Rational Perspectives on Decision Making Keys to Decision Making

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1 Rational Perspectives on Decision Making Keys to Decision Making
Classical Decision Model Rational Making 9/11/2018 Dr. V R / POM Unit 2

2 Classical Decision Model
An approach to decision making that tells managers how they should make decisions. Approach assumes that managers are logical and rational. Approach assumes that managers’ decisions will be in the best interests of the organization. Conditions suggested in this approach rarely, if ever, exist. 9/11/2018 Dr. V R / POM Unit 2

3 The Classical Model of Decision Making
Obtain complete and perfect information. Eliminate uncertainty. Evaluate everything rationally and logically… …and end up with a decision that best serves the interests of the organization. When faced with a decision situation, managers should… 9/11/2018 Dr. V R / POM Unit 2

4 Rational Decision Making
Consists of six (6) keep the steps that decision maker focused on facts and logic and help guard inappropriate assumptions pitfalls. against and Designed to help the manager approach a decision rationally and logically. 9/11/2018 Dr. V R / POM Unit 2

5 Rational Decision Making. . .(continued)
Recognizing and defining the decision situation Need to ‘define’ precisely what the problem is. Manager must develop a complete understanding of the problem. Manager must carefully analyze and consider the situation. 9/11/2018 Dr. V R / POM Unit 2

6 Rational Decision Making. . .(continued)
Identifying alternatives Managers must realize that their alternatives may be limited by legal, moral and ethical norms, authority economic norms. constraints, available considerations and technology, unofficial social 9/11/2018 Dr. V R / POM Unit 2

7 Rational Decision Making. . .(continued)
3) Evaluating alternatives Each alternative must pass successfully through three stages before it may be worthy of consideration as a solution. Feasibility – Is it financially possible? Is it legally possible? Are there limited human, material and/or informational resources available? Satisfactory – Does the alternative satisfy the conditions of the decision situation? [50% increase in sales] Affordability – How will this alternative affect other parts of the organization? What financial and non-financial costs are associated? The manager must put ‘price tags’ on the consequences of each alternative. Even an alternative that is both feasible and satisfactory must be rejected if the consequences are too expensive for the total system. 9/11/2018 Dr. V R / POM Unit 2

8 Rational Decision Making. . .(continued)
Selecting an alternative Choosing the best alternative is the real test of decision making. Optimization is the goal because a decision is likely to affect several individuals or departments. Finding multiple acceptable alternatives may be possible; selecting one and rejecting the others may not be necessary. 9/11/2018 Dr. V R / POM Unit 2

9 Rational Decision Making. . .(continued)
Implementing the chosen alternative Managers must consider people’s resistance to change when implementing decisions. For some decisions, implementation is easy; for others, very difficult or time consuming. Operational plans are very useful in implementing alternatives. Managers must also recognize that even when all of the consequences alternatives and their have been evaluated as precisely as possible, unanticipated consequences are still likely. 9/11/2018 Dr. V R / POM Unit 2

10 Rational Decision Making. . .(continued)
6) Following up and evaluating the results a) Managers must evaluate the effectiveness of their decisions – did the chosen alternative serve its original purpose? b) If the implemented alternative appears not to be working, the manager has several choices: Another previously identified alternative might be adopted or Recognize that the situation was not correctly defined and start the process all over again or Decide that the alternative has not been given enough time to work or should be implemented in a different way. 9/11/2018 Dr. V R / POM Unit 2

11 Evaluating Alternatives in the Decision-Making Process
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13 Behavioral Aspects of Decision Making
Sometimes decision making must reflect subjective considerations (tastes, etc.) Other behavioral aspects include: political forces, intuition, escalation of commitment, risk propensity and ethics. 9/11/2018 Dr. V R / POM Unit 2

14 Behavioral Aspects. . . (continued)
The Administrative Model of Decision Making Herbert A Simon, a Nobel Prize winner in Economics, developed the model to describe how decisions are often made rather than to prescribe how they should be made. Argues that decision makers have incomplete and imperfect information, are constrained by ‘bounded rationality’ and tend to ‘satisfice’ when making decisions. Bounded rationality suggests that decision makers are limited by their values and unconscious reflexes, skills and habits. [American vs foreign automakers] 9/11/2018 Dr. V R / POM Unit 2

15 Behavioral Aspects. . . (continued)
Satisficing is the tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency. Rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency. 9/11/2018 Dr. V R / POM Unit 2

16 The Administrative Model of Decision Making
Use incomplete and imperfect Information. Are constrained by bounded rationality. Tend to satisfice… ...and end up with a decision that may or may not serve the interests of the organization. When faced with a decision situation managers actually… 9/11/2018 Dr. V R / POM Unit 2

17 Behavioral Aspects. . . (continued)
The Classical and Administrative Models paint picture of However, quite a different making. decision each may be used to better understand how managers make decisions. The Classical Model attempts to explain how managers can at least attempt to be more rational and logical in their approach to decisions. The Administrative Model can be used by managers to develop a better understanding of their inherent biases and limitations. 9/11/2018 Dr. V R / POM Unit 2

18 Behavioral Forces Influencing Decisions
Political Forces in Decision Making Coalition - an individuals or achieve a informal alliance of groups formed to common goal directors, parliament [stockholders, blocs, etc] Impact of a coalition may be positive or negative. Managers must recognize when to use coalitions, how to assess if they are acting in the best interest of the organization and how to control their negative effects. 9/11/2018 Dr. V R / POM Unit 2

19 Behavioral Forces Influencing Decisions
Intuition – is an innate belief about something, without conscious consideration. Deciding to do something because it ‘feels right’ or one has a ‘hunch’. Feeling is based on years of experience and practice in making decisions in similar situations; may help managers make occasional decisions without going through an a-to-z process. 9/11/2018 Dr. V R / POM Unit 2

20 Behavioral Forces Influencing Decisions
Escalation of Commitment – occurs when a decision maker stays with a decision even when it appears to be wrong. [Pan Am holdings] Decision makers must guard against sticking too long with an incorrect decision. However, managers should not ‘bail out’ of a seemingly incorrect decision too soon. 9/11/2018 Dr. V R / POM Unit 2

21 Behavioral Forces Influencing Decisions
Risk Propensity – the extent to which a decision maker is willing to gamble when making a decision. Organizational culture is a prime ingredient in encouraging different levels of risk. 9/11/2018 Dr. V R / POM Unit 2

22 Behavioral Forces Influencing Decisions
Ethics Managerial ethics involves a wide variety of decisions: Relationships of the firm to its employees save money] Relationships [closing a dept to of the employees to the firm Relationships of the firm to other economic agents 9/11/2018 Dr. V R / POM Unit 2

23 For Better 1ndONEsia 9/11/2018 Dr. V R / POM Unit 2