Lecture 2: Decision-Making for a Changing World

The Decision-Making Process

1. Identification of a Problem

2. Identification of Decision Criteria

3. Allocation of Weights to Criteria

4. Development of Alternatives

5. Analysis of Alternatives

6. Selection of an Alternative

7. Implementation of the Alternative

8. Evaluation of Decision Effectiveness

Step 1: Identifying a Decision Problem

Problem: A discrepancy between an existing and a desired state of affairs.

• To identify a problem, compare the current state of affairs with some standard.

  • Example: If a car is no longer worth repairing, then the best decision may be to purchase another car.

Step 2: Identifying Decision Criteria

Decision criteria: Factors that are relevant in a decision.

Relevant Factors:

• Price

• Interior comfort

• Durability

• Repair record

• Performance

• Handling

Step 3: Weighting Criteria

• The decision criteria are not equally important.

• The decision maker has to allocate weights to the items listed in Step 2 to give them their relative priority in the decision.

Example:
Criterion | Weight
Price | 10
Interior comfort | 8
Durability | 5
Repair record | 5
Performance | 3
Handling | 1

Step 4: Developing Alternatives

List the alternatives that could resolve the problem.

Example Alternatives:

• BMW i3

• Ford Focus

• Hyundai Elantra

• Kia Soul

• Toyota Camry

Step 5: Analyzing Alternatives

Critically analyze each alternative by appraising it against the criteria.

Example:
Alternative | Initial Price | Interior Comfort | Durability | Repair Record | Performance | Handling | Total
BMW i3 | 9 | 7 | 6 | 4 | 4 | 7 | 37
Ford Focus | 9 | 6 | 5 | 6 | 8 | 6 | 40
Hyundai Elantra | 8 | 5 | 6 | 6 | 4 | 6 | 35
Kia Soul | 7 | 6 | 8 | 6 | 5 | 6 | 38
Toyota Camry | 6 | 5 | 10 | 10 | 6 | 6 | 43

Step 6: Selecting the Best Alternative

Evaluation of Alternatives:
Assessment = Criteria Weight x Rating

Example:
Alternative | Total Score
BMW i3 | 215
Ford Focus | 223
Hyundai Elantra | 198
Kia Soul | 209
Toyota Camry | 224

Result: Toyota Camry is the best choice based on this evaluation.

Step 7: Implementing the Decision

Decision implementation: Putting a decision into action.

• Even if the choice process is completed, the decision may fail if not implemented properly.

  • Example: Bought a Toyota Camry.

Step 8: Evaluating the Decision

• Did the alternative chosen in Step 6 and implemented in Step 7 accomplish the desired result?

• Did you achieve the desired result?

Common Decision-Making Errors and Biases

Decisions Managers Make

Planning:

• What are the organization’s long-term objectives?

• What strategies will best achieve those objectives?

• What should the organization’s short-term objectives be?

• How difficult should individual goals be?

Leading:

• How do I handle unmotivated employees?

• What is the most effective leadership style in a given situation?

• How will a specific change affect worker productivity?

• When is the right time to stimulate conflict?

Organizing:

• How many employees should report directly to me?

• How much centralization should there be?

• How should jobs be designed?

Controlling:

• What activities in the organization need to be controlled?

• How should those activities be controlled?

• When is a performance deviation significant?

Three Decision-Making Approaches

1. Rational Decision-Making:

   • Describes choices that are consistent and value-maximizing within constraints.

2. Bounded Rationality:

   • Rational within the limits of a manager’s ability to process information.

   • Satisfice: Accepting solutions that are "good enough."

3. Intuitive Decision-Making:

   • Based on values, experience, emotions, or subconscious mental processes.

Types of Problems

• Structured Problem: Straightforward, familiar, easily defined.

• Unstructured Problem: New or unusual, with ambiguous or incomplete information.

Types of Decisions

• Programmed: Repetitive, routine approach.

• Nonprogrammed: Unique, custom-made solutions.

Decision-Making Conditions

• Certainty: All outcomes are known.

• Risk: Likelihood of certain outcomes can be estimated.

• Uncertainty: Neither certainty nor reasonable probability estimates are available.

Contemporary Issues in Managerial Decision Making

• National culture: Influences decision-making styles and risk tolerance.

• Creativity: Helps appraise and identify alternatives.

• Design thinking: Applying design principles to management problems.

• Big Data: Analyzing vast amounts of information with advanced tools.