Decision Making Decision Making Identifying and choosing solutions that lead to a desired end result Judgment The cognitive aspects of the decision making process The Rational Model proposes that managers use a rational four step sequence when making decisions Managers are completely objective and possess complete information to make a decision Stage1 Identify the Problem or Opportunity Determining the Actual versus the Desirable problem exists when an actual situation and a desired situation differ opportunity represents a situation in which there are possibilities to do things that lead to results that exceed goals and expectations Stage 2 Generate Alternative Solutions Both the Obvious and the Creative Blunders 1 rushing to judgment 2 selecting readily available ideas or solutions and 3 making poor allocation of resources to study alternative solutions Stage 3 Evaluate Alternatives and Se lect a Solution Ethics Feasibility and Effectiveness Stage 4 Implement and Evaluate the Solution Chosen Benefits 1 The quality of decisions may be enhanced in the sense that they follow more logically from all available knowledge and expertise 2 It makes the reasoning behind a decision transparent and available to scrutiny 3 If made public it discourages the decider from acting on suspect considerations such as personal advancement or avoiding bureaucratic embarrassment Nonrational Models of Decision Making attempt to explain how decisions actually are made Based on assumption that decision making is uncertain Decision makers do not have complete information Difficult for managers to make optimal decisions Simon s Normative Model decision makers are bounded or restricted by a variety of constraints when making decisions Personal characteristics limited capacity of the human mind personality and time constraints Internal resources organization s human and social capital financial resources technology plant and equipment and internal processes and systems External resources the organization cannot directly control such as employment levels in the community capital availability and government policies Garbage can model decisions result from a complex interaction between four independent streams of events problems solutions participants and choice opportunities Decision Making Context Simple Context stable clear cause and effect relationships so best answer can be agreed upon Rational Model Complicated Context clear relationship between cause and effect but some people may not see it more than one solution may be effective Rational Model but investigation of all options must be present Complex Context one right answer but so many unknowns that decision makers cannot understand cause and effect relationships decision makers need to start out by experimenting testing options and probing to see what might happen look for creative solution Chaotic Context cause and effect relationships change so fast that no pattern emerges use of intuition to try and find patterns or aspects of the problem that can be managed Evidence based decision making using best available data and evidence when making managerial decisions System 1 Vs System 2 Thinking System 1 Thinking Intuitive fast automatic effortless implicit and emotional System 2 Thinking Calculated slower deliberate conscious effortful explicit and logical Usually our System 1 thinking does suffice but not always Decision Making Biases Availability heuristic a decision maker s tendency to base decisions on information that is readily available in memory cause people to overestimate the occurrence of unlikely events partially responsible for the recency effect People assess the frequency probability or likely causes of an event by the degree to which instances or occurrences of that event are readily available in memory Example Implications Manager more likely to give an employee a positive performance evaluation if the employee exhibited excellent performance over the last few months Representativeness heuristic the tendency to assess the likelihood of an event occurring based on one s impressions about similar occurrences used when people estimate the probability of an event occurring People assess the likelihood of an event occurring based on one s impressions about similar occurrences When making a judgment about an individual object or event people tend to look for traits an individual may have that correspond with previously formed stereotypes Example Implications Manager may hire a graduate from a particular university because the past three people hired from this university turned out to be good performers Confirmation bias first is to subconsciously decide something before investigating why it is the right decision second component which is to seek information that supports our point of view and to discount information that does not Anchoring bias occurs when decision makers are influenced by the first information received about a decision even if it is irrelevant happens because initial information impressions data feedback or stereotypes anchor our subsequent judgments and decisions relates to our tendency to be overconfident about estimates or forecasts Overconfidence bias Hindsight bias occurs when knowledge of an outcome influences our belief about the probability that we could have predicted the outcome earlier affected by this bias when we look back on a decision and try to reconstruct why we decided to do something Framing bias the tendency to consider risks about gains saving lives dif ferently than risks pertaining to losses losing lives Escalation of commitment bias tendency to stick to an ineffective course of action when it is unlikely that the bad situation can be reversed Prospect Theory Framing Losses loom larger than gains Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenants of utility theory This explains why managers will avoid moving resources to implement an innovative idea but start up companies who are already losing money will implement the idea Evidence Based Decision Making Model Implementation Principles Treat your organization as an unfinished prototype No brag just facts See yourself and your organization as outsiders do Evidence based management is not just for senior executives Like everything else you still need to sell it If all else fails slow the spread of bad practice The best diagnostic question what happens when people fail Decision Making Styles
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