Decision making is a position or judgment reached after due consideration and choice has been made between alternative courses of action. The process that one has to go through to reach the final conclusion is called the decision making process.
Decisions are reached using cognitive processes, memory, thinking, intelligence, analysis and evaluation.
There are primarily 2 types of decisions- Programmed and non-programmed decisions.
Models/approaches in the decision making process include:
- Rational
- Behavioral
- Incremental
- Group
- Public
Decision making process: basic problems
- Competence
- Information
- Legitimacy
- Complexity
- Values
Decisions depend on judgments – judgments about the nature of the dilemma, the probabilities of events, and the desirability of consequences. Decision making process is inherently subjective.
Contingency approach:
No one best way
Type of decision reflects character of problem Well structured decisions – familiar that is when the decision to make during routine chores or chores that are predictable (has happened in the past) by firm. If the Firms are flexible, quick, agile, adaptive -> Maintain strategic coherence->Align contingency planning with strategic aims-> This solves Ill-structured problems – new, complex, ambiguous (for eg: Covid 19 in the present scenario, every firm had to deal it in it’s own way and it was unpredictable)
Programmed and non-programmed decisions Programmed decisions are repetitive, handled by routine approaches.
Example:
Holiday period temporarily changes demand/supply dynamic.
Non-programmed decisions: ‘customized’ in order to solve unique or non-recurring problems.
Example:
Natural disaster blocks supply for a long period.
Rational decision making
The ‘classical’ and systematic approach geared towards the maximization of efficiency.
Views the manager as acting with complete information.
Steps:
Define objective of the problem or task at hand.
Identify alternatives
Calculate consequences ( cost benefit analysis of each alternative has to be done and one decision is chosen from the lot which maximizes benefit and minimizes cost)
Decide ( along with ROI, other factors such as firm reputation, agreement of other stakeholders on board to ultimately decide on one course of action)
Evaluate (once the decision is executed, the decision’s impact is evaluated by surveys, numbers by sales whichever arena the Decision is related to. If the decision has a negative impact, the consequences have to be controlled by taking another decision by repeating the process)
Rational decision making
Assumptions:
- The problem is clear and unambiguous
- There is a single, well defined objective
- All alternatives and consequences are known
- Preferences are clear and agreed
- The decision will maximize efficiency.
- Most valuable when applied to programmed decisions
Rational decision making – weaknesses
Complete information is rare.
Distorted perceptions of information available.
Incomplete knowledge of options and consequences.
Limitations on human capacity to deal with large and complex problems.
Limited intelligence in determining ‘best’ solutions.
Human emotion:
Defensive-avoidance = do nothing
Hyper-vigilance = paralysis by analysis
Bounded rationality
Acknowledges the ‘real world’ of managerial decision making.
Acknowledges the limitations of the rational model.
Acknowledges that people have limitations and boundaries on how rational they are able to be.
Concept of ‘satisfying’ – making decisions that are ‘good enough’.
The behavioral model
A descriptive approach – how decisions are actually made.
Applicable to complex, non-programmed decisions, assuming that decision: objectives are often vague and lacking consensus.
Rational processes do not capture the complexity of real organizational issues.
Managers search for information is ‘bounded’.
Most managers will ‘satisfy’ rather than ‘maximize’.
Group decision making
Advantages:
Provides more complete information and knowledge.
Increased diversity of experience and perspectives.
Likely to generate more alternatives.
Quantity and diversity of information is high when the group members represent different specialities.
May increase commitment to solutions.
Increases legitimacy – more democratic.
Wider ownership of decisions.
Group decision making
DISADVANTAGES
Can be time consuming
Possibility of ‘minority domination’ – status differences
Possibility of ‘group think’ –
conforming to group views
reluctance to express contrary views
unrealistic appraisal of alternatives
Possibility of conflict
Ambiguous responsibility
Common errors in the decision making process
Heuristics – ‘rule of thumb’ approaches
Clinging to what has worked in the past
Over-confidence
Hindsight bias: Hindsight bias is a psychological phenomenon that allows people to convince themselves after an event that they had accurately predicted it before it happened. This can lead people to conclude that they can accurately predict other events. Also known as I knew it along but it’s verified only when it actually happens.
