DECISION MAKING MODELS

Why Decision Making Matters

You will possibly agree that decision making is a part of everyday life. Whether you are at a board meeting or in the playground, you are almost constantly making decisions. Making decisions has been identified as one of the primary responsibilities of any leader. Decisions may involve allocating resources, appointing people, investing capital or introducing new products. If resources like men, money, machines, materials, time and. space were abundant, clearly any planning would be unnecessary. But, typically, resources are scarce and so there is a need for planning. Decision making is at the core of all planned activities. We can ill afford to waste scarce resources by making too many wrong decisions or by remaining indecisive for too long a time.

Decision making is the process of choosing between available alternatives to achieve a goal.

THREE PHASES IN DECISION MAKING PROCESS

Put into a time framework, you will find:

The past, in which problems developed, information accumulated, and the need for a decision was perceived

The present, in which alternatives are found and the choice is made

The future, in which decisions will be carried out and evaluated.

Henry Mintzberg and some of his colleagues (1976) have traced the phases of some decisions actually taken in organisations. They have also come up with a three-phase model as shown in below Figure

Phase-1:: Identification: Recognition of a problem or opportunity arises and a diagnosis is made

It was found that severe immediate problems did not have a very systematic, extensive diagnosis but that milder problems did have.

Phase-2: The development phase: Search for existing standard procedures, ready-made solutions or the design of a new, tailor made solution.

It was found that the design process was a grouping, trial and error process in which the decision-makers had only a vague idea of the ideal solution.

Phase-3: The Selection phase: Of the available alternatives, best choice of a solution is is made. There are three ways of making this selection:

By the judgement of the decision maker,
On the basis of experience or intuition rather than logical analysis
By analysis of the alternatives on a logical, systematic basis
By bargaining when the selection involves a group of decision makers. Once the decision is formally accepted, an authorization is made.

Decision making is a dynamic process and there are many feedback loops in each of the phases. Though on the surface, any decision-making appears to be a fairly simple three-stage process, it could actually be a highly complex dynamic
process.

TYPES OF MANAGERIAL DECISIONS

Three most widely recognised classifications are:

1. Classification-1 :: Personal and Organisational Decisions:
In Chester Barnard's opinion, "Personal decisions cannot ordinarily be delegated to others, whereas organisational decisions can often if not always be delegated".

Thus, the manager makes organisational decisions that attempt to achieve organisational goals and personal decisions that attempt to achieve personal goals.

Personal decisions can affect the organisation, as in the case of a senior manager deciding to resign.

For example, if the organization decision to go to abroad to visit customer site for 3 weeks, it might impacts your personal aspects (eg. Your personal involvement in one of the tasks in India may get impacted). As a manager, you need to resolve the conflict that might arise between organisational and personal goals.

2. Classification-2 :: Basic and Routine Decisions:

Basic decisions are those which are unique, most top management policy decisions, one-time decisions involving long-range commitments of relative permanence or duration, or those involving large investments.

Examples of basic decisions in a business firm include

Plant location
Organisation structure
Wage negotiations, product line, etc.

Routine decisions are the everyday, highly repetitive, management decisions which by themselves have little impact on the overall organisation.

However, taken together, routine decisions play a tremendously important role in the success of an organisation.

Examples of, routine decisions are

An accountant's decision on a new entry
A production supervisor’s decision to appoint a new worker
A salesperson's decision on what territory to cover

First-line supervisor makes practically all the routine decisions whereas the chairperson of the board makes very few routine decisions but many basic decisions. Obviously, a very large proportion (most experts estimate about 90 per cent) of the decisions made in an organisation are of the routine variety.

3. Classification-3 :: Programmed and Non Programmed:

Programmed Decisions: Routine / Repetitive Decisions - Handled through Standard Operating Procedures

Non-programmed Decisions: Unique / One-shot decisions - Must be made by managers using available information and their own judgement.

There is no single and satisfactory way of classifying decision situations. Moreover, the foregoing classifications have ignored two important problem-related dimensions: (1) How Complex is the Problem in terms of number of factors associated with it; and (2) how much certainty can be placed with the outcome of a decision.

Based on these two dimensions, four kinds of decision modes can be identified: Mechanistic, Analytical, Judgmental, and Adaptive

DECISION MAKING UNDER DIFFERENT STATES OF NATURE

The states of nature can be classified under below three categories

Decision Under Certainty
Decision Under Risk
Decision Under Uncertainty

1. Decision making under certainty:

When a manager knows the precise outcome associated with each possible alternative or course of action.
There is perfect knowledge about alternatives and their consequences. Exact results are known in advance with complete (100 percent) certainty.
Managers rarely operate under conditions of certainty
For example, as per the assurance provided by Government of India, Rs. 1,000 invested in a 6-year National Savings Certificate will bring a fixed sum of Rs. 2,015 after six complete years of investment

2. Decision making under risk:

When a single action may result in more than one potential outcome, but the relative probability of each outcome is known.
While the alternatives are clear, the consequence is probabilistic and doubtful. Thus, a condition of risk may be said to exist.
In practice, managers assess the likelihood of various outcomes occurring based on past experience, research, and other information.
A quality control inspector, for example, might determine the probability of number of `rejects' per production run

3. Decision making under uncertainty:

When a single action may result in more than one potential outcome, but the relative probability of each outcome is unknown.
Decisions under conditions of uncertainty are unquestionably the most difficult.
Occur in cases where no historical data are available from which to infer probabilities or in instances which are so novel and complex that it is impossible to make comparative judgements.
Selection of a new advertising programme from among several alternatives might be one such example.
On a personal level, the selection of a job from among alternatives is a career decision that incorporates a great deal of uncertainty.

MODELS OF DECISION MAKING PROCESS

We are going to examine three suggested models of the decision making process which will help you to understand how decisions are made and should be made.

The econologic model, or the economic man
The bounded rationality model or the administrative man;
The implicit favourite model or the gameman

1. Econologic Model or Economic Man Model

1. Discover the symptoms of the problem or difficulty
2. Determine the goal to be achieved or define the problem to be solved
3. Develop a criterion against which alternative solutions can be evaluated
4. Identify all alternative courses of action
5. Consider the consequences of each alternatives as well as the likelihood of
occurrence of each

Decisions are made after examining all possible alternatives

Briefly, this model rests on two assumptions: (1) It assumes people' are economically rational; and (2) that 'people attempt to maximise outcomes in an orderly and sequential process.

The economic man model represents a useful prescription of how decisions should be made, but it does not adequately portray how decisions are actually made

Assumptions Econologic model makes about the capabilities of human beings:

People have the capability to gather all necessary information for a decision, i.e., people can have complete information;
People can mentally store this information in some stable form, i.e., they can accurately recall any information any time they like;
People can manipulate all this information in a series of complex calculations design to provide expected values;
People can rank the consequences in a consistent fashion for the purposes of identifying the preferred alternative.

2. Bounded Rationality Model or Administrative Man Model

Presented by Simon - also known as the administrative man model - it assumes that people, while they may seek the best solution, usually settle for much less because the decisions they confront typically demand greater information processing capabilities than they possess.

In choosing between alternatives, people look for the alternative that is satisfactory or good enough

It can be described decision processes in terms of three mechanisms:

Sequential attention to alternative solutions:People examine possible solutions to a problem sequentially. If the first solution fails to work it is discarded and the next solution is considered. When an acceptable solution is found, the search is discontinued.

Use of heuristics: decision makers use heuristics to reduce large problems to manageable proportions so that decisions can be made rapidly. They look for obvious solutions or previous solutions that worked in similar situations.

Satisfying: Decision Maker is satisfier. An alternative is satisfactory if:

There exists a set of criteria that describes minimally satisfactory alternatives;
The alternative in question meets or exceeds all these criteria.

1 Set the goal to be pursued or define the problem to be solved.

2 Establish an appropriate level of aspiration or criterion level (that is, when do you know that a solution is sufficiently positive to be acceptable even if it is not perfect'?)

3 Employ heuristics to narrow problem space to a single promising alternative.

4 If no feasible alternative is identified (a) lower the aspiration level, and (b) begin the search for a new alternative solution (repeat steps 2 and 3).

5 After identifying a feasible alternative (a), evaluate it to determine its acceptability (b)

6 If the identified alternative is unacceptable, initiate search for a new alternative solution (repeat steps 3-5).

7 If the identified alternative is acceptable (a) implement the solution (b).

8 Following implementation, evaluate the ease with which goal was (or was not) attained (a) and raise or lower level of aspiration accordingly on future decisions of this type.

Finally, in contrast to the. prescriptive econologic model, it is claimed that the bounded rationality model is descriptive; that is it describes how decision makers actually arrive at the identification of solutions to organisational problems.

3. Implicit Favourite Model or Gamesman Model

This model deals primarily with non-programmed decisions (decisions that are novel or Unique / One-shot decisions)

Non-programmed decisions are made in intuitive fashion. By doing so, the individual becomes convinced that he or she is acting in a rational fashion and making a logical, reasoned decision on an important topic.

People usually arrive at decisions in an intuitive manner much before they find logical support for the same decision

The implicit favourite model developed by Soelberg (1967) emerged when he

observed the job choice process of graduating business students and noted that,

In many cases, the students identified implicit; favourites very early in the recruiting and choice process.

However, they continued their search for additional alternatives and quickly selected the best alternative candidate, known as the confirmation candidate.

Next, the students attempted to develop decision rules the demonstrated unequivocally that the implicit favourite was superior to the alternative confirmation candidate.

This was done through perceptual distortion of information about the two alternatives and through weighing systems designed to highlight the positive features of the implicit favourite.

Finally, after a decision rule was derived that clearly favoured the implicit favourite, the decision was announced.

Source & Reference: Indira Gandhi National Open University Study material for Managemement Studies.

Pages