Decision making, Importance of Decision-Making, Characteristics of Decision-Making, Essentials for effective Decision-Making, Types/ categories of Problems and Decisions, TYPES OF BUSINESS DECISIONS, Open decision making System, Decision Making Environment, The Classical Model of decision making, Decision making process, Decision Making Style

1. Chapter - 3
Managerial
Decision Making
By. Dr. B. J. Mohite (9850098225)

2. Decision & Decision making
Decision - choice made from available alternatives
Decision Making - process of identifying problems
and opportunities and resolving them
 Williams: It is a process of choosing a course of
actions from two or more alternatives.
 Bartol and Martin: The process through which
managers identify organizational problems and
attempt to resolve them.
 Stoner and Wankel: The process by which a course
of action is selected as the way to deal with a
specific problem

3. Importance & Characteristics of
Decision-Making
• It is prerequisite for every managerial functions.
• It involves problem finding and problem solving using
available alternatives.
• It a process of selecting the course of action to solve the
problem
• It is situational- certainty, uncertainty, risk.
• It is dynamic process
• It is a mental process because the final selection is made
after thoughtful consideration.
• Aimed at achieving the objectives of the org.

4. Essentials for effective
Decision-Making
1. Accuracy
2. Environment for decision
3. Timely decision
4. Communication of decision
5. Participative decision-making
6. Implementation of decision

5. Difficulties in Decision-making
1. Incomplete Information
2. Un-supporting environment
3. Non-acceptance by subordinates
4. Ineffective Communication
5. Incorrect timing

6. Types/ categories of Problems and Decisions
 Structured problems
 Involved clear goals and are familiar or have occurred before.
 Information about problem is available & complete.
 Programmed decision
 A repetitive decision that can be handled by a routine approach.
 Managers have made decision many times before
 Example: Deciding to reorder office supplies
 Unstructured problems
 Problems that are new or unusual and for which information is incomplete.
 Problems that will require custom-made solutions.
 Non-programmed decisions
 Decision that are unique and nonrecurring.
 No rules to follow since the decision is new
 These decisions are made based on information, and a manger’s judgment.
 Example: Should the firm invest in a new technology?

7. TYPES OF BUSINESS DECISIONS
• Programmed Decisions
• Non-Programmed
Decisions
• Strategic Decisions
• Tactical Decisions
• Operational Decisions

8. Programmed vs. Non-programmed Decisions
Characteristics Programmed Non-programmed
Also called Structured decision Unstructured
Type of problem Structured, routine,
well defined
Unstructured, novel,
ill defined
Managerial level Lower level Upper level
Frequency of
problem
Repetitive New, unusual
Information Readily available Ambiguous or
incomplete
Time frame for
solution
Short Relatively long
Judgment Objective Subjective
Solution relies on Procedures, rules, and
policies
Managerial Judgment
and creativity

9. METHODS OF DECISION MAKING
 Decision made by authority without group discussion
 Decision by expert team
 Decision by averaging individuals
 Decision made by authority after group discussion
 Decision by minority or by majority vote
 Decision by compromise

10. Types of systems based on the manager’s knowledge about
the environment.
1.Closed decision making System: If the manager operates in a
known environment then it is a closed decision making system.
The conditions of the closed decision making system are:
a)The manager has a known set of decision alternatives and
knows their outcomes fully in terms of value, if implemented.
b)The manager has a model, a method or a rule whereby the
decision alternatives can be generated, tested, and ranked.
The manager can choose one of them, based on some goal or objective
A few examples are:
1. Product mix problem,
2. an examination system to declare pass or fail, or
3. an acceptance of the fixed deposits.

11. 2. Open decision making System
If the manager operates in an environment not known to
him, then the decision making system is termed as an ODMS.
The conditions of this system are:
a) The manager does not know all the decision alternatives
b) The outcome of the decision is also not known fully. The
knowledge of the outcome may be a probabilistic one.
c) No method, rule or model is available to study and
finalize one decision among the set of decision
alternatives.
d) It is difficult to decide an objective or a goal and,
therefore, the manager resorts to that decision, where his
aspirations or desires are met best.

13. DECISION MAKING UNDER CERTANITY
• Outcome of all alternative are fixed and fully
known to Manager then this is called Decision
making under certainty
• It is very difficult to find complete certainty in
most of the business decisions.
• in many routine type of decisions, almost
complete certainty can be noticed.
• Ex: New carpet for a office.

15. • The decision maker is not in a position, even to
assign the probabilities of happening of the events.
• In the environment of uncertainty, more than one
type of event can take place and the decision maker
is completely in dark regarding the event that is
likely to take place.
• Such situations generally arise in cases where
happening of the event is determined by external
factors and information about alternatives and future
events is incomplete
• For example, demand for the product, moves of
competitors, etc. are the factors that involve
uncertainty.

16. DECISION MAKING UNDER RISK
• Here more then one state of nature exists and the
decision maker has sufficient information to assign
probabilities to each of this states.
• These probabilities could be obtained from the past
records/ experience and simply the subjective judgment
of the decision maker.
• Under condition of risk, knowing the probability
distribution of the state of nature, the best decision is to
select the course of action which has the largest
expected pay off value.
• Under the condition of risk, there are more than one
possible events that can take place.
• The decision maker has adequate information to assign
probability to the happening or non- happening of each
possible event.

17. Decisions helps to manage four types of risk:
1. Envisioning risk: The risk of solving the wrong problem
2. Ideation risk: the risk of not developing good alternative
3. Evaluation risk: The risk of choosing a poor alternative
4. Strategic risk: The risk of not following a beneficial strategy

18. 18
Parameters for Selecting a
Decision Making Model
1. Depends on the manager’s personal
preference
2. Whether the decision is programmed or non-
programmed
3. Extent to which the decision is characterized
by risk, uncertainty, or ambiguity

19. The Classical Model of decision making
• This is the earliest model of decision making developed as per
organization’s best economic interests.
• They believed that man is completely rational in his decisions,
he always selects that alternative which gives him the greatest
advantage.
• This perspective model tells how the decision should be made.
– Assumes managers have access to all the information needed
to reach a decision.
– Managers can then make the optimum decision by easily
ranking their own preferences among alternatives.
• Unfortunately, mangers often do not have all required information
• Approach assumes that managers are logical and rational.
• Approach assumes that managers’ decisions will be in the best
interests of the organization.

20. The Classical Model
Rank each alternative
from low to high
Select best
alternative
List alternatives
& consequences Assumes all information
is available to manager
Assumes manager can
process information
Assumes manager knows
the best future course of
the organization

21. Administrative Model of decision making
 Is Descriptive model describes how non-programmed
decisions are made in uncertainty/ambiguity situation.
 This model Challenges the classical assumptions that managers
have information about all process.
 Herbert A Simon, a Nobel Prize winner in Economics,
developed the model to describe how decisions are often made
rather than to prescribe how they should be made
 Argues that decision makers have incomplete and imperfect
information, are constrained by ‘bounded rationality’ and tend
to ‘satisfiec’ when making decisions.
 Bounded rationality suggests that decision makers are limited
by their values and unconscious response, skills and habits.

22. • Satisficing is the tendency to search for alternatives
only until one is found that meets some minimum
standard of sufficiency.
• Rather than conducting an exhaustive search for the
best possible alternative, decision makers tend to
search only until they identify an alternative that
meets some minimum standard of sufficiency.
• The Administrative Model can be used by managers
to develop a better understanding of their inherent
biases and limitations

23. Normative/ Perspective Descriptive
Theoretical in Nature Practical In nature
Advocate perfect rationality Advocate Bounded rationality

24. Step 1: Identifying the Problem
Problem: A discrepancy between an existing and desired state of affairs.
Characteristics of Problems
• A problem becomes a problem when a manager becomes aware of
it.
• there is a pressure to solve the problem.
• the manager must have the authority, information, or resources
needed to solve the problem.
Step 2: Identify the Decision Criteria
Decision criteria are factors that are important or relevant to resolving
the problem.
• Costs that will be incurred (investment required).
• Risks likely to be encountered ( chance of failure).
• Outcomes that are desired ( growth of the firm).
Decision making process

25. Step 3: Allocating Weights to the Criteria
• Decision criteria are not of equal importance:
* Assigning a weight to each item.
* Places the items in the correct priority order of their importance
in the decision making process.
Step 4: Developing Alternatives
• Identifying available alternatives.
* Alternatives are listed that can resolve the problem.
Step 5 : Analyzing alternatives
• Appraisi g ea h alter ati e’s stre gths a d eak esses
* A alter ati e’s appraisal is ased o its a ility to resol e the issues
identified in step 2 and step 3.

26. Step 6: Selecting the alternative
Choosing the best alternative
* The alternative with the highest total weight is chosen.
Step 7: Implementing the Alternative
Putting the decision to and gaining comment from those whose will
carry out the decision.
Step 8: Evaluating the decision’s effectiveness
The soundness of the decision is judged by its outcomes.
* How effectively was the problem resolved by outcomes resulting
from the chosen alternatives?
* if the problem was not resolve, what went wrong?

27. The decision making process-Example
Memory and Storage, Display Quality,
Better Life,Warranty, Carrying weight
Memory and Storage-10, Display
Quality -8, Better Life -6,Warranty -4,
Carrying weight-3
Toshiba, HP, Soni Vaio, Qosmio,
Gateway, Apple iBook, Lenovo, Dell
Toshiba, HP, Soni Vaio, Qosmio,
Gateway, Apple iBook, Lenovo, Dell
Identification of a problem
Identification of Decision Criteria
Allocation of weights to criteria
Development of alternatives
Analyzing of alternatives
Selection of alternatives
Implementation of alternatives
Evaluation of decision alternatives
“My sales Reps need new computers!”
Toshiba, HP, Soni Vaio, Qosmio,
Gateway, Apple iBook, Lenovo, Dell
“ Toshiba!”

28. Also called Collective participative decision making
style. Democratic decision making is when the leader
gives up ownership and control of a decision and allows
the group to vote. Majority vote will decide the action.
Advantages include a fairly fast decision, and a certain
amount of group participation. The disadvantage of this
style includes no responsibility. An individual is not
responsible for the outcome. In fact, even the group
feels no real responsibility because some members will
say, "I didn't vote for that.". Lack of group and personal
responsibility seems to disqualify this style of decision
making; however, the democratic style does have its
place in business.
Decision Making Style

29. Autocratic decision making is when the leader maintains total
control and ownership of the decision. The leader is also
completely responsible for the good or bad outcome as a result
of the decision. The leader does not ask for any suggestions or
ideas from outside sources and decides from his or her own
internal information and perception of the situation. Advantages
include a very fast decision, and personal responsibility by the
leader, for the outcome. If an emergency situation exists, the
autocratic style is usually the best choice. The disadvantages
are varied and sometimes include less than desired effort from
the people that must carry out the decision. If the employee is
personally affected by the decision but not included when the
decision is made, morale and effort may or may not suffer. It is
not always predictable. If the outcome for the decision is not
positive, members of the organization begin to feel they could
have done a better job themselves and the leader may lose
credibility.

30. Collective - Participative decision making is when the leader
involves the members of the organization. Other perspectives of
the situation are discovered because the leader deliberately asks
and encourages others to participate by giving their ideas,
perceptions, knowledge, and information concerning the decision.
The leader maintains total control of the decision because,
although outside information is considered, the leader alone
decides. The leader is also completely responsible for the good or
bad outcome as a result of the decision. The advantages include
some group participation and involvement. This is especially
valuable when a person is affected negatively by the decision. In
most cases, the individual is informed before the decision is
implemented (no surprises) and usually feels good about personal
involvement. If the leader is a good communicator, and listens
carefully to the information collected, he or she will usually have a
more accurate understanding of the situation and make a better
decision. The disadvantages of this style include a fairly slow, time
consuming decision; less security, because so many people are
involved in the decision.

31. Consensus decision making is when the leader gives up total
control of the decision. The complete group is totally involved in
the decision. The leader is not individually responsible for the
outcome. The complete organization or group is now
responsible for the outcome. This is not a democratic style
because everyone must agree and "buy in" on the decision. If
total commitment and agreement by everyone is not obtained
the decision becomes democratic. The advantages include
group commitment and responsibility for the outcome.
Teamwork and good security is also created because everyone
has a stake in the success of the decision. A more accurate
decision is usually made, with a higher probability of success,
because so many ideas, perspectives, skills and "brains" were
involved in the creation. The disadvantages include a very slow
and extremely time consuming decision. It is also a lot of work
getting everyone in the organization involved. It takes skill and
practice for a group to learn how to work together.

32. Decision Making Techniques
1. Payoff matrix: Decision analysis tool that summarizes pros and
cons of a decision in a tabular form.
When all the alternatives and their outcomes are firmly not
known in such cases decisions are made with the help of payoff
analysis. In Payoff matrix Column shows condition & Row shows
alternatives. Payoff matrix provides quantitative measures to
decision makers called expected value(EV). This method is highly
relied on decision makers judgment

33. 2. Decision Trees
• Decision trees used for showing sequential decisions
• A decision tree is a graphic display of the decision process
that indicates decision alternatives, states of nature and
their respective probabilities, and payoffs for each
combination of decision alternative and state of nature
Steps:
1. Define the problem
2. Draw the decision tree with nodes & branches
3. Assign probabilities to the states of nature
4. Estimate payoffs for each possible combination of
decision alternatives and states of nature

34. Decision Tree Example
Favorable market
Unfavorable market
Favorable market
Unfavorable market
Construct
small plant
A decision node A state of nature node
Symbols used in a decision tree:
a. —decision node from which one of several alternatives may be selected
b. —a state-of-nature node out of which one state of nature will occur

35. 3. Decision Table
This is very much precise in nature and helps analyst to take into
account various options, conditions, variables and alternatives.
Conditions and alternatives are presented with the help of table

36. 4. Decision rules
• These are generally used in programmable or
operating decisions in economical and
efficient manner.

37. 5. Linear Programming
• This technique is used to select optimum solution among all feasible
solutions.
• It is used to identify profit maximization and cost minimization situation
among existing one.
• It involves making an optimum allocation of limited resources of an
organization to achieve a particular objective.
6. Queuing theory / Waiting – line method
• This is and OR method that uses the mathematical technique for balancing
services provided and waiting lines. Waiting lines occur when the demand
for the service exceeds the service facilities. as a perfect balancing between
demand and supply can be achieved, customer have to wait for the service
(demand exceed) or there may be no customers for the organization to serve
(excess supply).
• If the queue is long, customer has to wait for long duration, causing
frustration, the firm may loose the customer and on the other hand it is not
feasible for the firm to maintain facilities to provide quick service all the
time since the cost of idle service facilities have to borne by the company.
Therefore the company has to strike a balance between the both. The
queuing technique helps to optimize the customer service on the basis of
quantitative criteria. It provides information for decision making but does
not resolve the problem.

38. Types of Decisions
1. Programmed and Non-Programmed Decisions:
2. Major and Minor decisions
3. Routine and Strategic Decisions
4. Policy and operative decisions
5. Organizational and Personal decisions.
6. Individual and Group Decisions
7. Long-term and short-term decisions
8. Departmental decisions
9. Non-economic decisions: relate to values, moral behavior, etc.
10. Crisis and research Decisions: Crisis decisions are those which are made to
meet unanticipated situations. Mostly made immediately under pressure
of the circumstances. Research Decisions are made after thorough analysis
without any pressure.
11. Initiative and forced Decisions
12. Problem and opportunity Decisions: problem decisions= resolving
pro le situatio s hi h ha e arise as a ti ipated or ot…,
opportunity decisions= pertain to taking advantage of an
opportu ity…so eti es i ol es risk.

39. Common decision-Making errors and Biases
Overconfidence
Immediate
Gratification
Anchoring
Effect
Selective
Perception
Confirmation
framing
Availability
representation
Randomness
Self-serving
Decision-Making
Errors & Biases

40. Criteria of Decision making
a. Optimistic Decisions: The DM think optimistically about the
event that influence decisions. They choose the alternative that
maximizes the outcome
b. Pessimistic Decisions: They believe that worst possible outcome
will occur no matter what they do. They estimate the worst
outcomes associated with each alternative and select the best of
these worst outcomes.
c. Realistic Decisions: They take the middle path neither optimistic
nor pessimistic.
d. Regret minimizing Decisions: They want to minimize the conflict
they experience after the fact.
e. Insufficient Reason Decisions: These are also called eqi-
probable decision maker. They assume that all the possible
outcomes have equal chance of occurring.

41. Herbert Simon model: Decision Making
Decision making is a process which the decision maker uses to
arrive at a decision. Simon considered each managerial action as
decision making. He describes the process of decision making as
comprising four steps: Intelligence, Design, Choice & Review

43. Decision making Phases
• Herbert A. Si o ’s four basic phases:
– Intelligence stage: includes collection, classification,
processing & presentation of data related to the
organization & its environment. This is necessary to
identify situations calling for a Decision.
– Design stage: inventing, developing, and analyzing possible
course of actions. And examined for technological,
behavioral & economic feasibility
– Choice stage: Selecting a optimal course of action from
those available.
– Review stage: Assessing past choices and do necessary
changes if any.

44. Rational decision making model
• Manager is totally rational about the decision making.
• They have all the relevant information needed to take decisions.
• They are aware of the possibilities of the different alternative course
of actions and there outcomes
Significance of rational decision – making
• Manager who use a rational, intelligent, systematic approach are
more likely to come up with high quality solutions to the problem
they face.
• They have clear understanding of the alternative course of action to
accomplish the goal under particular situation.
• It is based on the information available and their ability to evaluate
the alternatives.
• Aim is to select the best alternative course which help to achieve the
goal.

45. Steps in the Rational decision making model
1. Recognize the need for decision
2. Diagnose the problem
3. Developing alternative
4. Selecting alternative
5. Implementing alternatives
6. Exercising control & follow-up.

46. Disadvantage
• It is difficult for manager to be completely rational
in decision making by taking future into
consideration, as future is uncertain.
• It is very difficult to determine all the alternative
course of actions.
• It is impossible to be completely rational when the
manager wants to venture into a new area.
• Evaluation of each of the alternative becomes
difficult.
• Ma ager a ’t e o pletely ratio al due to
limitation of information, time and certainty.

47. Bounded Rationality
• Co eptualized y Her ert Si o i early 96 ’s
– He won the Nobel prize
• People try to behave rationally within the limits of their
information processing capabilities and within the context
of their attitudes and emotions
– they engage in restricted searches for information;
– have limited information processing capabilities
– rely on familiar sources of information
• biases and heuristics
• construct simplified models of reality

49. Simon’s definition...
The capacity of the human mind for
formulating and solving complex problems is
very small compared with the size of the
problems whose solution is required for
objectively rational behavior in the real world
-- or even for a reasonable approximation of
such objective rationality.

50. Cognitive Limitations
 Human decision makers can retain only a few bits of
information in short-term memory
 7 plus or minus 2
 Those who think in concrete rather than abstract terms tend
to be somewhat limited in their ability to process
information
 inside versus outside the box
 Propensity for risk may limit the amount of information
needed to arrive at a decision
 risk takers may require less information than risk avoiders

51. Bounded Rationality
Problem Space
Simon refers to this as “satisficing”

52. Bounded Rationality
• We all suffer from it
• There is no cure
• So how do we deal with it?
– We rely on structured problem solving
methods to help us minimize or overcome
the effects of BR