L E A R N I N G O U T C O M E SAfter reading this chapter, I will be able to:Describe the steps in the decision-making process.Identify the assumptions of the rational decision-making model.Explain the limits to rationality.Define certainty, risk, and uncertainty as they relate to decision making.Describe the actions of the bounded-rational decision maker.

L E A R N I N G O U T C O M E S (contd)After reading this chapter, I will be able to:Identify the two types of decision problems and the two types of decisions that are used to solve them.Define heuristics and explain how they affect the decision-making process.Identify four decision-making styles.Describe the advantages and disadvantages of group decisions.Explain three techniques for improving group decision making.

Decision-makingDecision-making processA set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solutionProblemA discrepancy between an existing and a desired state of affairsDecision criteriaFactors that are relevant in a decision

Examples of Planning-Function DecisionsWhat are the organizations long-term objectives?What strategies will best achieve those objectives? What should the organizations short-term objectives be? What is the most efficient means of completing tasks? What might the competition be considering?What budgets are needed to complete department tasks?How difficult should individual goals be?EXHIBIT 4.1

The Decision-Making ProcessEXHIBIT 4.2

Criteria and Weight in Car-Buying Decision (Scale of 1 to 10)EXHIBIT 4.3CRITERIONWEIGHTPrice10Interior comfort8Durability5Repair record5Performance3Handling1

Assessment of Car AlternativesEXHIBIT 4.4INITIALINTERIORDURA-REPAIR ALTERNATIVESPRICECOMFORTBILITYRECORDPERFORMANCEHANDLINGTOTALJeep Cherokee210875537Ford Mustang96568640Mercedes C23085664635Pontiac Grand Am95676538Mazda Tribute569107744Dodge Durango105643331Volvo S6048768942Isuzu Axiom76865638BMW 32597644737Audi A65854101042Toyota Camry6510106643Volkswagen Passat86657840

Weighting of Vehicles (Assessment Criteria X Criteria Weight)EXHIBIT 4.5

Decision-making (contd)Decision implementationPutting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it

Making Decisions: The Rational ModelCertaintyThe implication that the outcome of every possible alternative is knownUncertaintyA condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined.RiskThe probability that a particular outcome will result from a given decision

Assumptions of RationalityEXHIBIT 4.6

Making Decisions: The Rational ModelRationalDescribes choices that are consistent and value-maximizing within specified constraintsBounded rationalityBehavior that is rational within the parameters of a simplified model that captures the essential features of a problemSatisficeMaking a good enough decision

Three Elements of CreativityEXHIBIT 4.7Source: T. M. Amabile, Motivating Creativity in Organizations, California Management Review (Fall 1997): 43.Creativity The ability to produce novel and useful ideas

Common Decision-making ErrorsHeuristics: Using judgmental shortcutsAvailability heuristicthe tendency for people to base their judgments on information that is readily available to themRepresentative heuristicThe tendency for people to base judgments of probability on things with which they are familiarEscalation of commitmentAn increased commitment to a previous decision despite negative information

How Do Problems Differ?Well-structured problemsStraightforward, familiar, easily defined problemsIll-structured problemsNew problems in which information is ambiguous or incompleteProgrammed decisionA repetitive decision that can be handled by a routine approachNonprogrammed decisionsDecisions that must be custom-made to solve unique and nonrecurring problems

Programmed Decision-Making AidsPolicyA general guide that establishes parameters for making decisions about recurring problemsProcedureA series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation)RuleAn explicit statement that tells managers what they ought or ought not to do (limits on procedural actions)

Types of Problems, Types of Decisions, and Level in the OrganizationEXHIBIT 4.8

Technology And Decision MakingExpert systemsSoftware that acts like an expert in analyzing and solving ill-structured problemsUse specialized knowledge about a particular problem area rather than general knowledge Use qualitative reasoning rather than numerical calculationsPerform at a level of competence higher than that of nonexpert humans.Neural networksSoftware that is designed to imitate the structure of brain cells and connections among them

Decision Making: StylesDirective styleCharacterizes the low tolerance for ambiguity and a rational way of thinking of individuals who are logical and efficient and typically make fast decisions that focus on the short term.Analytic styleCharacterizes the high tolerance for ambiguity combined with a rational way of thinking of individuals who prefer to have complete information before making a decision.

Decision Making: Styles (contd)Conceptual styleIndividuals who tend to be very broad in outlook, to look at many alternatives, and to focus on the long run and often look for creative solutions. Behavioral styleIndividuals who think intuitively but have a low tolerance for uncertainty; they work well with others, are open to suggestions, and are concerned about the individuals who work for them.

Decision-Making StylesEXHIBIT 4.9

Group Decision MakingAdvantagesMake more accurate decisionsProvides more complete informationOffers a greater diversity of experiences and perspectivesGenerates more alternativesIncreases acceptance of a solutionIncreases the legitimacy of a decision.DisadvantagesIs more time-consuming and less efficientMinority domination can influence decision processIncreased pressures to conform to the groups mindset (groupthink)Ambiguous responsibility for the outcomes of decisions

Improving Group Decision MakingBrainstormingAn idea-generating process that encourages alternatives while withholding criticismNominal group techniqueA decision-making technique in which group members are physically present but operate independentlyElectronic meetingA type of nominal group technique in which participants are linked by computer

Payoff Matrix for VISAEXHIBIT QM1VISA AMERICAN EXPRESS MARKETINGRESPONSE STRATEGY(IN MILLIONS OF $)CA1CA2CA3S1131411 S291518 S3242115 S4181428

Regret Matrix for VISAEXHIBIT QM2VISA AMERICAN EXPRESS MARKETINGRESPONSE STRATEGY(IN MILLIONS OF $)CA1CA2CA3S111717 S215610 S30013 S4670

Decision Tree and Expected Values for Renting a Large or Small Retail SpaceEXHIBIT QM3

The Breakeven AnalysisEXHIBIT QM4

Popular Financial ControlsOBJECTIVERATIOCALCULATIONLiquidity testCurrent ratio_Current assets_ Current liabilitiesAcid testCurrent assets level inventories Current liabilitiesLeverage testDebt-to-assets _Total debt_ Total assetsTimes-interest-earnedProfits before interest and taxes Total interest chargesOperations testInventory turnoverCost of sales InventoryTotal-assets-turnover Revenues Total assetsProfitabilityProfit margin-on-revenuesNet profit after taxes Total revenuesReturn-on-investmentNet profit after taxes Total assetsEXHIBIT QM5

Production Data for Virus SoftwareEXHIBIT QM6Number of Hours Required per UnitWINDOWS MACMONTHLY PRODUCT DEPARTMENT VERSIONVERSION CAPACITY (HOURS)Design462,400Manufacture2.02.0900Profit per unit$18$24

Graphical Solution to Hernandezs Linear Programming ProblemEXHIBIT QM7

Queuing TheoryQueuing theoryA technique that balances the cost of having a waiting line against the cost of service to maintain that line

Determining the Most Economic Order QuantityEXHIBIT QM8

Economic Order QuantityEconomic order quantity (EOQ)A technique for balancing purchase, ordering, carrying, and stock-out costs to derive the optimum quantity for a purchase order