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Thursday, July 12, 2012

The Decision-Making Process - Perception

The optimizing decision maker is rational. He or she makes consistent, value-maximizing choices within specified constraints. This also includes the resource crunch and other limitations as well.

The rational decision making model

This model proposes six steps, which are as follows:

Step 1: Defining the problem

Ø  A problem is a discrepancy between an existing and a desired state of affairs.
Ø  Many poor decisions can be traced to the decision-maker overlooking a problem or defining the wrong problem.

Step 2: Identify the decision criteria important to solving the problem.

Ø  The decision maker determines what is relevant in making the decision. Any factors not identified in this step are considered irrelevant to the decision maker.
Ø  This brings in the decision makers interests, values, and similar personal preferences.

Step 3: Weight the previously identified criteria in order to give them the correct priority in the decision.

Step 4: Generate possible alternatives that could succeed in resolving the problem.

Step 5: Rating each alternative on each criterion.

Ø  Critically analyze and evaluate each alternative.
Ø  The strengths and weaknesses of each alternative become evident as they are compared with the criteria and weights established in the second and third steps.

Step 6: The final step is to compute the optimal decision:

Ø  Evaluating each alternative against the weighted criteria and selecting the alternative with the highest total score.

The above-mentioned model works with following assumptions (March, 1994):

Ø  Problem clarity. The decision maker is assumed to have complete information regarding the decision situation.
Ø  Known options. It is assumed the decision maker is aware of all the possible consequences of each alternative.
Ø  Clear preferences. Criteria and alternatives can be ranked and weighted to reflect their importance.
Ø  Constant preferences. Specific decision criteria are constant and the weights assigned to them are stable over time.
Ø  No time or cost constraints. The rational decision maker can obtain full information about criteria and alternatives because it is assumed that there are no time or cost constraints.
Ø  Maximum payoff. The rational decision maker will choose the alternative that yields the highest perceived value.

Creativity in Decision Making

Creativity is the ability to produce novel and useful ideas. These are ideas that are not only different from what has been done before, but, that are also appropriate to the problem or opportunity presented. People differ in their inherent creativity. A study of lifetime creativity of 461 men and women found that fewer than one percent were exceptionally creative. Ten percent were highly creative, and about sixty percent were somewhat creative.

Model of creativity

This model proposes that individual creativity essentially requires expertise, creative-thinking skills, and intrinsic task motivation.

Ø  Expertise is the foundation for all creative work. The potential for creativity is enhanced when individuals have abilities, knowledge, proficiencies, and similar expertise in their field of endeavor.
Ø  Creative thinking skills. This encompasses personality characteristics associated with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light.
Ø  Intrinsic task motivation. The desire to work on something because it is interesting, involving, exciting, satisfying, or personally challenging. This turns creativity potential into actual creative ideas. It determines the extent to which individuals fully engage their expertise and creative skills

Most decisions in the real world do not follow the rational model. Decision-makers generally make limited use of their creativity. Choices tend to be confined to the neighborhood of the problem symptom and to the neighborhood of the current alternative.

Two of the most important ways of decision-making in organizations are:

Ø  Bounded Rationality
Ø  Intuitive decision making

Bounded rationality

When faced with a complex problem, most people respond by reducing the problem to a level at which it can be readily understood, due to limited information-processing capability. As a result, people seek solutions that are satisfactory and sufficient. This is called bounded rationality (Simon, 1947). Individuals operate within the confines of bounded rationality. They construct simplified models that extract the essential features.
How does bounded rationality work? Once a problem is identified, the search for criteria and alternatives begins. The decision maker will identify a limited list made up of the more conspicuous choices, which are easy to find, tend to be highly visible, and they will represent familiar criteria and previously tried-and-true solutions. Once this limited set of alternatives is identified, the decision-maker will begin reviewing it. The decision-maker will begin with alternatives that differ only in a relatively small degree from the choice currently in effect. The first alternative that meets the “good enough” criterion ends the search. The order in which alternatives are considered is critical in determining which alternative is selected. Assuming that a problem has more than one potential solution, the satisficing choice will be the first acceptable one the decision-maker encounters. Alternatives that depart the least from the status quo are the most likely to be selected.

Intuitive decision making

It is an unconscious process created out of distilled experience. It operates in complement with rational analysis. On one hand, some researchers consider it a form of extrasensory power or sixth sense, and on the other hand, some believe it is a personality trait that a limited number of people are born with.

Eight conditions when people are most likely to use intuitive decision making are:

Ø  when a high level of uncertainty exists
Ø  when there is little precedent to draw on
Ø  when variables are less scientifically predictable
Ø  when “facts” are limited
Ø  when facts do not clearly point the way to go
Ø  when analytical data are of little use
Ø  when there are several plausible alternative solutions to choose from, with good arguments for each
Ø  when time is limited, and there is pressure to come up with the right decision

Decision making process

A. Problem Identification

Problems that are visible tend to have a higher probability of being selected than ones that are important. Visible problems are more likely to catch a decision-makers attention. If a decision-maker faces a conflict between selecting a problem that is important to the organization and one that is important to the decision-maker, self-interest tends to win out. The decision-maker's self interest also plays a part. While selecting a decision to solve a problem, decision maker puts more importance to his/her self-interest over the organizational interest.

B. Alternative Development

Since decision-makers seek a satisficing solution, there is a minimal use of creativity in the search for alternatives. Efforts tend to be confined to the neighborhood of the current alternative. Evidence indicates that decision-making is incremental rather than comprehensive. Decision-makers make successive limited comparisons. The picture that emerges is one of a decision-maker who takes small steps toward his or her objective.

C. Making Choices

In order to avoid information overload, decisionakers rely on heuristics or judgmental shortcuts in decision making. There are two common categories of heuristics – availability and representativeness. Each creates biases in judgment.

The availability heuristic – It is “the tendency for people to base their judgments on information that is readily available to them.” Events that evoke emotions, that are particularly vivid, or that have occurred more recently tend to be more available in our memory. For example, many more people suffer from fear of flying than fear of driving in a car.
Representative heuristic – To assess the likelihood of an occurrence by trying to match it with a preexisting category, managers frequently predict the performance of a new product by relating it to a previous product's success.

D. Escalation of commitment

It is an increased commitment to a previous decision in spite of negative information. It has been well documented that individuals escalate commitment to a failing course of action when they view themselves as responsible for the failure.

E. Individual Differences: Decision-Making Styles

People differ along two dimensions. The first is their way of thinking. Some people are logical and rational. They process information serially. Some people are intuitive and creative. They perceive things as a whole. The other dimension is a person's tolerance for ambiguity. Some people have a high need to minimize ambiguity. Others are able to process many thoughts at the same time. These four decision making styles can be represented in the following way:


Ø  Low tolerance for ambiguity and seek rationality
Ø  Efficient and logical
Ø  Decisions are made with minimal information and with few alternatives assessed.
Ø  Make decisions fast and focus on the short-run.


Ø  Greater tolerance for ambiguity
Ø  Desire for more information and consideration of more alternatives
Ø  Best characterized as careful decision makers with the ability to adapt to or cope with new situations


Ø  Tend to be very broad in their outlook and consider many alternatives
Ø  Their focus is long range, and they are very good at finding creative solutions to problems.


Ø  Characterizes decision makers who work well with others
Ø  Concerned with the achievement of peers and subordinates and are receptive to suggestions from others, relying heavily on meetings for communicating
Ø  Tries to avoid conflict and seeks acceptance

F. Organizational Constraints

Following are the organizational constraints that affect decision-makers.

Ø  Performance evaluation – Managers are strongly influenced in their decision making by the criteria by which they are evaluated. Their performance in decision making will reflect expectation.
Ø  Reward systems – The organizations reward system influences decision makers by suggesting to them what choices are preferable in terms of personal payoff.
Ø  Programmed routines – All, but the smallest of organizations create rules, policies, procedures, and other formalized regulations in order to standardize the behavior of their members.
Ø  Time constraints – Decisions must be made quickly in order to stay ahead of the competition and keep customers satisfied. Almost all important decisions come with explicit deadlines.
Ø  Historical Precedents – Decisions have a context. Individual decisions are more accurately characterized as points in a stream of decisions. Decisions made in the past are ghosts which continually haunt current choices. It is common knowledge that the largest determining factor of the size of any given years budget is last years budget.
Ø  Cultural Differences – The cultural background of the decision maker can have significant influence on:

Ethics in Decision Making

Ethical considerations should be an important criterion in organizational decision making. There are three Ethical Decision Criteria:

1. Utilitarian criterion – decisions are made solely on the basis of their outcomes or consequences. The goal of utilitarianism is to provide the greatest good for the greatest number. This view tends to dominate business decision making.

2. Focus on rights – calls on individuals to make decisions consistent with fundamental liberties and privileges as set forth in documents such as the Bill of Rights.

3. An emphasis on rights means respecting and protecting the basic rights of individuals, such as the right to privacy, to free speech, and to due process.

4. Focus on justice – requires individuals to impose and enforce rules fairly and impartially. There is an equitable distribution of benefits and costs.

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