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
2. Explain the four ways managers make change.
4. Describe different decision-making styles and discuss 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
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
even recognize you’re doing these things. Yet, these errors and biases are likely undermining your ability to
make good judgments and good choices. Beware! Be aware!
CHAPTER OUTLINE
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,
selecting an alternative, and evaluating the decision’s effectiveness. (See
Exhibit 2-1 for an illustration of the decision-making process.)
A. Step 1: Identify a problem. A problem is a discrepancy between an
existing and a desired condition. In order to identify a problem, you, as a
manager, should recognize and understand the three characteristics of
problems:
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
B. Step 2: Identify decision criteria. Decision criteria are criteria that define
D. Step 4: Developing alternatives. The decision-maker must now identify
viable alternatives that could resolve the problem.
E. Step 5: Analyze alternatives. Each of the alternatives must now be
F. Step 6: Select an alternative. This step to select the best alternative from
among those identified and assessed is critical. If criteria weights have
2.2 MANAGERS MAKING DECISIONS
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-
5 shows how decision-making fits into the four functions of management.
In this section, students examine how decisions are made, the types of problems
and decisions faced by real-life managers, the conditions under which managers
make decisions, and decision-making styles.
A. Making Decisions: 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
B. Making Decisions: Bounded Rationality. In spite of these limits to
perfect rationality, managers are expected to be rational as they make
decisions. Because the perfectly rational model of decision-making isn’t
realistic, managers tend to operate under assumptions of bounded
rationality, which is decision-making behavior that is rational, but limited
(bounded) by an individual’s ability to process information.
2. Managers’ decision-making may be strongly influenced by the
organization’s culture, internal politics, power considerations, and
C. Making Decisions: The Role of Intuition. Managers also regularly use
their intuition. Intuitive decision-making is a subconscious process of
making decisions on the basis of experience and accumulated judgment.
Exhibit 2-6 describes the five different aspects of intuition.
1. Making decisions on the basis of gut feeling doesn’t necessarily
happen independently of rational analysis; the two complement
managerial decision-making.
D. Making Decisions: The Role of Evidence-Based Management. The
premise behind evidence-based management (EBMgt) is that any
decision-making process is likely to be enhanced through the use of
relevant and reliable evidence. EBMgt promotes the use of the best
available evidence to improve management practice.
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
A. Types of Decisions. Managers encounter different types of
problems and use different types of decisions to resolve them.
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 handled by a routine
approach. Managers rely on three types of programmed
decisions:
a. A procedure is a series of interrelated sequential
2. Unstructured problems are problems that are new or
unusual and for which information is ambiguous or
3. Exhibit 2-7describes differences between programmed
versus nonprogrammed decisions.
a. At higher levels in the organizational hierarchy,
managers deal more often with difficult,
B. Decision-Making Conditions.
1. Certainty is a situation in which a manager can make
2. More common is the situation of risk, in which the
decision-maker is able to estimate the likelihood of certain
FUTURE VISION: Who Makes the Decisions, Person or Machine?
Consumers with E-book readers may be surprised that the information they download
may be monitored by publishers and retailers. Such information can be a treasure for
managers who need up to date information in order to make decisions. The latest
decision software will go beyond simple tracking and storing of data to learn and pick out
patterns of behavior. This intelligent software will have many managerial applications for
decision-making including health care and human resources.
The following discussion questions are posed:
Talk About It 1: What steps of the decision-making process will technology be most
useful for? Explain.
Talk About It 2: How can technology be a “tool” for managerial decision-making?
3. Uncertainty is a situation in which the decision-maker is not
certain and cannot even make reasonable probability estimates
concerning outcomes of alternatives.
a. The choice of alternative is influenced by the limited
amount of information available to the decision-maker.
b. It’s also influenced by the psychological orientation of the
decision-maker.
2) A pessimistic manager will pursue a maximin
3) The manager who desires to minimize the
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 STYLES
Managers have different styles in making decisions and solving problems. One
perspective proposes that people differ along two dimensions in the way they
approach decision-making.
A. Linear-Nonlinear Thinking Profile
1. Research shows that an individual’s thinking style reflects two
2. These four dimensions are collapsed into two styles. The linear
thinking style is characterized by a person’s preference for using
external data and facts and processing this information through
B. Decision-Making Biases and Errors
Managers use different styles and “rules of thumb” (heuristics) to simplify
their decision-making. See Exhibit 2-11 for the common decision-making
biases.
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
7. Availability bias is seen when decision-makers tend to remember
events that are the most recent and vivid in their memory.
8. Decision-makers who show representation bias assess the
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
C. Overview Managerial Decision-Making
1. Exhibit 2-12 provides an overview of managerial decision-making.
2. Regardless of the decision, it has been shaped by a number of
factors, which are discussed in Chapter 7.
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?
A. Guidelines for Effective Decision-Making
2. Create standards for good decision-making.
4. Use an effective decision-making process.
5. Build highly reliable organizations (HROs) that practice five habits:
a. Do not be tricked by your own success.
anticipate.
B. Design Thinking and Decision-Making
Design thinking has been described as “approaching management problems as
C. Big Data and Decision-Making
Big data is the vast amount of quantifiable information that can be analyzed by
ANSWERS TO REVIEW AND DISCUSSION
QUESTIONS
Student answers to these questions will vary.
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.
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;
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. Would you call yourself a linear or nonlinear thinker? What are the decision-making
implications of these labels? What are the implications for choosing where you want to
work?
2-6. “As managers use computer and software tools more often, they’ll be able to make
more rational decisions.” Do you agree or disagree with that statement? Why?
2-7. 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.
2-8. 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?
PERSONAL INVENTORY ASSESSMENTS
Student answers to these questions will vary.
ETHICS DILEMMA
Student answers to these questions will vary.
This dilemma describes a situation where a baggage handler refused to load a
dangerously thin hunting dog with bloody paws and covered in sores onto a flight. The
baggage handler was afraid that the dog wouldn’t survive the flight and refused to load
the dog despite her supervisor’s instructions. The baggage handler was fired but later
reinstated with back pay.
Ask the students:
2-11. Was the decision by the supervisor to fire the baggage handler appropriate?
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
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
MY TURN TO BE A MANAGER
• For one week, pay close attention to the decisions you make and how you make
them. Write a description of five of those decisions, using the steps in the
decision-making process as your guide. Also, describe whether you relied on
external or internal sources of information to help you make each decision and
whether you think you were more linear or nonlinear in how you processed that
• When you feel you haven’t made a good decision, assess how you could have
• Find three examples of managerial decisions described in any of the popular
business periodicals (Wall Street Journal, BusinessWeek, Fortune, etc.). Write a
paper describing each decision and any related information, such as what led to
• Interview two managers and ask them for suggestions on what it takes to be a
• Steve’s and Mary’s suggested readings: Noel M. Tichy and Warren G. Bennis,
Judgment: How Winning Leaders Make Great Calls (Portfolio, 2007); Gerd
Gigerenzer, Gut Feelings: The Intelligence of the Unconscious (Viking, 2007);
Stephen P. Robbins, Decide & Conquer: Make Winning Decisions and Take
Control of Your Life (Financial Times Press, 2004); and John S. Hammond,
Ralph L. Keeney, and Howard Raiffa, Smart Choices: A Practical Guide to
Making Better Decisions (Harvard Business School Press, 1999). (LO: 1,
Describe the eight steps in the decision-making process, AACSB: Analytical
• Do a web search on the phrase “101 dumbest moments in business.” Get the
most current version of this end-of-year list. Choose three of the examples and
describe what happened. What’s your reaction to each example? How could the
• In your own words, write down three things you learned in this chapter about
• Self-knowledge can be a powerful learning tool. Go to mymanagementlab and
complete these self-assessment exercises: How Well Do I Handle Ambiguity?
How Well Do I Respond to Turbulent Change? and What’s My Decision-Making
Style? Using the results of your assessments, identify personal strengths and
weaknesses. What will you do to reinforce your strengths and improve your
ANSWERS TO CASE APPLICATION 1
QUESTIONS
Student answers to these questions will vary.
Tasting Success
2-13. Which decisions in this story could be considered unstructured problems?
Structured problems?
2–14. How does the Black Book help Coke’s managers and other employees in decision-
making?
2-15. What does Coke’s big data have to do with its goals?
2-16. Do some research on revenue analytics. What is it? How can it help managers
make better decisions?
Revenue Analytics is the application of disciplined analytics that predict consumer
ANSWERS TO CASE APPLICATION 2
QUESTIONS
Student answers to these questions will vary.
The Business of Baseball
2-17. 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
2-18. Is it appropriate for baseball managers to use only quantitative, objective criteria in
evaluating their players? What do you think? Why?
2-19. Do some research on Sabermetrics. What is it? What does it have to do with
decision-making?
2-20. 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.
2-21. Can there be too much information in managing the business of baseball?
Discuss.
ADDITIONAL CHAPTER INFORMATION
You may want to provide additional challenges for your students by asking them to
research a recent business situation in the news. Why do they think some of the
decisions were made? Which decision-making styles appear to have been used by
management in this situation?