Chapter 4
Managerial decision making
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-1
Lecture outline
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The nature of managerial decision making
Managers as decision makers
Steps in effective decision making
Barriers to effective decision making
Diversity issues: Group decision making
Creativity in decision making
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-2
Types of problems for
decision makers
• Crisis problems
Serious difficulties needing immediate action
• Non-crisis problems
Issues needing attention and resolution, but
without the importance and immediacy of a crisis
• Opportunity problems
Situations offering significant potential for
organisational gain if appropriate action is taken
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-3
The nature of managerial
decision making
Differences in decision-making
situations:
• Programmed decisions
- Routine, repetitive, well-structured situations by use of
pre-determined decision rules
• Non-programmed decision-making
- Pre-determined decision rules impractical due to novel
and/or ill-structured situations
• The element of risk
- Possibility that a chosen decision could lead to losses
rather than intended results
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-4
Managers as decision
makers
Models of managerial decision making:
• Rational model
- Suggests managers engage in completely rational decision
processes, ultimately making optimal decisions, and possess
and understand all information relevant to their decisions at
the time they make them.
• Non-rational models
- Suggest information gathering and processing limitations
make it difficult for managers to make optimal decisions.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-5
Non-rational models
• Satisficing model
- Managers seek alternatives only until they find
one which looks satisfactory, rather than seeking
an optimal decision.
• Incremental model
- Managers make the smallest response possible
to reduce the problem to at least a tolerable level.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-6
Non-rational models
(continued)
• Rubbish-bin model
- Managers behave in virtually a random way in
making non-programmed decisions
• Intuitive model
- Managers rely on instinct or “gut feel”
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-7
The concept of bounded
rationality
Managers’ ability to make perfectly rational decisions
is limited by:
• Inadequate information about the issues and the
alternatives
• Time and cost factors
• Perceptions about relative importance of data
• Limited memory capacity
• Limited calculating and information processing capacity
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-8
Promoting effective decision
making
Steps to effective decision making:
• Identifying the problem
- Scan for change; categorise as problem/non-problem;
diagnose nature and cause
• Generating alternative solutions
- Uncritically brainstorm to develop alternatives; combine and
improve ideas
• Evaluating and choosing an alternative
- Feasibility, quality, cost, reversibility, ethics, acceptability
• Implementing and monitoring the chosen solution
- Plan and implement; evaluate effect on others; monitor
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-9
Steps in decision
making
Identification of the problem
Generate alternative solutions
Evaluate alternatives and
choose the appropriate
alternative
Evaluation
of decision
effectiveness
Implement and monitor
the chosen alternative
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-10
Generating alternative
solutions: brainstorming
• Don’t criticise ideas while generating
possible solutions
• Freewheel - even wild ideas can be
useful.
• Offer as many ideas as possible
• Combine and improve on ideas already
offered
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-11
Overcoming barriers to
effective decision making
1. Accepting the problem challenge
2. Searching for enough options
3. Recognising decision-making biases
4. Avoiding the decision escalation
phenomenon
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-12
Accepting the problem
challenge
• Complacency
- Individuals either do not see signs of danger/opportunity
or avoid them.
• Defensive avoidance
- Individuals either deny the importance of a danger/
opportunity or deny any responsibility for taking action.
• Panic
- Individuals become so upset they frantically seek a way to
solve the problem.
• Deciding to decide
- Decision makers accept the challenge and follow an
effective decision-making process.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-13
Searching for sufficient
alternatives
• Costs of gathering and checking
information
• Time considerations
• Identification of key stakeholders and
their concerns
• Clarification of objectives
• Use of multiple perspectives
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-14
Decision-making biases
• Framing
- Tendency to make different decisions, depending on
how a problem is presented or expressed.
• Prospect theory
- Decision makers find the prospect of an actual loss
more painful than giving up the possibility of a gain.
• Representativeness
- Tendency to be overly influenced by stereotypes in
making judgments about the likelihood of occurrences.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-15
Decision-making biases
• Availability
- Tendency to judge the likelihood of an occurrence on the
basis of the extent to which other like instances can easily
be recalled.
• Anchoring and adjustment
- Tendency to be influenced by an initial figure, even when
the information is largely irrelevant.
• Overconfidence
- Tendency to be more certain of judgments regarding the
likelihood of a future event than one’s actual predictive
accuracy warrants.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-16
Decision escalation
Escalation situations: have a strong
possibility of escalating commitment
and accelerating losses
May take two forms:
• Non-rational escalation
• Sunk costs (non-recoverable)
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-17
Decision escalation
‘Escalating commitment
and accelerating losses’
Non-rational escalation: increased
commitment of resources beyond rational limits
Sunk costs: not recoverable, and
should not influence decision-making
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-18
Group decision making
ADVANTAGES
DISADVANTAGES
More information available
Time-consuming
More
alternative solutions
Delays and ill-feeling possible
Increases solution
understanding and acceptance
Domination by individuals
Builds member
knowledge and skill base
Risk of groupthink
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-19
Groupthink… “too much
agreement”
• Illusions of invulnerability
• Collective rationalisation
• Belief in inherent morality/rightness of the
cause
• Stereotyping of outgroups (the “enemy”)
• Pressure on dissenters
• Self-censorship
• Illusions of unanimity
• Self-appointed “mind-guards”
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-20
Enhancing group decision
making
Devil’s advocates
Dialectical inquiry
Groupware use
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
Better
group
decision
making
4-21
Promoting innovation: the
creativity factor
‘Creativity is the cognitive process of
developing an idea, concept,
commodity or discovery viewed as
novel by its creator or target
audience.’
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-22
Creativity in decision
making
Creativity requires both:
• Convergent thinking
Attempting to move logically to a problem
solution.
• Divergent thinking
Generating new ways of viewing a problem and
seeking novel alternatives.
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-23
Basic ingredients of
creativity
• Domain-relevant skills
- Expertise in a field relevant to the problem
• Creativity-relevant skills
- Cognitive kills in generating novel ideas,
approaches, modes of thinking about problems
• Task motivation
- Interest in the task for its own sake; a desire
to resolve the problem
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-24
Stages of creativity
• Preparation
- Gathering information, defining problem, generating
alternatives, analysing data
• Incubation
- Subconscious mental activity and divergent thinking
• Illumination
- New insights gained; breakthroughs made
• Verification
- Checking the validity of insight; logical thinking
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-25
Enhancing group creativity
• Brainstorming
• Nominal group technique (NGT)
• Delphi method
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-26
Lecture summary
• The nature of managerial decision
making
- Problem types - crisis, non-crisis and opportunity;
problem situations - programmed and non-programmed
• Managers as decision makers
- Rational and non-rational models: satisficing, incremental,
rubbish-bin
• Effective decision making
- Ideal decision-making process: four step process
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-27
Lecture summary
• Barriers to effective decision making
- Complacency, defensive avoidance or panic;
decision-making biases; the decision escalation
phenomenon
• Group decision making
- Advantages and disadvantages; enhancing group
performance; dangers of groupthink in cohesive groups
• Creativity in decision making
- Divergent and non-divergent thinking; necessary skills;
Techniques for enhancing group creativity
© 2008 McGraw-Hill Australia Pty Ltd.
Power Points t/a Management Foundations: A Pacific Rim Focus 2e by Bartol et al
Slides prepared by Rob Lawrence, Victoria University (Australia)
4-28