4 Chapter

Foundations
of Decision
Making
Learning Outcomes
• Describe the decision-making process.
• Explain the three approaches managers can use
to make decisions.
• Describe the types of decisions and decision-
making conditions managers face.

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Learning Outcomes (cont.)
• Discuss group decision-making.
• Discuss contemporary issues in managerial
decision making.

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Management Myth
• MYTH: A good decision should be defined by its
outcome.
• TRUTH: A good decision should be judged by the
process used, not the results achieved.

“Think about important decisions you have made

recently. Did you follow a series of steps to think
through while making this decision?”
“Was there a high degree of uncertainty involved in
making the decision?”
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4.1 Describe the
decision-making
process.

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How Do Managers Make Decisions?

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1. Identifying a Decision Problem
Problem:
a discrepancy between an existing and a desired
state of affairs.

“How do managers become aware of such a discrepancy?

They have to compare the current state of affairs with some
standard, which can be past performance, previously set
goals, or the performance of another unit within the
organization.”

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2. Identifying Decision Criteria
Relevant Factors:
• Price
• Model
• Size
• Manufacturer
• Options
• Repair record

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3. Weighting Criteria
1. Most important
criterion assigned a
weight of 10.
2. Other weights
assigned against
this standard.

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4. Developing Alternatives

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5. Analyzing Alternatives

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6. Selecting the Best Alternative

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7. Implementing the Decision

Decision implementation:
putting a decision into action.

- Although the choice process is now complete, the decision

may still fail if it’s not implemented properly.

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8. Evaluating the Decision
Appraising the outcome of the decision:

Was the problem resolved?

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Common Errors

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Common Errors
• Overconfidence bias - they think they know more than they do or
hold unrealistically positive views of themselves.
• Immediate gratification bias - describes decision makers who tend
to want immediate rewards and to avoid immediate costs.
• Anchoring effect -describes when decision makers fixate on initial
information as a starting point and then, once set, fail to adequately
adjust for subsequent information.
• Selective perception bias - when decision makers selectively
organize and interpret events based on their biased perceptions.
• Confirmation bias - decision makers who seek out information that
reaffirms their past choices and discount information that
contradicts past judgments
• Framing bias - when decision makers select and highlight certain
aspects of a situation while excluding others. 16
Common Errors
• Availability bias - is when decisions makers tend to remember
events that are the most recent and vivid in their memory.
• Representation bias - when decision makers assess the likelihood
of an event based on how closely it resembles other events or sets
of events.
• Randomness bias - describes when decision makers try to create
meaning out of random events.
• Sunk costs error - when decision makers forget that current choices
can’t correct the past.
• Self-serving bias -decision makers who are quick to take credit for
their successes and to blame failure on outside factors.
• Hindsight bias - the tendency for decision makers to falsely believe
that they would have accurately predicted the outcome of an event
once that outcome is actually known. 17
4.2 Explain the three
approaches
managers can use to
make decisions.

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Decision Making
Decision making is the essence of management.
Managers—as they plan, organize, lead, and
control—are called decision makers.

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Three Approaches Used to Make
Decisions
• Rational decision making
1) Choices that are consistent and value-maximizing within specified
constraints.
2) Decision maker who was perfectly rational would be fully objective
and logical.
• Bounded rational decision making
1) Since most decisions that managers make don’t fit the assumptions
of perfect rationality, a more realistic approach to describing how
managers make decisions.
2) Managers satisfice, rather than maximize. That is, they accept
solutions that are “good enough.”
• Intuition
1) It’s making decisions on the basis of experience, feelings, and
accumulated judgment.
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2) It’s been described as “unconscious reasoning.”
4.3 Describe the types
of decisions and
decision-making
conditions that
managers face.

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Types of Problems
1. Structured problem : the goal of the
decision maker is clear, the problem familiar,
and information about the problem easily
defined and complete

2. Unstructured problem : situations that are

new or unusual and for which information is
ambiguous or incomplete

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Types of Decisions
Programmed:
Repetitive decisions that can be handled
using a routine approach.

Nonprogrammed:
Repetitive decisions that can be handled
using a routine approach

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Problems, Decision Types, and
Organizational Levels

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4.4
Discuss group
decision-making.

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How Do Groups Make Decisions?
Decisions are often made by groups representing
the people who will be most affected by those
decisions.

•Committees
•Task forces
•Review panels
•Work teams

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Advantages of Group Decision
Making

• More complete information

• Diversity of experiences/perspectives
• More alternatives generated
• Increased acceptance of solution
• Increased legitimacy

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Disadvantages of Group Decision
Making

• Time-consuming
• Minority domination
• Ambiguous responsibility
• Pressures to conform

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Groupthink
When a group exerts extensive pressure on an
individual to withhold his or her different views in
order to appear to be in agreement.

• What it does
• How it occurs
• How to minimize it

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When Are Groups Most Effective?
Individual Group
•Faster decision making •More accurate
•More efficient use of decisions
work hours •More creative
•More heterogeneous
representation
•Greater acceptance of
final solution

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Improving Group Decision Making
Make group decisions more creative by:

1. Brainstorming
2. The nominal group technique
3. Electronic meetings

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4.5 Discuss
contemporary
issues in
managerial decision
making.

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Contemporary Issues

National culture influences the way decisions are

made and the degree of risk involved.

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Contemporary Issues
Creativity lets the decision maker:

• Understand a problem more fully

• See problems others can’t
• Identify all viable alternatives

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Contemporary Issues
Design thinking:
approaching
management problems
as designers approach
design problems

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Contemporary Issues

Big data
The vast amounts of quantifiable information
that can be analyzed by highly sophisticated data
processing.

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