Chapter 6

Decision-Making

©2004 by Nelson, a division of Thomson Canada Limited 1

What Would You Do?
 Low gas prices lead to
lower profits
 Lower profits lead to
employee layoffs
 Exploration needs continue
 How will you convince top
management to approve
the risky deepwater
drilling?
©2004 by Nelson, a division of Thomson Canada Limited 2
 Learning Objectives:
What is Rational Decision-
Making?

After reading these next two

sections, you should be able to:

1. explain the steps to rational

decision-making
2. discuss the limits to rational
decision- making
©2004 by Nelson, a division of Thomson Canada Limited 3
Steps to Rational
Decision-Making
1. Define the problem
2. Identify the decision criteria
3. Weight the criteria
4. Generate alternative courses of
action
5. Evaluate each alternative
6. Compute the optimal decision
Adapted from Exhibit 6.1
©2004 by Nelson, a division of Thomson Canada Limited 4
Define the Problem
A problem is a gap between a
desired state and an existing state
 To make decision to solve problems,
managers must:
 be aware of the gap
 be motivated to reduce the gap

have the knowledge, skills, abilities, and
resources to fix the problem

©2004 by Nelson, a division of Thomson Canada Limited 5

Identify Decision
Criteria
Decision criteria are standards used to
guide judgments and decisions
 generally, the more criteria a solution
meets, the better that solution will be

©2004 by Nelson, a division of Thomson Canada Limited 6

Weight the Criteria

Which criteria are more or less

important?
 Absolute comparisons
 each criterion is compared to a
standard or ranked on its own merits
 Relative Comparisons
 each criterion is compared directly to
every other criterion
©2004 by Nelson, a division of Thomson Canada Limited 7
 Absolute Weighting of
Decision Criteria for a Car
Purchase
Performance Design
Criteria Criteria
 Starting/accelerati  Overall look
on
 Interior
 Fuel efficiency
 Handling/steering
 Seats
 Transmission
 Accessories
 Ride quality  Cargo space
 braking  Fit and finish
©2004 by Nelson, a division of Thomson Canada Limited 8
Criteria Used to
Evaluate Best Company
Locations
 Commuting distance
 Operating costs
 Tax rates
 Education level
 Labour costs
 Housing costs

Adapted from Exhibit 6.4

©2004 by Nelson, a division of Thomson Canada Limited 9
Rankings of Cities by
Selection Criteria
Values
Regina 6.10
Saskatoon
5.40
Saint John 5.35
Halifax 5.05
Winnipeg 4.25
Edmonton 3.75
Calgary 3.40
Ottawa 2.75
Adapted from Exhibit 6.5
©2004 by Nelson, a division of Thomson Canada Limited 10
 Limits to Rational
Decision-Making

Bounded Rationality

Risk and Decision-Making Under

Risky Conditions Common Decision-making Mistakes

©2004 by Nelson, a division of Thomson Canada Limited 11

Bounded Rationality
Managers try to take a rational
approach to decision-making.

Constrained by:
 limited resources
 attention problems
 memory problems
 expertise problems

©2004 by Nelson, a division of Thomson Canada Limited 12

Choosing Solutions
 Maximizing decisions
 choosing the best solution
 this is impossible to do
 Satisficing decisions
 choosing the “good enough” solution
 fits with bounded rationality

©2004 by Nelson, a division of Thomson Canada Limited 13

Risk and Decision-
Making under Risky
Conditions
 Rationality assumes decision
making under a condition of
certainty
 complete information and knowledge
of all possible outcomes
 Most decisions are made under
a condition of risk
 there exists a real possibility of losing
©2004 by Nelson, a division of Thomson Canada Limited 14
Effects of Framing on
Decision Making
 Positive frame
 a problem presented as a gain
 become more risk-averse

 Negative frame
 a problem presented as a loss
 become more risk-seeking

©2004 by Nelson, a division of Thomson Canada Limited 15

Conditions of
Uncertainty
The odds or winning or losing are
unknown.
Risk propensity:
 a person’s tendency to take or avoid
risks
 a high risk propensity needed to take
risks under conditions of uncertainty

©2004 by Nelson, a division of Thomson Canada Limited 16

Common Decision-
Making Mistakes
 Over-reliance on intuition
 Availability bias
 Representative bias
 Anchoring and adjustment bias

©2004 by Nelson, a division of Thomson Canada Limited 17

Over-Reliance on
Intuition
 Intuition plays a part in many
managerial decisions
 Intuition works bets for
experienced managers
 Over-reliance can cause people to
become over confident, careless,
and inconsistent

©2004 by Nelson, a division of Thomson Canada Limited 18

Availability Bias
 Tendency of decision makers to
give preference to recent
information, vivid images that
evoke emotions, and specific acts
and behaviours that they
personally observe
 May overlook data

©2004 by Nelson, a division of Thomson Canada Limited 19

Representative Bias
 Unrecognized tendency of decision
makers to judge the likelihood of
an event’s occurrence based on its
similarity to previous events

©2004 by Nelson, a division of Thomson Canada Limited 20

Anchoring and
Adjustment Bias
 Judgment (good-bad, large-small,
yes-no) is “anchored” by an initial
value
 Once the anchor is “dropped”, two
things happen
 all subsequent experiences are
judged by their similarity to the
anchor
 all possible decision alternatives tend
21
©2004 by Nelson, a division of Thomson Canada Limited
to cluster around the anchor
Learning Objectives:
Improving Decision-
Making
After reading these next two
sections, you should be able to:

3. describe how individual decision-

making can be improved
4. explain how group decisions and
group decision-making techniques
can improve decision-making

©2004 by Nelson, a division of Thomson Canada Limited 22

Improving Individual
Decision Making
 Decision rules
 Multivariable testing
 Decision software
 Escalation of commitment

©2004 by Nelson, a division of Thomson Canada Limited 23

Decision Rules
A set of criteria that alternative
solutions must meet to be
acceptable to the decision maker
Two types:
 dictionary rule
 minimum threshold rule

©2004 by Nelson, a division of Thomson Canada Limited 24

Multivariable Testing
A systematic approach of
experimentation used to analyze
and evaluate potential solutions
Improves decision making by:
 relying on data
 encouraging simultaneous evaluation
of several potential solutions

©2004 by Nelson, a division of Thomson Canada Limited 25

Multivariable Testing to
Increase Amusement Park
Attendance on Tuesdays

Free Free
Test 2-for-1 Lunch Parking Profits
Test 1 $4,000
Test 2 X X $2,000
Test 3 X X $9,000
Test 4 X X $5,000

Adapted from Exhibit 6.8

©2004 by Nelson, a division of Thomson Canada Limited 26
Decision Software
 Most decision makers satisfice
 Most decisions are intuitive and
done in an unstructured manner

©2004 by Nelson, a division of Thomson Canada Limited 27

Avoiding Escalation of
Commitment
 The tendency to stick with a “wrong”
decision
 Usually involves an increased
commitment of resources
 To avoid escalation:
 require progress reports
 use outside auditors
 change managers
 label decisions as experimental projects
©2004 by Nelson, a division of Thomson Canada Limited 28
Using Groups to
Improve Decision-
Making
 Advantages and pitfalls
 Structured conflict
 Nominal group technique
 Delphi technique
 Stepladder technique
 Electronic brainstorming

©2004 by Nelson, a division of Thomson Canada Limited 29

Advantages of Group
Decision-Making
Improved problem definition
and increased alternative
generation
 groups view problems form several
perspectives
 groups can find and access more
information than individuals
 greater information and knowledge
allows for more alternative solutions
to be generated
©2004 by Nelson, a division of Thomson Canada Limited 30
Pitfalls of Group
Decision-Making
 Groupthink
 It takes considerable time
 One or two people dominate
discussions

©2004 by Nelson, a division of Thomson Canada Limited 31

Groupthink
A barrier to good decision-making caused
by pressure within the group for members
to agree with each other.
Occurs when:
 group is insulated from different perspectives
 leader expresses a strong preference for one
solution
 no established procedure for defining and
exploring alternatives
 group members are similar in background

©2004 by Nelson, a division of Thomson Canada Limited 32

Structured Conflict
 C-type conflict
 cognitive conflict
 focuses on problem- and issue-related
differences of opinion
 A-type conflict
 affective conflict
 emotional reactions to disagreements

©2004 by Nelson, a division of Thomson Canada Limited 33

 Devil’s Advocacy
1. Generate a potential solution
2. Assign a devil’s advocate to
criticize and question the
solution
3. Present the critique of the
potential solution to decision
makers
4. Gather additional relevant
information
5. Decide whether to use, change,
or not use the originally
©2004 by Nelson, a division of Thomson Canada Limited 34
Dialectical Inquiry
1. Generate a potential solution
2. Identify the assumptions underlying
the potential solution
3. Generate a conflicting counterproposal
based on the opposite assumptions
4. Have advocates of each position
present their arguments and debate
them
5. Decide whether to use, change, or not
use the originally proposed solution

©2004 by Nelson, a division of Thomson Canada Limited 35

What Really Works
Devil’s Advocacy and Dialectical
Inquiry

©2004 by Nelson, a division of Thomson Canada Limited 36

Nominal Group
Technique
 Group members independently write
down as many problem definitions and
alternative solutions as possible
 Ideas are then shared one at a time
 Advantages and disadvantages are
discussed
 Ideas independently ranked
 Idea with the highest average rank is
selected
©2004 by Nelson, a division of Thomson Canada Limited 37
Delphi Technique
 Assemble a panel of experts
 Create a questionnaire of open-ended
questions
 Analyze, summarize and feedback
members’ responses in a report
 Experts list reasons for agreeing or
disagreeing with the report
 Repeat steps 3 and 4 until consensus is
reached

©2004 by Nelson, a division of Thomson Canada Limited 38

Stepladder Technique
 Group members are added to a
group discussion one at a time,
existing group members listen to
each new member’s ideas, and
then the group shares ideas it had
already discussed, discusses the
old and new ideas and then makes
a decision
 requires time to consider the problem
and present ideas
 new members must be unaware of
previous group discussion
©2004 by Nelson, a division of Thomson Canada Limited 39
Electronic
Brainstorming
Four brainstorming rules:
1. the more ideas, the better
2. all ideas are acceptable
3. use others’ ideas to create more
ideas
4. criticism or evaluation of ideas is not
allowed
 Use computers to manage the
process
©2004 by Nelson, a division of Thomson Canada Limited 40
Advantages of
Electronic
Brainstorming
 Overcomes production
blocking
 technology allows everyone to record
their ideas as they are created
 Overcomes evaluation
apprehension
 anonymous process creates free
expression
©2004 by Nelson, a division of Thomson Canada Limited 41
 Disadvantages of
Electronic
Brainstorming
 Greater expense
 Anonymity may bother people
who are used to having their
ideas by virtue of their position
 Some find it difficult to express
themselves in writing
 Lack of typing skills can
frustrate participants

©2004 by Nelson, a division of Thomson Canada Limited 42

What Really Happened?
 Deepwater drilling was a risky
unproven method at the time
 Management’s high risk propensity
led them to begin deepwater
drilling
 The decision was a profitable one

©2004 by Nelson, a division of Thomson Canada Limited 43