Adobe Systems
Decision making
Lecture 3

Adobe Systems
Agenda
•The decision making process
•Define decision and decision-making process.
•The manager as decision maker
•(full) rationality vs. bounded rationality
•decision making styles
•Structuring the decision making problem
•Methods of decision making
•One-time decisions
•Sequential decisions
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Where are we?


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Decisions in the management functions


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Decision defined
Decision + decision making process
Decision making process
̶making a choice from two or more alternatives (= alternative solutions to a problem).
̶„problem“ = discrepancy between an existing and desired state of affairs.

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(Full) Rationality
The rational decision making
Bounded rationality
̶Managers make consistent, value-maximizing choices with specified constraints.
̶Assumptions are that decision makers:
ØAre perfectly rational, fully objective, and logical.
ØHave carefully defined the problem and identified all viable alternatives.
ØHave a clear and specific goal
ØWill select the alternative that maximizes outcomes in the organization’s interests rather than in
their personal interests.
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̶Managers make decisions rationally, but are limited (bounded) by their ability to process
information.
̶Assumptions are that decision makers:
ØWill not seek out or have knowledge of all alternatives
ØWill satisfice — choose the first alternative encountered that satisfactorily solves the problem —
rather than maximize the outcome of their decision by considering all alternatives and choosing the
best.
̶Influence on decision making
ØEscalation of commitment: an increased commitment to a previous decision despite evidence that it
may have been wrong.
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Intuitive decision making
̶making decisions based on experience, feelings, and accumulated judgment.
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Decision making styles
̶Dimensions
̶Ways of thinking
Rational, orderly, and consistent
Intuitive, creative, and unique
̶Tolerance for ambiguity
Low tolerance: require consistency and order
High tolerance: multiple thoughts simultaneously
̶Types of Decision Makers
̶Directive
Use minimal information and consider few alternatives.
̶Analytic
Make careful decisions in unique situations.
̶Conceptual
Maintain a broad outlook and consider many alternatives in making decisions.
̶Behavioral
Avoid conflict by working well with others and being receptive to suggestions.
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Structured
Structured vs. unstructured problems
Unstructured
̶Structured Problems
̶Involve goals that clear.
̶Are familiar (have occurred before).
̶Are easily and completely defined—information about the problem is available and complete.
̶Programmed Decision
̶A repetitive decision that can be handled by a routine approach.
̶Policy
A general guideline for making a decision about a structured problem.
̶Procedure
A series of interrelated steps that a manager can use to respond (applying a policy) to a
structured problem.
̶Rule
An explicit statement that limits what a manager or employee can or cannot do.
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̶Unstructured Problems
̶Problems that are new or unusual and for which information is ambiguous or incomplete.
̶Problems that will require custom-made solutions.
̶Nonprogrammed Decisions
̶Decisions that are unique and nonrecurring.
̶Decisions that generate unique responses.

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Characteristics of a DM problem
Structuring a problem
Decision making matrix
1.List of alternatives = possible decisions
a.available
b.mutually exclusive
c.collectively exhaustive
2.States of nature = future conditions of events
a.possible to happen
b.mutually exclusive
c.collectively exhaustive
3.Degree of certainty = the level of knowledge of decision maker about the states of nature.
4.Decision criterion = a factor relevant in a decision.
5.Payoffs = the value of decision criterion associated with each decision and state of nature.
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Decision making conditions
̶Certainty
̶A situation in which a manager can make an accurate decision because the outcome of every
alternative choice is known.
̶Risk
̶A situation in which the manager is able to estimate the likelihood (probability) of outcomes that
result from the choice of particular alternatives.
̶Uncertainty
̶Limited information prevents estimation of outcome probabilities and may force managers to rely on
intuition, hunches, and “gut feelings”.
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Attitude towards risk


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Uncertainty
Methods of decision making

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Risk
Methods of decision making
̶Expected (monetary) value
-takes into account the weighted average payoff for each alternative
                                     k
    EMVi =   Pj * Vij
                                    i = 0
-selecting maximum average payoff;
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̶Expected value of perfect information
-represents an upper bound on the amount of money a decision maker would be justified in spending
to obtain perfect information.
̶EPVI = EPC – EMV
̶That leads to decision under certainty…
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Sequential decisions
̶Oriented chart
̶Decision trees can be used instead of decision matrix in order to structure the decision problems.
̶Decision trees are used as a method of portraying these sequential decisions.
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̶decision fork à alternatives
̶chance fork à states of nature
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Complex sequential decision (example)


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Must know - keywords
̶decision
̶decision-making process
̶problem
̶decision criteria
̶state of nature
̶payoff
̶risk
̶uncertainty
̶decision style
̶(bounded) rationality
̶satisficing
̶attitude towards risk
̶mini-max
̶maxi-max
̶expected value
̶decision tree
̶decision matrix
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