978-0134527604 Chapter 2

Chapter 2

Making Decisions

In this chapter, students will explore the importance of decision-making to managers and

learn how to make effective decisions.

LEARNING OBJECTIVES

1. Describe the eight steps in the decision-making process.

2. Explain the four ways managers make decisions.

4. Describe how biases affect decision making.

5. Identify effective decision-making techniques.

It’s Your Career

Be a Better Decision Maker

Decisions are an essential part of your life, personally and professionally. Each and every

day is a series of decisions, from minor to significant, and everything in between. Good

decision-making is a skill, and like any skill, it can be learned and improved. So, how can

you improve your decision-making skills? The chapter outlines four things students need

1. Know, understand, and use the decision-making process. Yes, there is a “method” to making decisions

2. Know when and how to use rational or intuitive decision-making or both. Different types of problems

and different types of conditions will influence how you approach making a decision.

3. Know your decision-making style. Not everyone approaches decision making the same way. But you do

4. Know, recognize, and understand the biases and errors that may influence your decision-making. Biases

and errors can creep into your decision making. You may think you’re making good decisions and may not

2.1 THE DECISION-MAKING PROCESS

A decision is a choice made from two or more alternatives. The decision-

making process is a set of eight steps that include identifying a problem,

1. You must be aware of the problem. Be sure to identify the actual

problem rather than a symptom of the problem.

2. You must be under pressure to act. A true problem puts pressure

3. You must have the authority or resources to act. When managers

recognize a problem and are under pressure to take action but do

not have the necessary resources, they usually feel that

unrealistic demands are being put upon them.

B. Step 2: Identify Decision Criteria. Decision criteria are criteria that

2.2 APPROACHES TO DECISION MAKING

At this point in the study of Chapter 2, students will learn about the manager as a

decision-maker and how decisions are actually made in organizations. Exhibit 2-

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A. Rationality. Managerial decision-making is assumed to be rational—that

is, making choices that are consistent and value-maximizing within

specified constraints. If a manager could be perfectly rational, he or she

would be completely logical and objective.

1. Rational decision-making assumes that the manager is making

2. The assumptions of rationality can be met if the manager is faced

with a simple problem in which (1) goals are clear and alternatives

limited, (2) time pressures are minimal and the cost of finding and

1. Under bounded rationality, managers make satisficing decisions, in

which they accept solutions that are “good enough.”

2. Managers’ decision-making may be strongly influenced by the

organization’s culture, internal politics, power considerations, and

by a phenomenon called escalation of commitment—an

1. Making decisions on the basis of gut feeling doesn’t necessarily

2. Although intuitive decision-making will not replace the rational

decision-making process, it does play an important role in

1. The four essential elements of EBMgt are the decision–maker’s

expertise and judgment; external evidence that’s been evaluated

2. The strength or influence of each of these elements on a decision

will vary with each decision.

3. The key for managers is to recognize and understand the mindful,

2.3 TYPES OF DECISIONS AND DECISION-MAKING CONDITIONS

1. Structured problems are straightforward, familiar, and easily

defined. In dealing with structured problems, a manager may use

a programmed decision, which is a repetitive decision that can be

2. Unstructured problems are problems that are new or unusual

and for which information is ambiguous or incomplete. These

problems are best handled by a nonprogrammed decision that

is a unique decision that requires a custom-made solution.

3. Exhibit 2-7 describes differences between programmed versus

nonprogrammed decisions.

a. At higher levels in the organizational hierarchy,

1. Certainty is a situation in which a manager can make accurate

2. More common is the situation of risk, in which the decision-maker

is able to estimate the likelihood of certain outcomes. Exhibit 2-8

shows an example of how a manager might make decisions using

“expected value,” considering the conditions of risk.

FUTURE VISION: Crowdsourcing Decisions

Instead of looking internally for a solution to keeping chocolate cool during shipping,

Hershey is asking the crowd. Finding innovative solutions to problems is one of several

uses of crowdsourcing in organizations. Crowdsourcing can help managers gather

insights from customers, employees, or other groups to help make decisions such as

what products to develop, where they should invest, or even who to promote. Today’s

Internet connectivity provides businesses quick and easy access to insights from

customers and employees, effectively tapping into their cumulative wisdom. This

revolution in the decision-making process could challenge conventional management

practices, requiring new skills from managers.

The following discussion questions are posed:

Talk About It 1: How can crowdsourcing help managers make better decisions?

Talk About It 2: What are some risks in using crowdsourcing to make decisions?

3. Uncertainty is a situation in which the decision-maker is not

certain and cannot even make reasonable probability estimates

1) An optimistic manager will follow a maximax

choice, maximizing the maximum possible payoff.

2) A pessimistic manager will pursue a maximin

3) The manager who desires to minimize the

maximum “regret” will opt for a minimax choice.

LEADER MAKING A DIFFERENCE

Elon Musk is not your typical CEO. In 2002, he sold his second Internet startup, PayPal,

to eBay for $1.5 billion. Currently, Musk is CEO of Space Exploration Technologies

(SpaceX) and Tesla Motors, and chairman and largest shareholder of SolarCity, an

energy technology company. Each of these ventures has transformed (or is

transforming) an industry: PayPal—Internet payments; Tesla—automobiles; SpaceX—

aeronautics; and SolarCity—energy. As a decision-maker, Musk deals mostly with

unstructured problems in risky conditions. However, like other business innovators,

Musk is comfortable with that and in pursuing what many might consider “crazy” idea

territory. His genius has been compared to that of the late Steve Jobs and Fortune

magazine named him the 2013 Businessperson of the Year.

What can you learn from this leader making a difference?

2.4 DECISION-MAKING BIASES AND ERRORS

1. Overconfidence bias occurs when decision-makers tend to think

2. Immediate gratification bias describes decision-makers who tend

to want immediate rewards and avoid immediate costs.

3. The anchoring effect describes when decision-makers fixate on

4. Selective perception bias occurs when decision-makers

5. Confirmation bias occurs when decision-makers seek out

information that reaffirms their past choices and discount

information that contradicts their past judgments.

6. Framing bias occurs when decision-makers select and highlight

certain aspects of a situation while excluding others.

8. Decision-makers who show representation bias assess the

9. Randomness bias describes the effect when decision-makers try

to create meaning out of random events.

10. The sunk costs error is when a decision-maker forgets that current

choices cannot correct the past. Instead of ignoring sunk costs,

11. Self-serving bias is exhibited by decision-makers who are quick to

12. Hindsight bias is the tendency for decision-makers to falsely

1. Exhibit 2-12 provides an overview of managerial decision-making.

2.5 EFFECTIVE DECISION-MAKING FOR TODAY’S WORLD

Today’s business world revolves around making decisions, which are often risky

ones made with incomplete or inadequate information and under intense time

pressure. How can managers make effective decisions under these conditions?

1. Understand cultural differences.

3. Know when it is time to call it quits.

4. Use an effective decision-making process. Experts say an

effective decision-making process has these six characteristics: a.

It focuses on what’s important.

5. Develop your ability to think clearly so that you can make better

choices at work and in your life.

B. Design Thinking and Decision-Making.

Design thinking has been described as “approaching management

2-1. Why is decision-making often described as the essence of the manager’s job?

2-2. Describe the eight steps in the decision-making process.

(6) select alternative; (7) implement alternative; and (8) evaluate decision effectiveness.

2-3. Compare and contrast the four ways managers make decisions.

The assumptions of rationality are as follows: the problem is clear and unambiguous; a

single, well-defined goal is to be achieved; all alternatives and consequences are known;

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and the final choice will maximize the payoff. Bounded rationality says that managers

make rational decisions but are bounded (limited) by their ability to process information.

Satisficing happens when decision-makers accept solutions that are good enough. With

escalation of commitment, managers increase commitment to a decision even when

they have evidence it may have been a wrong decision. Intuitive decision-making means

making decisions on the basis of experience, feelings, and accumulated judgment.

Using evidence-based management, a manager makes decisions based on the best

available evidence. (LO: 2, Explain the four ways managers make change, AACSB:

Analytical thinking)

2-4. Explain the two types of problems and decisions. Contrast the three decision–

making conditions.

Programmed decisions are repetitive decisions that can be handled by a routine

2-5. How can managers blend the guidelines for making effective decisions in today’s

world with the rationality and bounded rationality models of decision-making, or can

they? Explain.

2-6. Is there a difference between wrong decisions and bad decisions? Why do good

managers sometimes make wrong decisions? Bad decisions? How can managers

improve their decision-making skills?

2-7. What is big data? How can organizations effectively use big data to improve

decision making? Should managers be cautious in using big data?

correlations between variables it does not explain which correlations are meaningful.

(LO: 5, Identify effective decision-making techniques, AACSB: Analytical thinking)

PERSONAL INVENTORY ASSESSMENTS

ETHICS DILEMMA

This dilemma describes a situation where a Little League team manager and district

administrator falsified documents to allow boys who lived outside the team’s boundaries

to play on the team. The team was eventually stripped of its championship as a result.

This caused an outcry from various groups including the White House who argued that

the players should not be penalized for the actions of the adults. However, Little League

officials claimed that it was important to the integrity of the organization to ensure that all

rules are properly followed.

SKILLS EXERCISE: DEVELOPING YOUR CREATIVITY SKILL

Creativity is an important skill for all managers—not just those in marketing and R&D. In

this exercise, students work on developing their creativity skills using eight steps

suggested by the authors. To practice their new creativity skills, students can engage in

a brainstorming exercise where they see how many words can be made from the letters

in the word ‘brainstorm.’ To illustrate the usefulness of brainstorming, this could be done

as an entire class with someone assigned to write down the created words. There are

95 possible words that can be generated. (LO: 5, Identify effective decision-making

techniques, AACSB: Analytical thinking)

WORKING TOGETHER: TEAM EXERCISE

In this team-based activity, small groups of students are to discuss previous decision–

making experiences. They should discuss whether they feel they made good/bad

decisions and what happened during the decision-making process that contributed to the

quality of the decision. The group should develop a list of practical suggestions for

making good decisions.

In preparation for this exercise, you might initiate a class discussion centered on a

particular decision-making situation. Ask the class if anyone is considering making a

large purchase, such as a car, stereo, computer, or house. Students can help this

individual make the decision by offering suggestions following the eight steps of the

MY TURN TO BE A MANAGER

• Consider a big decision that you have made. Write a description of the decision

using the steps in the decision-making process as your guide. What could you

have done differently in the process to improve your decision? (LO: 1, Describe

the eight steps in the decision-making process, AACSB: Analytical thinking)

• Write a procedure, a rule, and a policy for your instructor to use in your class. Be

sure that each one is clear and understandable. And be sure to explain how it fits

the characteristics of a procedure, a rule, or a policy. (LO: 1, Describe the eight

steps in the decision-making process, AACSB: Analytical thinking)

• Interview two managers and ask them for suggestions on what it takes to be a

good decision-maker. Write down their suggestions and be prepared to present

them in class. (LO: 5, Identify effective decision-making techniques, AACSB:

Analytical thinking)

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• Visit the Mindtools website (www.mindtools.com) and find the decision-making

toolkit. Explore the decision making tools suggested and select one tool to use

the next time you need to make a decision. (LO: 5, Identify effective decision-

making techniques, AACSB: Analytical thinking)

2-12. How does the GIS help Wendy’s improve their decisions on store locations?

2-13. Are the store location decisions certain or uncertain decisions?

2-14. How can intuition contribute to Wendy’s decision-making process?

ANSWERS TO CASE APPLICATION 2

QUESTIONS

Student answers to these questions will vary.

The Business of Baseball

2-15. In a general sense, what kinds of decisions are made in baseball? Would you

characterize these decisions as structured or unstructured problems? Explain. What

type(s) of decision-making condition would you consider this to be? Explain.

The answer to this question lies in which aspect of baseball you are referring. When it

comes to actually playing the game and the decision involved, the problems are

structured. For example, if a pop fly is hit to left field and there is a player on 1st, where

is the ball thrown? On the other hand, recruiting high profile players, building a new

2-16. Is it appropriate for baseball managers to use only quantitative, objective criteria in

evaluating their players? What do you think? Why?

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Students should see that qualitative criteria are also important because baseball is a

sport that involves life-long fans and grudges. Many of the decisions involved in baseball

are based on fan loyalty and a team’s potential to sell tickets. Not all of these decisions

involve objective measures. (LO: 3, Classify decisions and decision-making conditions,

AACSB: Analytical thinking)

2-17. Do some research on Sabermetrics. What is it? What does it have to do with

decision-making?

2-18. Describe how baseball front office executives and college coaches could use each

of the following to make better decisions: (a) rationality, (b) bounded rationality, (c)

intuition, and (d) evidence-based management.

Baseball teams, like any organization, make a variety of different decisions each day.

2-19. Can there be too much information in managing the business of baseball?