rational, but
limited by an individual’s ability to process information
• Satisfice: accepting solutions that are “good enough”
• Escalation of commitment: an increased commitment to
a previous decision despite evidence it may have been
wrong
– The Challenger space shuttle disaster is often used as an
example of escalation of commitment. Decision makers chose to
launch the shuttle that day even though the decision was
questioned by several individuals who believed it was a bad one.
Why would decision makers escalate commitment to a bad
decision? Because they don’t want to admit that their initial
decision may have been flawed. Rather than search for new
alternatives, they simply increase their commitment to the original
solution.

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Example Satisfice
• Upon graduation you want a job, preferably as a personal
financial planner with a minimum salary of $55,000 and within
100 miles of your hometown.
• You accept a job offer as a business credit analyst—not
exactly a personal financial planner but still in the finance
field—at a bank 50 miles from home at a starting salary of
$47,500.
• If you had done a more comprehensive job search, you would
have discovered a job in personal financial planning at a trust
company only 25 miles from your hometown and starting at a
salary of $55,000.
• You weren’t a perfectly rational decision maker because you
didn’t maximize your decision by searching all possible
alternatives and then choosing the best.
• But because the first job offer was satisfactory (or “good
enough”), you behaved in a bounded-rationality manner by
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accepting it.
Intuition
• Intuitive decision-making: making decisions on the basis
of experience, feelings, and accumulated judgment
• One survey found that almost half of the executives
surveyed “used intuition more often than formal analysis to
run their companies.”
• Intuitive decision making can complement both rational
and bounded rational decision making.
– First of all, a manager who has had experience with a similar type
of problem or situation often can act quickly with what appears to
be limited information because of that past experience.
– In addition, a recent study found that individuals who experienced
intense feelings and emotions when making decisions actually
achieved higher decision-making performance, especially when
they understood their feelings as they were making decisions.
• The old belief that managers should ignore emotions
when making decisions may not be the best advice.
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Exhibit 2-6
What is Intuition?

Exhibit 2-6 shows the five different aspects of intuition identified by researchers studying
managers’ use of intuitive decision-making.
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Evidence-Based Management
• Evidence-based management (EBMgt): the systematic
use of the best available evidence to improve
management practice.
• The four essential elements of EBMgt are:
– (1) the decision maker’s expertise and judgment;
– (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; and
– (4) relevant organizational (internal) factors such as context,
circumstances, and organizational members.
• The strength or influence of each of these elements on a
decision will vary with each decision.
• The key for managers is to recognize and understand the
mindful, conscious choice as to which elements are most
important and should be emphasized in making a decision.
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Types of Decisions: Structured Problems
and Programmed Decisions
• Structured problems: straightforward, familiar,
and easily defined problems
• Programmed decisions: repetitive decisions that
can be handled by a routine approach

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Types of Programmed Decisions
• Procedure: a series of sequential steps used to
respond to a well-structured problem
• Rule : an explicit statement that tells managers
what can or cannot be done
• Policy: a guideline for making decisions
– The customer always comes first and should always be satisfied.
– We promote from within, whenever possible.
– Employee wages shall be competitive within community
standards.

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Types of Decisions: Unstructured Problems
and Nonprogrammed Decisions
• Unstructured problems: problems that are new
or unusual and for which information is ambiguous
or incomplete
• Nonprogrammed decisions: unique and
nonrecurring and involve custom made solutions

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 Exhibit 2-7
Programmed vs Nonprogrammed Decisions

Characteristic Programmed Decisions Nonprogrammed

Decisions
Type of problem Structured Unstructured
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or incomplete

Goals Clear, specific Vague

Time frame for solution Short Relatively long

Solution relies on… Procedures, rules, policies Judgment and creativity

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Decision-Making Conditions
• Certainty: a situation in which a manager can
make accurate decisions because all outcomes
are known
• Risk: a situation in which the decision maker is
able to estimate the likelihood of certain outcomes
• Uncertainty: a situation in which a decision maker
has neither certainty nor reasonable probability
estimates available

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Managing Risk
• Managers can use historical data or secondary
information to assign probabilities to different
alternatives
• This is used to calculate expected value—the
expected return from each possible outcome—by
multiplying expected revenue by the probability of
each alternative

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 Exhibit 2-8
Expected Value

Event Expected Probability Expected Value of

Revenues Each Alternative
Heavy snowfall $850,000 0.3 $255,000
Normal snowfall $725,000 0.5 $362,000
Light snowfall $350,000 0.2 $70,000
Blank Blank Total expected revenue: $687,500

For each Event in the table, Expected Revenues multiplied by Probability gives the
Expected Value of Each Alternative.
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Making Decision under Uncertainty
• Under these conditions, the choice of alternatives is
influenced by the limited amount of available information
and by the psychological orientation of the decision
maker.
• An optimistic manager will follow a maximax choice
(maximizing the maximum possible payoff);
• A pessimist will follow a maximin choice (maximizing the
minimum possible payoff);
• And a manager who desires to minimize his maximum
“regret” will opt for a minimax choice.
• Let’s look at these different choice approaches using an
example. Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
 Exhibit 2-9
Payoff Matrix
Visa Marketing Strategy (in MasterCard MasterCard MasterCard
millions of dollars CA 1 CA 2 CA 3
Strategy 1 13 14 11
Strategy 2 9 15 18
Strategy 3 24 21 15
Strategy 4 18 14 28

In this example, if our Visa manager is an optimist, she’ll choose strategy 4 (S4)
because that could produce the largest possible gain: $28 million. Note that this
choice maximizes the maximum possible gain (maximax choice).
If our manager is a pessimist, she’ll assume that only the worst can occur. The
worst outcome for each strategy is as follows: S1 = $11 million; S2 = $9 million;
S3 = $15 million; S4 = $14 million. These are the most pessimistic outcomes
from each strategy. Following the maximin choice, she would maximize the
minimum payoff; in other words, she’d select S3 ($15 million is the largest of the
minimum payoffs). Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
 Exhibit 2-10
Regret Matrix
Visa Marketing Strategy (in MasterCard MasterCard MasterCard
millions of dollars CA 1 CA 2 CA 3
Strategy 1 11 7 17
Strategy 2 15 6 10
Strategy 3 0 0 13
Strategy 4 6 7 0
In the third approach, managers recognize that once a decision is made, it
will not necessarily result in the most profitable payoff.. There may be a “regret”
of profits given up—regret referring to the amount of money that could have been
made had a different strategy been used. Regret = Opportunity loss
The maximum regrets are S1 = $17 million; S2 = $15 million; S3 = $13 million;
and S4 = $7 million. The minimax choice minimizes the maximum regret, so our
Visa manager would choose S4. By making this choice, she’ll never have a regret
of profits given up of more than $7 million. This result contrasts, for example, with
a regret of $15 million had she chosen S2 and MasterCard had taken CA1.
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Heuristics
• Heuristics or “rules of thumb” can help make
sense of complex, uncertain, or ambiguous
information.
• However, they can also lead to errors and biases
in processing and evaluating information.

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Exhibit 2-11
Common Decision-Making Biases

Exhibit 2-11 identifies 12 common decision errors of managers and biases they may have.
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Decision-Making Biases and Errors (1 of 4)
• Overconfidence Bias: holding unrealistically
positive views of oneself and one’s performance
• Immediate Gratification Bias: choosing
alternatives that offer immediate rewards and
avoid immediate costs
• Anchoring Effect: fixating on initial information
and ignoring subsequent information

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Decision-Making Biases and Errors (2 of 4)
• Selective Perception Bias: selecting, organizing
and interpreting events based on the decision
maker’s biased perceptions
• Confirmation Bias: seeking out information that
reaffirms past choices while discounting
contradictory information
• Framing Bias: selecting and highlighting certain
aspects of a situation while ignoring other aspects

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Decision-Making Biases and Errors (3 of 4)
• Availability Bias: losing decision-making
objectivity by focusing on the most recent events
• Representation Bias: drawing analogies and
seeing identical situations when none exist
• Randomness Bias: creating unfounded meaning
out of random events

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Decision-Making Biases and Errors (4 of 4)
• Sunk Costs Errors: forgetting that current actions
cannot influence past events and relate only to
future consequences
• Self-serving Bias: taking quick credit for
successes and blaming outside factors for failures
• Hindsight Bias: mistakenly believing that an
event could have been predicted once the actual
outcome is known (after-the-fact)

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Exhibit 2-12
Overview of Managerial Decision Making

Exhibit 2-12 provides an overview of managerial decision making.

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Guidelines for Making Effective Decisions
• Understand cultural differences
• Create standards for good decision making
– Good decisions are forward-looking, use available
information, consider all available and viable options,
and do not create conflicts of interest.
• Know when it’s time to call it quits
• Use an effective decision-making process
• Develop your ability to think clearly
• Build an organization that can spot the
unexpected and quickly adapt to the changed
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Characteristics of an Effective Decision-
Making Process
• Focuses on what’s important
• Is logical and consistent
• Acknowledges subjective and analytical thinking,
blends analytical with intuitive thinking
• Requires only as much information as is needed
to resolve particular dilemma
• Encourages the gathering of relevant information
• Is straightforward, reliable, easy-to-use, flexible
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Highly Reliable Organization (HRO)
• In relation to “Build an organization that can spot the
unexpected and quickly adapt to the changed
environment”, Karl Weick coined the HRO, with 5 features
(habits):
– They’re not tricked by their success: HRO preoccupied
with failures, react quickly to those that do not fit
– They defer to the experts on the front line: rely to those
who interact day to day with customer
– They let unexpected circumstances provide the
solution:
– They embrace complexity: “takes complexity to sense
complexity”, deeper understanding of the situation
– They anticipate, but also recognize their limits: know
what works and what doesn’t
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Design Thinking and Decision Making
• Using a rational and analytical mindset in identifying problems,
coming up with alternatives, evaluating alternatives, and
choosing one of those alternatives—may not be the best, and
is certainly not the only, choice in today’s environment.
• Design thinking: approaching management problems as
designers approach design problems
– Managers should look at problem identification collaboratively and
integratively, with the goal of gaining a deep understanding of the situation.
– Look not only at the rational aspects, but also at the emotional elements.
– Then Design thinking would influence how managers identify and evaluate
alternatives.
– ‘What is something completely new that would be lovely if it existed but
doesn’t now?’ ”
– Design thinking means opening up your perspective and gaining insights by
using observation and inquiry skills and not relying simply on rational
analysis.

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Big Data and Decision-Making
• Big data: the vast amount of quantifiable data that can be
analyzed by highly sophisticated data processing
• “3V’s: high volume, high velocity, and/or high variety
information assets.”
• Can be a powerful tool in decision making, but collecting
and analyzing data for data’s sake is wasted effort
• While Taylor used a stopwatch to time and monitor a
worker’s every movement, big data is using math
modeling, predictive algorithms, and artificial intelligence
software to measure and monitor people and machines
like never before.
• “Companies should remember that while big data is very
good at detecting correlations, it does not explain which
correlations are meaningful.”
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Review Learning Objective 2.1
• Describe the eight steps in the decision-
making process.
– 1. Identify problem
– 2. Identify decision criteria
– 3. Weight the criteria
– 4. Develop alternatives
– 5. Analyze alternatives
– 6. Select alternative
– 7. Implement alternative
– 8. Evaluate decision effectiveness

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Review Learning Objective 2.2 (1 of 2)
• Explain the four ways managers make
decisions.
– Assumptions of rationality
§ The problem is clear and unambiguous
§ A single, well-defined goal is to be achieved
§ All alternatives and consequences are known
§ The final choice will maximize the payoff

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Review Learning Objective 2.2 (2 of 2)
• Satisficing: when decision makers accept solutions that
are good enough
• Escalation of commitment: managers increase
commitment to a decision, even when they have evidence
it may have been a wrong decision
• Intuitive decision making: making decisions on the basis
of experience, feelings, and accumulated judgment
• Evidence-based management: a manager makes
decisions based on the best available evidence

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Review Learning Objective 2.3 (1 of 2)
• Classify decisions and decision-making
conditions.
– Programmed decisions are repetitive decisions that
can be handled by a routine approach and are used
when the problem being resolved is straightforward,
familiar, and easily defined (structured).
– Nonprogrammed decisions are unique decisions that
require a custom-made solution and are used when the
problems are new or unusual (unstructured) and for
which information is ambiguous or incomplete.

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Review Learning Objective 2.3 (2 of 2)
• Classify decisions and decision-making
conditions.
– Certainty is a situation in which a manager can make
accurate decisions because all outcomes are known.
– Risk is a situation in which a manager can estimate the
likelihood of certain outcomes.
– Uncertainty is a situation in which a manager is not
certain about the outcomes and can’t even make
reasonable probability estimates

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Review Learning Objective 2.4
• Describe how biases affect decision-making.
– The 12 common decision-making errors and biases:
§ Overconfidence
§ Immediate gratification
§ Anchoring effect
§ Selective perception
§ Confirmation
§ Framing
§ Availability
§ Representation
§ Randomness
§ Sunk costs
§ Self-serving
§ Hindsight
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Review Learning Objective 2.5 (1 of 2)
• Identify effective decision-making techniques.
– An effective decision-making process:
1. Focuses on what’s important
2. Is logical and consistent
3. Acknowledges subjective and objective thinking
and blends analytical and intuitive approaches
4. Requires only “enough” information as is needed
to solve a problem
5. Encourages and guides gathering relevant
information and informed opinions
6. Is straightforward, reliable, easy to use, and
flexible
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Review Learning Objective 2.5 (2 of 2)
• Design thinking: approaching management
problems as designers approach design problems
• Big Data: when tempered with good judgment, it
can be a powerful tool in decision making

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Copyright

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