Chapter 5 Decisions-making

The decision-making process

The rational model

The common errors in the decision-making

Types of problems, decisions and level in the organization

Decision-making styles

Making-decision in groups

Exhibit 5-1 The Decision-Making Process

Identification of a problem

Identificationof decision criteria

Allocationof weights To criteria

Development of

alternatives

Analysis ofalternatives

Selection of an alternative

Implementation of the alternative

Evaluation of decisioneffectiveness

The problem A single, All alternatives Preferences Preferences No time Final choiceis clear and well-defined and are clear are constant or cost will maximizeunambiguous goal is to consequences and stable constraints economic be achieved are known exist payoff

Leadto

Rational Decision Making

Exhibit 5-2 Assumptions of Rationality

Bounded Rationality

This is the behavior that people construct simplified models that extract the essential features from problems without capturing all of their complexities in order to decide rationally.

Availability heuristic

This is the tendency to base judgments on information that is readily available.

Representative heuristic

This is the tendency for people to base judgments of probability on things with which they are familiar.

Escalation of commitment

It refers to an increased commitment to a previous decision despite negative information

Exhibit 5-3 Types of Problems , Decisions and Level in the Organization

Level inorganization

Ill-structured

Type of problem

Well-structured

Top

Lower

Programmeddecisions

Nonprogrammeddecisions

Types of Problems

Well-structured problems are problems that are straightforward, familiar to the decision maker, and the goal is clear, the information about them are complete.

Ill-structure problems are new, or unusual, and information about such problems is ambiguous or incomplete.

Types of Decisions

Programmed decision is a repetitive decision that can be handle by a routine approach. (Procedure, rule, policy)

Non-programmed decision is a decision that must be custom-made to solve unique and non-recurring problems.

Exhibit 5-4 Decision-MakingHigh

LowRation Intuitive

Analytic Conceptual

Directive Behavioral

Way of Thinking

Tole

ran

ce f

or

Am

big

uit

y

The Advantages and Disadvantages of Group Decision Making

More complete informationMore alternativesIncreasing acceptance of a solutionIncreasing legitimacy and democracy

Advantages

Time-consumingMinority dominationPressures to conform (groupthink)Ambiguous responsibility

Disadvantages

Several Effective Ways of Group Decision-Making

Brainstorming This is an idea-generating process that encourages

alternatives while withholding criticism.

Nominal group technique This is a decision-making technique in which group

members are physically present but operate independently.

Delphic technique

This is a decision-making technique in which participants are specialist in some field, they are not necessary to assemble together, and required to write solution alternatives anonymously.

Electronic meeting This is a type of nominal group technique in which

participants are linked by computers.

Study & Practice

How to organize an effective meeting?

What’s the actions of the bounded-rational decision maker?

What’s the advantages and disadvantages of group decisions?

Understand several important ways of group decision

Quantitative Decision-Making Techniques

Payoff Matrices

Decision Trees

Break-Even Analysis

Payoff Matrices

Maximax choice

Optimistic decision, maximizing the maximum possible payoff

Maximin choice

Pessimistic decision , maximizing the minimum possible payoff

Regret choice

Minimizing the maximum regret

Exhibit Payoff Matrix for Discover

Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 S2 9 15 18 S3 24 21 15 S4 18 14 28

Exhibit 6-2 Maximax Choice

Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 14 S2 9 15 18 18 S3 24 21 15 24 S4 18 14 28 28

Max

S4 28

Exhibit 6-3 Maximin Choice

Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13 14 11 11 S2 9 15 18 9 S3 24 21 15 15 S4 18 14 28 14

Min

S3 15

Exhibit 6-3 Regret Choice

Discover Marketing strategy Visa’s Response(in millions of $) CA1 CA2 CA3 S1 13(11) 14(7) 11(17) 17 S2 9(15) 15(6) 18(10) 15 S3 24(0) 21(0) 15(13) 13 S4 18(6) 14(7) 28 (0) 7

Max

S4 7

Exhibit 6-4 Decision Trees

=Decision point

=Alternatives branch

=Probability branch

=Possible value

=Outcome point

Exhibit 6-4 Decision Tree and Expected Values for Renting a Large or Small Retail Space

$240,000Rent12,000sq.ft

Rent

20,000sq.ft

Strong

.70

Strong

.70

Weak.30

Weak.30

$320,000

$50,000

$130,000

Expected value(in 000s).70[320]+.30[50]=239

Expected value(in 000s).70[240]+.30[130]=207

Rent12,000sq.ft

Rent

20,000sq.ft

Strong

.70

Strong

.70

Weak.30

Weak.30

$320,000

$50,000

$130,000

Add 4000

$10,000

No expansion

1.0

1.0

$300,000

$240,000

2 years

8 years

19208240

23001008300

n

a

E

E

239010239 lE

2336101303.022407.023007.0 mE

Break-Even Analysis

This is a technique for identifying the point at which total revenue is just sufficient to cover total costs.

Exhibit 6-5 The Break-Even Analysis

F(Total fixed cost)

Rev

enue

s/co

st

Output

S(Total revenue)

O

A

C(Total cost)

Variable cost

Fixed cost

EBreak-even point

B

VCP

TFCBE