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Decision Making - Coggle Diagram
Decision Making
Managerial methods of decision making
Bounded rationality
Defined as: decisions made within the parameters of a simplified model that captures the essential features of a problem.
Bounded by limitations, managers attempt to behave rationally
Involves "satsificing" - good enough decisions
For example: Where there is not enough information for a manager to make the correct decision, so they have to "satisfice" rather than maximise, and make a good enough decision.
Intuition
Intuition is a product of:
Previous experience
"Gut-level" feeling
Accumulated judgment
For example: Steve Jobs working at Pixar, and in his second stint at Apple, he became more intuitive and listened to others and instincts
Rationality
Managerial decision making is assumed to be rational
Rational decisions are consistent and value-maximising
Assumes a number of things:
The problem, is clear
A well defined goal is to be achieved
All alternatives and consequences are known
Preferences are clear, constant and stable
No time or cost constraints exist
Final choice will maximise payoff
For example, a manager making the best decision possible with all necessary information would be displaying rationality.
GROUP DECISION MAKING
ADVANTAGES
More complete view of information and knowledge
Diversity of views
Increase acceptance of a solution
Extra ratification due to group dynamics - increase legitimacy
DISADVANTAGES
Time consuming
Minority domination
Pressure to conform
Ambiguity in terms of responsibility
Leverage advantages to offset disadvantages
Results in fruitful collaborative decision making
How do Managers Arrive at Decisions
Bounded Rationality
Takes into account the limitations of the manager
What decisions can be made within these cognitive bounds?
Seeking a decision that will suffice, rather than the most optimistic option
"good enough"
Intuition
influenced by feelings and emotion
"gut feelings"
decisions based off previous experiences and that accumulated judgement
convenient and essential when data alone isn't enough
Rationality
It assumes that the problem is:
well-defined
preferences are clear and present
Cost and time constraints are minor or non-existent
Clear and unambiguous
Is the particular decision value-maximising?
CONDITIONS OF DECISION MAKING
RISK
Can estimate likelihood of certain outcomes
Certain level of risk to be managed
UNCERTAIN
No certainty
No reasonable estimates of outcomes
CERTAINTY
Every alternative known
no need for contingency thinking
Problems & Decisions
Well Structured Problems & Programmed Decisions
Problems are easily defined
Programmed decisions are handled by routine & standardised approaches
decisions that are repetitive
Un-structured problems & non-programmed decisions
Unstructured problems are new or unusual
thus require a new structure
Non programmed decisions are unique decisions that require custom-made solutions
Nonrecurring
Decision making styles
Linear
Preference for using external data & facts
Process information through rational, logical thinking
Non Linear
Preference for internal sources of information
More nuanced style of decision making
Decision making errors
Decision making is an imperfect process
subject to a range of errors and biases
Heuristics
Overconfidence bias
Immediate gratification bias
Anchoring effect
Selective perception bias
Confirmation bias
Framing bias
Availability bias
Representation bias
Randomness bias
Sunk costs error
Self-serving bias
Hindsight bias
How to avoid the negative effects of decision errors & biases
Being aware of them and then trying not to exhibit them