“Whenever you see a successful business,

someone once made a courageous

decision.”
-Peter F. Drucker
DECISION MAKING
AND
PROBLEM SOLVING
 THE NATURE OF DECISION
MAKING
• DECISION MAKING
– The process of choosing from among several
alternatives.

• PROBLEM SOLVING
– Finding the answer to a question
 NOTE:
In some situations decision making
and problem solving start out alike
but may lead down different paths.
BASIC ELEMENTS OF
DECISION MAKING
 Information

Goals Alternative Action- Value of Out- Choice of

Actions Outcome comes Relative One
Probabilities To Goals Alternatives
Outcome 1.1
Action 1 Outcome 1.2
Outcome 1.3
Outcome 2.1
Action 2 Outcome 2.2
Outcome 3.3

Outcome 3.1
Action 3 Outcome 3.2
Outcome 3.3
 TYPES OF DECISIONS
• PROGRAMMED DECISION
– A decision that recurs often enough for a decision
rule to be developed.

• DECISION RULE
– A statement that tells a decision maker which alternative to
choose based on the characteristics of the decision situation.
 TYPES OF DECISIONS
• NONPROGRAMMED DECISION
– A decision that recurs infrequently and for which
there is no previously established decision rule.
• PROBLEM SOLVING
– A special form of decision making in which the issue is unique
– it often requires developing and evaluating alternatives
without the aid of a decision rule.
Note: The frequency of recurrence
determines whether a decision is
programmed or nonprogrammed.
 CHARACTERISTICS OF PROGRAMMED and
NONPROGRAMMED DECISIONS
PROGRAMMED NONPROGRAMMED
CHARACTERISTICS
DECISIONS DECISIONS
Type of Decision Well Structured Poorly Structured
Frequency Repetitive and Routine New and Unusual
Goals Clear, Specific Vague
Information Readily Available Not Available, unclear channels

Consequences Minor Major

Organizational Level Lower Levels Upper Levels
Time for Solution Short Relatively Long
Basis for Solution Decision rules, set procedures Judgement and Creativity
 DECISION
MAKING
CONDITIONS
Decisions are made to bring about desired outcomes,
but the information available about those outcomes
varies. The range of available information can be
considered as a continuum whose endpoints represent
complete certainty – when all alternative outcomes are
known – and complete uncertainty, when all alternative
outcomes are unknown. Points between the two
extremes create risk – the decision maker has some
information about the possible outcomes and may be
able to estimate the probability of their occurrence.
 ALTERNATIVE OUTCOMES UNDER DIFFERENT DECISION MAKING
CONDITIONS
Information Probability of Information Goal: to
Alternatives Outcome Maximize
Conditions Occurring Conditions Profit

1.0 $ 10,000,000 Profit $ 10,000,000

Promote
Certainty 1.0 $ 2,000,000 Profit $ 2,000,000
Do Not
Promote
Large Market 0.6 $ 10,000,000 Profit $ 6,000,000 Expected Value:
Promote Small Market 0.4 $ 2,000,000 Profit $ 6,800,000
$ 800,000
Risk Large Market 0.6 $ 2,000,000 Profit $ 1,200,000 Expected Value:
Do Not Small Market 0.4 $ 500,000 Profit $ 200,000 $ 1,400,000
Promote

? Uncertain Outcomes
Promote ? Uncertain Unknown
? Uncertain
Uncertainty ? Uncertain
Do Not ? Uncertain Outcomes
Promote ? Uncertain Unknown
YJHYE
Behavioral Approach
to Decision Making
Behavioral approach is also known as descriptive
approach and administrative model. This theory is
proposed by Herbert A Simon, a well known economist,
in which he attempts to explain how decisions are made
in real life situations. A manager has to make decisions
under different conditions and situations. While taking a
decision how a manager perceives the things, how does
he react and how does he try to resolve, all this is human
behavior.
• Managers have limited and simplified view of problems
because they do not have full information about the
problems, do not possess knowledge of all possible
alternative solutions, do not have the ability to process
environmental and technological information and do
not have sufficient time and resources to conduct an
exhaustive search for alternative solutions to the
problems. Therefore, this model is based on two
concepts: bounded rationality and satisfying.
The decision-making process though a
logical one is a difficult task. All
decisions can be categorized into the
following three basic models:
Bounded Rationality
Model or
Administrative Man
Model
• Bounded Rationality model is based on the
concept developed by Herbert Simon. This
model does not assume individual rationality
in the decision process.
 Instead, it assumes that people, while they
may seek the best solution, normally settle for
much less, because the decisions they confront
typically demand greater information, time,
processing capabilities than they possess. They
settle for “bounded rationality or limited rationality
in decisions. This model is based on certain basic
concepts.
 Sequential Attention to alternative
solution:
• Normally it is the tendency for people to
examine possible solution one at a time
instead of identifying all possible solutions
and stop searching once an acceptable
(though not necessarily the best) solution is
found.
 Heuristic:

• These are the assumptions that guide the

search for alternatives into areas that have a
high probability for yielding success.
 Satisficing:
• Herbert Simon called this “satisficing” that is
picking a course of action that is satisfactory or
“good enough” under the circumstances. It is the
tendency for decision makers to accept the first
alternative that meets their minimally acceptable
requirements rather than pushing them further
for an alternative that produces the best results.
 Suboptimizing
• Knowingly accepting less than the best
possible outcome to avoid unintended
negative effects on the other aspects of the
organization.
OTHER BEHAVIORAL FORCES
IN DECISION MAKING
 Political forces in decision making
• Political forces can play a major role in how
decisions are made.
• Coalition- is an informal alliance of individuals
or groups formed to achieve a common goal.
This common goal often preferred decision
alternative.
 INTUITIVE
• Intuitive decision-making ability is also known
as 'sixth sense' and involves being able to
gather information that other individuals may
miss. It is the opposite of rational decision
making, which is when individuals use
analytics, facts, and a step-by-step process to
come to a decision.
 ESCALATION OF COMMITMENT
• When someone continues to dedicate resources,
including time and money, to a failing course of action.
• It is sometimes easy to feel that if we give up on a
course of action, then we lose the money and time
already committed to that decision. In response, we
sometimes continue to commit resources in an
attempt to turn our failure around. Thereby, increasing
the cost and making it much harder to just
acknowledge a bad decision and move on.
ETHICS AND DECISION MAKING
 ETHICS
• A person’s beliefs about what constitute right and
wrong behavior.
• Ethical behavior is that which conforms to
generally accepted social norms. Some decisions
made by managers may have little or nothing to
do with their own personal ethics, but many
other decisions are influenced by manager’s
ethics.
Here are some criteria that can help ensure appropriate ethical
considerations are part of the decisions being made in the
organization:
• Compliance - Does it conform to the company's values and
code of ethics? Does it meet (should exceed) legal
requirements?
• Promote good and reduce harm - What solution will be good
to the most people while minimizing any possible harm?
• Responsibility - What alternative provides the most
responsible response? Does the solution ensure meeting our
duties as a good corporate citizen?
• Respects and preserves rights - Does the option negatively
impact an individual's or organization's rights?
• Promotes trust - Does the solution lead to honest and open
communication? Is it truthful? Is there full disclosure?
• Builds reputation - Would a headline of your decision
generate pride or shame? Does your solution add to or
detract with the identity you want for the organization?
 Prospect
Theory and
Decision Making
• Focuses on decision under a condition of risk
• Also, it argues that when people make
decisions under a condition of risk they are
more motivated to avoid losses than they are
to seek gains.
 An Integrated
Approach to
Decision Making
• Decision makers use some hybrid of the
rational, behavioral, and integrated
approaches to make the tough day-to-day
decisions in running organizations. Some uses
a methodical process of gathering as much
information as possible. Develop it and
evaluates before making a decision.
 GROUP DECISION MAKING IN
ORGANIZATIONS

Group Polarization – the tendency for a group’s average post-

discussion attitudes to be more extreme that its average pre-
discussion attitudes.
Groupthink – a mode of thinking that occurs when members of a
group are deeply involved in a cohesive in-group, and the desire
for unanimity offsets their motivation to appraise alternative
courses of action.
 SYMPTOMS OF GROUPTHINK
1. An illusion of invulnerability, shared by most or
all members, that creates excessive optimism
and encourages extreme risk taking.

2. Collective efforts to rationalize or discount

warning that might lead members to reconsider
assumptions before recommitting themselves to
past policy decisions.
 SYMPTOMS OF GROUPTHINK
3. An unquestioned belief in the group’s inherent
morality, inclining members to ignore the ethical
and moral consequences of their decisions.
4. Stereotyped views of “enemy” leaders as too
evil to warrant genuine attempts to negotiate or
as too weak or stupid to counter whatever risky
attempts are made to defeat their purposes.
 SYMPTOMS OF GROUPTHINK
5. Direct pressure on a member who expresses strong
arguments against any of the group’s stereotypes,
illusions, or commitments, making clear that such
dissent is contrary to what is expected to loyal
members.
6. Self-censorship of deviations from the apparent group
consensus, reflecting each member’s inclination to
minimize the importance of his or her doubts and
counterarguments.
 SYMPTOMS OF GROUPTHINK
7. A shared illusion of unanimity, resulting partly from
self-censorship of deviations, augmented by the false
assumption that silence means consent
8. The emergence of self-appointed “mindguards”,
members who protect the group from adverse
information that might shatter their shared
complacency about the effectiveness and morality of
their decisions.
Prevention
of
Groupthink
A. Leader prescriptions
1. Assign everyone the role of critical
evaluator.
2. Be impartial; do not state preferences
3. Assign the devil’s advocate role to at
least one group member.
4. Be open to dissenting point of view
B. Organizational prescriptions
1. Set up several independent
groups to study the same issue.
2. Train managers and group
leaders in groupthink prevention
techniques.
C. Individual prescriptions
1. Be a critical thinker
2. Discuss group deliberations
with a trusted outsider; report
back to the group.
D. Process prescriptions
1. Periodically break the group
into subgroups to discuss the issues
2. Take time to study external
factor
3. Hold second-chance meetings
to rethink issues before making a
commitment.
Brainstorming – a technique used in the idea-
generation phase of decision making that assist in
development of numerous alternative courses of action

Nominal group technique – group members follow a

generate-discuss-vote cycle until they reach a decision.

The Delphi technique – a method of systematically

gathering judgements of experts for use in developing
forecasts.