Chapter 3: Foundations of Decision Making Flashcards
What is the decision making process?
A set of 8 steps that includes identifying a problem, selecting a solution and evaluating the effectiveness of the solution.
What are the 8 steps of the decision making process?
. Identification of a problem . Identification of decision criteria . Allocation of weights to criteria . Development of alternatives . Analysis of alternatives . Selection of an alternative . Implementation of the alternative . Evaluation of decision effectiveness
Then it goes back to the start
Step 1 of the decision making process: What is a problem?
The discrepancy between an existing and a desired state of affairs.
Problem identification can be subjective
Step 2 of the decision making process: What is decision criteria?
Factors that are relevant in a decision.
Will be important in solving the problem must be identified.
If a decision maker doesn’t identify a particular factor in this second step, it’s treated as irrelevant.
Eg. Buying a new vehicle because a person’s car doesn’t work. They assess factors that are relevant to their decision, which might include criteria such as price, model and size.
Step 3 of the decision making process: How to determine the importance of criteria?
Decision criteria are not equally important. It’s necessary to allocate weights to the items listed in step 2 in order to give them relative priority in the decision.
A simple approach is to rate criteria’s importance out of 10.
Step 4 of the decisions making process: Developing of alternatives.
After step 3, the decision maker lists the alternatives that could succeed in resolving the problem.
No attempt is made in this step to evaluate the alternatives, only to list them.
Step 5 of the decision making process: Analysis of alternatives.
Once the alternatives have been identified, the decision maker must critically analyse each one. Each alternative is evaluated by appraising it against the criteria.
The strengths and weaknesses of each criteria become evident as they’re compared with the criteria and weights established in steps 2 and 3.
Judgements are reflected in the criteria chosen in step 2, the weights given to the criteria and the evaluation of alternatives.
The influence of personal judgement explains why two car buyers with the same amount of money may look at two totally distinct set of alternatives or even look at the same alternatives and rate them differently.
Step 6 of the decision making process: What determines the best choice?
Step 6 is the critical act of choosing the best alternative from among those assessed.
Since pertinent factors in the decision have been determined, weighted appropriately and identified AND viable alternatives have been assessed, this step is fairly simple.
You merely have to choose the alternative that generated the highest score in step 5.
How do you calculate scores when analysing alternatives (step 5)?
Page 64.
Step 7 of the decision making process: What is decision implementation?
Although the choice process is completed in the previous step, the decision may still fail if it’s not implemented properly.m
Decision implementation - refers to putting a decision into action.
If others will be affected by the decision, implementation also includes conveying the decision to those affected and getting their commitment to it.
Step 8 of the decision making process: What does evaluating decision effectiveness involve
This is where managers appraise the outcome of the decision to see whether the problem was resolved.
Evaluating the results of the deck on is part of the managerial control process (discussed in chapter 13).
What common errors are committed in the decision-making process?
Rules of thumb/heuristics - they may lead to errors and biases in processing and evaluating information.
What are heuristics?
Judgemental shortcuts or ‘rules of thumb’ used to is simplify decision making.
When managers make decisions, they use their own particular style, and may use ‘rules of thumb’ or heuristics, to simply their decision making.
Rules of thumb can be useful because they help make sense of complex, uncertain and ambiguous information.
What are the common decision-making errors and biases?
. Anchoring effect . Selecting perception bias . Confirmation bias . Framing bias . Availability bias . Representation bias . Randomness bias . Sunk costs error . Self-serving . Highlight bias . Overconfidence bias . Immediate gratification effect
Explain the following decision-making errors and biases: anchoring effect, selective perception bias, confirmation bias and framing bias.
Pages 65-66.
Explain the following decision-making errors and biases: availability bias, representation bias, randomness bias and sunk cost error.
Pages 65-66.
Explain the following decision-making errors and biases: self-serving, hindsight bias, overconfidence, immediate gratification effect.
Pages 65-66.
How can managers avoid the negative effects of decision errors and biases?
By being aware of them and then not using them.
Beyond that, managers also should pay attention to ‘how’ they make decisions and try to identify the heuristics they typically use and critically evaluate how appropriate those are.
Finally, managers might want to ask those around them to help identify weaknesses in their decision-making style and try to improve in them.
What are the three approaches managers can use to make decisions?
Decision making is particularly important to managers because it’s part of all four managerial functions.
The three perspectives/perspectives:
. Rational decision making
. Bounded rational decision making
. Intuitive decision making
