Everything you need to know about decision making. Decision making is very important managerial activity. Decisions are taken by each and every person in the organisation according to the situation, problem and hierarchy.
Decision making is a regular exercise of the organisation. The manager takes decisions for solving problems, handling the situation and resolving crises.
The manager translates various plans like objective, policy, strategy etc., into action by making decisions. By implementing decisions these actions are converted into outcomes or results.
Decision making is one of the most important functions of management. The word “decision” is derived from a Latin word “Decis” which means “Cutting away or cutting off to come to a conclusion” this is itself means that a single thing is a to be brought in action by cutting off many other things that look alike.
Thus decision making means choosing one alternative from available so many.
1. Introduction to Decision Making 2. Meaning and Definitions of Decision Making 3. Pre-Requisites 4. Characteristics 5. Importance 6. Elements 7. Principles 8. Conditions
9. Process 10. Approaches 11. Models 12. Styles 13. Tools and Techniques 14. Personal Phase 15. Common Problems 16. Administrative Problems.
Decision Making: Meaning, Definitions, Pre-Requisites, Characteristics, Importance, Elements, Principles and Other Details
- Introduction to Decision Making
- Meaning and Definitions of Decision Making
- Pre-Requisites for Decision Making
- Characteristics of Decision Making
- Importance of Decision Making
- Elements of Decision Making
- Principles of Decision Making
- Decision Making Conditions
- Decision Making Process
- Approaches of Decision Making
- Models of Decision Making Behaviour
- Styles of Decision Making
- Tools and Techniques of Decision Making
- Personal Phase of Decision Making
- Common Problems in Decision Making
- Administrative Problems in Decision Making
Decision Making – Introduction
Decision making is very important managerial activity. Decisions are taken by each and every person in the organisation according to the situation, problem and hierarchy. Decision making is a regular exercise of the organisation. The manager takes decisions for solving problems, handling the situation and resolving crises. The manager translates various plans like objective, policy, strategy etc., into action by making decisions. By implementing decisions these actions are converted into outcomes or results.
Decisions are made on managerial functions such as – planning, organising, staffing, directing, and controlling and other issues related to different functional areas like marketing, production, personnel and finance etc. There are so many stages in decision making.
The quality of decisions is the key of success or failure of an organisation. The timely and correct decisions on important issues taken by managers ensure the wealth and survival of the organisation. Thus, decision-making should be done very carefully and accurately.
A manager’s duties mostly involve making decisions of one kind or the other. Everyday hundreds of decisions are made in a company consciously and unconsciously. According to Peter F. Drucker, “Whatever a manager does, he does through making decisions.” Decision-making is connected with formulating plans, establishing objectives, laying down policies and so on. According to Rustom S. Davar, “Decision-making can be defined as the selection based on some criteria of one’s behaviour alternative from two or more possible alternatives. To decide means to cut-off or in practical context to come to a conclusion.”
According to Manley H. Jones, “the decision is a solution selected after examining several alternatives chosen because the decider foresees that the course of action he selects will do more than the other to further his goals and will be accompanied by the fewest possible objections and consequences”. Thus, a decision essentially involves choosing a particular course of action, after considering the possible alternatives. It may be expressed in words or it may be implied from behaviour.
Decision Making – Meaning and Definitions Provided by Mc Farland, G.R. Terry, F.G. Moore, Haiman, Peter Drucker, Shull, Delberg and Cummin and Kreitner
Decision making is one of the most important functions of management. The word “decision” is derived from a Latin word “Decis” which means “Cutting away or cutting off to come to a conclusion” this is itself means that a single thing is a to be brought in action by cutting off many other things that look alike. Thus decision making means choosing one alternative from available so many.
Naturally it is a bought work. This is based on the mental ability of the manager who has to take decisions. A manager who is able to take proper and timely decision is supposed to be a good manager. Decision making is a human process and depends upon the immediate assessment of pros and cons of the available alternatives.
Every human being has to take decisions in his life. Peter Drucker – the father of scientific management said, “Whatever a manager does, he does through decision making”. Haimann considers decision as, “a course of action chosen by the manager as the most effective means at his disposal for achieving goals and solving problems”.
According to Mc Farland, “A decision is an act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represents a course of behaviour chosen from a number of possible alternatives.”
According to G. R. Terry, “Decision making is the selection based on some criteria from two or more possible alternatives”.
According to F. G Moore, “Decision making is a blend of thinking, deciding and acting”.
Haimann considers decision as, “a course of action chosen by the manager as the most effective means at his disposal for achieving goals and solving problems”.
“Whatever manager does, he does through decision making” – Peter Drucker.
“Decision-making is a conscious and human process involving both individual and social phenomenon based upon factual and values premises which concludes with a choice of one behavioural activity among one or more alternatives with the intention of moving towards some desired state of affairs.” – Shull, Delberg and Cumming.
“Decision making is a process of identifying and choosing alternative course of action in a manner appropriate to the demand of the situation the act of choosing implies that alternative course of action must be weighted and weeded out.” – Kreitner.
Decision Making – Pre-Requisites for Decision Making
Decision making is a complex task. It is an art by itself. However, it has some pre-requisites.
A manager can take proper and appropriate decisions if empowered with the following:
a. Appropriate authority.
b. Suitable decision support systems including information and control systems (management information system such as – marketing information system, Human resource information system or Production information system etc come very hand for decision making).
c. Organisational policies and procedures.
d. Trained employees (trained in terms of problem solving and judgement skills) both for line and staff positions.
e. Conducive organisational climate for decision making.
f. Appropriate decision making workloads.
g. Standard operating procedures.
Decision Making – Characteristics
(i) Decision-making is based on rational thinking. The manager tries to foresee various possible effects of a decision before deciding a particular one.
(ii) It involves the evaluation of various alternatives available. The selection of the best (optimal) alternative will be made only when pros and cons of all of them discussed and evaluated.
(iii) Decision-making is the end of the process of making a decision, because it is preceded by discussions and deliberations.
(iv) Decision-making is used to reach organizational goals.
(v) Decision-making is a process of selection and the aim is to select the optimal alternative.
(vi) Decision-making involves commitment. The management is committed to every decision it takes. The commitment may for a short run or long run objectives.
(vii) Decisions are made in organizational context as it is aimed at achieving the objectives of the organization.
(viii) Decision-making is a mental process, because the final selection is made after thinking, judging and consideration.
(ix) Decision involves rationality because through decisions, one tries to achieve goals of the organization and be happy.
Decision Making – Importance
Decision-making makes it possible to adapt the best course of action in carrying out a given task. When there is different way of performing a task, it becomes necessary to find out the best way and this is done by decision-making. The course of action finally selected should produce the optimal results for the organization. By selecting the best course of action, ensures the use of organizational scarce resources to run the business profitably.
Decision-making helps any manager to take timely right act to solve the problem on hand and come out with an optimal solution. It helps to identify the best course of action in each given situation and thereby promotes efficiency. No doubt a manager makes a decision depending on the alternatives available and the situation on hand.
The decision thus made must be acceptable by both management and workforce. This is because the satisfied workforce puts its efforts positively to achieve the desired results without mush supervision and control. A decision made by a manager in right time will save business from the acts of competitors.
Decision Making – 10 Major Elements
1. A problem is fully analysed and the available alternatives are considered before taking a decision.
2. The best decision-making requires intelligence, experience and insight into a problem.
3. A decision is taken according to the environment of business.
4. Centralisation and decentralisation of authority affect the decision indirectly. If authority is centralised, all important decisions are taken by the chief executive. If it is decentralised, key decisions are taken by the top executive and routine decisions are taken by the lower level management people.
5. The psychology of an individual is involved in decision-making.
6. A decision discloses the preferences, intellectual maturity, experience, educational standard, social and religious attitudes, optimism or pessimism, designation and status of a decision maker.
7. Decisions are taken when they are needed.
8. As soon as the decisions are taken, they must be communicated to the concerned persons. Decisions are communicated without ambiguity.
9. Employees are also involved in a decision-making process.
10. Political and social environment of business affect the decision-making.
If the management takes a decision after consulting the employees, the following advantages may accrue:
i. Better relations with employees.
ii. Loyalty to the management.
iii. There is no hindrance in the implementation of a decision.
iv. Efficiency of the employees is increased.
v. Issuing directions to employee is very easy.
Decision Making – Principles: Purpose-Driven, Inclusive, Educational, Voluntary, Self-Designed, Flexible, Egalitarian, Respectful, Accountable, Time Limited and Achievability
Eleven principles of collaborative problem solving have been identified. Such collaboration needs inclusionary process that promotes lateral communication and shared decision-making. It makes shareholder groups do develop policy recommendations on a variety of public issues.
The principles are:
(a) Purpose-driven – People need a reason to participate in the process.
(b) Inclusive, Not Exclusive – All parties with significant interest in the issues should be involved in the collaborative process.
(c) Educational – The process relies on mutual education of all parties.
(d) Voluntary – The parties who are affected or interested participate voluntarily.
(e) Self-Designed – All parties have an equal opportunity to participate in designing collaborative process. The process must be explainable and designed to meet the circumstances and needs of the situation.
(f) Flexible – Flexibility must be designed into the process to accommodate changing issues and data needs, political environment and programmatic constraints such as time and meeting arrangements.
(g) Egalitarian – All parties have equal access to relevant information and the opportunity to participate in the collaborative process, which is essential.
(h) Respectful – Acceptance of the diverse values, interests and knowledge of the parties involved in the collaborative process is essential.
(i) Accountable – The participants are accountable both to their constituencies and to the process that they agreed to establish.
(j) Time Limited – Realistic deadlines (time limits) are necessary throughout the process.
(k) Achievability – Commitments made to achieve the agreement(s) and effective monitoring are essential.
Decision Making – Decision Making Conditions: Certainty, Risk and Uncertainty
Not all organization operate under exactly same conditions and not all conditions are same, which makes a decision makers job challenging one where he / she is required to make right decisions almost every time.
While making decisions, the managers normally face three types of conditions:
Under conditions of certainty, we know what will happen in the future. Certainty is when a decision maker is able to predict the outcome accurately. The conditions of certainty exist when the managers can obtain complete and reliable information about future, i.e. future is highly predictable.
When a decision is made under certainty, a manager knows exactly what the outcome will be because he knows his resources, time available, and other things. While evaluating different alternatives, the results of each alternative can be predicted with a fair degree of correctness and therefore, it is possible to choose the best course of action.
In business environment, no two situations are exactly similar to each other and future conditions cannot be known in advance with 100% accuracy. This uncertainty in prediction and handling of unknown and inexperienced forms the element of risk to the decision-making.
In this condition, complete information is unavailable, but we have a good idea of the probability of particular outcomes. Past experience and current economic scenario help in predicting the future.
The potential of new entrants in the market, the adoption of a cost-effective technology by a competitor are the probable risks that a manager can predict in the future and should, therefore, incorporate them in his current decision-making process while evaluating different alternatives.
Uncertainty is the situation where almost no information is available about future, for example change in the economic / legal or political scenario in future i.e. future is totally unpredictable. This may be due to fast changing external environment, which is beyond the control of managers. Under uncertain conditions, it is difficult or impossible for the decision- maker to estimate probabilities for various alternatives and their respective outcomes.
For example, in marketing a new product, the decision may depend on whether management anticipates a period of prosperity, recession, or stagnant.
So it can be summed up as, under conditions of certainty, we know what will happen in the future. Under risk, we know what the probability of each possible outcome is. Under uncertainty we do not know the probabilities and may be not even the possible outcomes.
Decision Making – Process: Identify the Problem, Analysis of Identified Problem, Discovery of Alternatives, Implementation and Follow Up and a Few Others
All the decisions by the managers have direct effect on the organisation as a whole. If decisions are not taken carefully they may prove to be wrong with adverse effect on the organisations. Any decision taken on spur of moment and with only mental instinct may not be a proper and correct decision.
Thus the management has to go along a number of steps to ensure correct and proper decision, that too in a chronological order, Adherence to the following steps results in proper decisions –
Process # 1. Identify the Problem:
Decisions are required to be taken on varied issues and problems. It is, therefore, necessary first to know the issue or the problem. Many decisions are to be taken in anticipation of problems and situations. Unless such issues, problems, and situations are not identified, taking decisions is not possible.
Naturally the decision maker has first to identify the problems or issues or situations along with their importance, nature and so on. Thus identification of problems is the first step in decision making, to identify, is the responsibility of decision maker which he has to fulfill with proper knowledge, experience and capability.
Process # 2. Analysis of Identified Problem:
Identification of problem does not provide sufficient information that may help in decision making. The known problem or the anticipated problem must be studied in depth. Such a study includes analysis of the problem. All relevant information is required to be collected, studied and arranged in a sequential order. This enables the decision maker to understand the pros and cons of the problem and of probable decisions. Thus analysing and understanding the problem is next step in the decision making process.
Process # 3. Discovery of Alternatives:
As we know decision making is choosing a fitting alternative from amongst available many. Once the problem is thoroughly understood, various solutions can be evolved. Each such solution may be the final decision. Thus all such solutions are generally identical with some differences. All the solutions are thus discovered first. Every such possible solution is an alternative. These alternatives can be evolved either by giving a detailed thought or by consulting experts.
Process # 4. Selecting the Best Alternative i.e. Decision Making:
As seen above almost all alternatives look alike. But there are some differences regarding nature, time of implementation, good-better-best effect, financial involvement, social impact etc. These differences matter more as they have organisation wide impact. Secondly it is to be seen whether the probable alternative provides long term solution or implementation.
The problems may be temporary (timely) or permanent (constant) in nature. Naturally solutions should also have the same nature. Thirdly the decision maker has to assess as well as anticipate bad or good results (effects) of each of the alternatives. It, therefore, becomes a tough job for the decision maker. He has to use his wisdom, foresight ability and experience and hypothetically test every probable solution. It is, only after the whole exercise, possible to confirm an alternative which in turn becomes the decision.
Process # 5. Implementation and Follow Up:
Decisions are taken to resolve the problems. These problems are not with the decision makers. Thus the decisions have to reach the concerned people who face the problems. It is, therefore, essential to communicate these decisions to all concerned. Many times methodology of implementing the decision is also required to be communicated. Decisions can be implemented only after this. The top management has to observe the effects of decisions after implementation a feedback is sought.
This enables the management to compare their assessment with actual effects. Correctness of the decisions can be finally confirmed only after their implementation. Such implementation must be supervised properly to ensure right compliance. If the decisions stand to be supervised properly to ensure right compliance.
If the decisions stand to the expectations, improvement, solution of problem, their correctness and effectiveness is confirmed. If there are any lacunae, these can be removed by making required amendments to the decisions. All this is implementation and follow up state.
Decision Making – Approaches: The Intuitive – Emotional Approach, The Rational Model Approach, Satisficing Approach and Political-Behavioural Approach
Different theories have suggested different approaches of decision making.
These approaches are discussed hereunder:
Approach # 1. The Intuitive-Emotional Approach:
Decision-maker takes decisions based on intuition which is characterised by the use of hunches, inner feelings or the ‘gut-feeling’ of the decision maker. Decision maker who makes decisions based on intuition, practices management exclusively as an art.
This decision maker prefers habit or experience, relative thinking, and instinct using the unconscious cognitive process. The decision maker takes into account a number of alternatives into consideration, but simultaneously jumps one step in analysis and search to another and back again.
Most of the managers suddenly become emotional and nothing can change their minds.
George Odiorne has stated the following emotional factors which can adversely affect decision makers:
i. They fasten on the big lie stick with it.
ii. They are attracted to scandalous issues and heighten their significance,
iii. They press every fact into a normal pattern.
iv. They overlook everything except the immediately useful.
v. They have an affinity for romantic stories and find such information more significant than any other kind including hard evidence.
This type of emotional attachments is possible and can lead to poor decisions.
The intuitive decision maker is normally an activist, fast mover, incisely questions situations and finds unique solutions to difficult problems. Some theorists prescribe intuitive approach of decision making.
The supporters of intuition or judgement point out that in many cases, judgement may lead to better decisions than optimising techniques. They also argue that analytical models are only tools to help the decision maker to refine judgement.
The opponents of this approach argue that:
(i) It does not effectively use all the tools available to modern decision-makers and
(ii) The rational approach ensures that adequate attention is given to consequences of decisions before big mistakes are committed.
Considering the views of both supporters and opponents of this approach, it is suggested that the managers who wish to improve their intuition might try to:
(i) Becoming more involved by filling their minds with facts and experiences in the areas where their future decisions will be made;
(ii) Practicing intuitive decision making and keeping a score on how well such decisions turned out;
(iii) Developing awareness that hunches can help in decision making.
(iv) Becoming aware of biases and allow for them. Undiscovered biases do the most damage, and
(v) Seek out independent opinions. It is always good to seek the opinion of some person who has no vested interest in the decision.
Approach # 2. The Rational Model Approach:
In the rational-analytical approach, the decision maker is intelligent and rational. The decision maker makes the choice, in full awareness of all available feasible alternatives, to maximise advantages. The decision maker considers all alternatives as well as consequences of all possible choices, orders these consequences in the light of a fixed scale of preferences, and chooses the alternative that procures the maximum gain.
The rational approval to decision making includes the following steps:
(i) Recognise the need for a decision;
(ii) Establish, rank and weigh criteria;
(iii) Gather available information and data;
(iv) Identify possible alternatives;
(v) Evaluate each alternative with respect to all criteria; and
(vi) Select the best alternative.
Assumption of Rational Approach:
The rational approach is based on the concept of ‘economic man’.
This concept views that people behave rationally and that their behaviour is based on the following assumptions:
(i) People have clearly defined criteria, and the relative weights which they assign to these criteria are stable;
(ii) People have knowledge of all relevant alternatives;
(iii) People have the ability to evaluate each alternative with respect to all the criteria and arrive at an overall rating for each alternative;
(iv) People have the self-discipline to choose the alternative which rates the highest (they will not manipulate the system).
Challenges of the Rational Model:
Rational-analytical approach is the oldest decision theory. It prescribes a rational, conscious, systematic and analytical approach.
This has been challenged because:
(i) The decision-maker is often not a unique actor but part of a multiparty decision situation;
(ii) Decision-makers are not rational enough or informed enough to consider all alternatives or know all the consequences. And information is costly;
(iii) Decision-makers take decisions with more than a maximisation of objectives in mind. They tend to, “satisfice” i.e., make a decision expected to yield a satisfactory, as opposed to an “optimal” outcome. Besides, the objective may change.
(iv) Decision-maker makes decisions based on limited knowledge or less perfect information;
(v) The most difficult stage in the decision process may be the evaluation or the prediction of outcomes for the various alternatives;
(vi) The problem is the temptation to manipulate the information and choose a favoured; but not necessarily the best; alternative. This temptation may come from within the decision-maker or it may be created by external forces.”
Approach # 3. Satisficing Approach:
Herbert Simon developed the principle of bounded rationality. This principle states that- “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 behaviour — or even for a reasonable approximation to such objective rationality.”
The principle of bounded rationality states that there are definite limits to human rationality. Based on the principle of bounded rationality, Herbert Simon proposed a decision theory of the “administrative man.”
The assumptions of the theory are:
i. A person’s knowledge of alternatives and criteria is limited.
ii. People act on the basis of a simplified, ill-structured, mental abstraction of the real world; this abstraction is influenced by personal perceptions, biases, and so on and so forth.
iii. People do not attempt to optimise but will take the first alternative which satisfies their current level of aspiration. This is called satisficing.
iv. An individual’s level of aspiration concerning a decision fluctuates upward and downward depending on the values of most recently found alternatives.
These assumptions explain that limits exist to human rationality. Therefore, an individual must take decisions based on limited and incomplete knowledge. In view of this, the individual decision maker cannot optimise but only satisfice.
Optimising means choosing the best possible alternative. Satisficing means choosing the first alternative that meets the decision maker’s minimum standard of satisfaction. Minimum standard of satisfaction i.e., criteria for aspiration depends on the current level of aspiration. Level of aspiration refers to the level of performance that a person expects to attain and it is determined by the person’s prior success and failures.
Satisfying approach to decision making is presented in Figure 6.2. If the decision maker is satisfied that an acceptable alternative has been found, it is selected otherwise, and the decision maker searches for an additional alternative.
The value of best previous alternative and current level of aspiration influence the value of alternative found. This, in turn, indicates whether or not the decision maker is satisfied with best alternative found so far?
If the decision maker is satisfied with the best alternative found, he selects that alternative as decision. Otherwise, he searches for additional alternatives and continues the process. The value of best previous alternative and current level of aspiration are influenced by the value of new alternative found. In fact, it is mutual impact.
Approach # 4. Political-Behavioural Approach:
Normally decisions made by organisations affect a variety of people and organisations. Hence, another view suggests that the corporations must consider all the people and organisations in making decisions. Corporations interact with a variety of stakeholders as the corporation and its stakeholders are mutually dependent on each other.
The employees exchange their human resources for fair salaries, benefits and harmonious industrial and human relations. Customers exchange their money for qualitative products and courteous services. Shareholders exchange their money for high rate of dividend and safety of their capital. Government provides security and protection and in turn expects payment of taxes regularly.
Financial institutions exchange their finance for high rate of interest, security of principal amount and regular payment of interest. Suppliers of inputs expect fair terms of trade and continuous business.
Competitors exchange information through chamber of commerce, trade and industry for mutual existence and development. The dealers expect continuous business. Thus, a stakeholder is an individual or organisation who can affect or is affected by the decision making and achievement of organisational purpose and objective.
Every stakeholder gives something to the corporation and expects something in return. Similarly, the corporation also gives something to its stakeholders and expects in return. The corporation can have more power, if it maintains favourable relations with the stakeholders compared to other corporations.
More powerful stakeholders have better terms of exchange and, therefore, have more influence on decisions. In fact, the corporations depend on such powerful stakeholders.
The stakeholders influence the decisions of the corporation depending upon their strength. If the labour unions are strong and have strong political affiliation, they can influence the managerial decisions. In fact such union gets even their unreasonable demands met by the management.
Similarly, if the number of shareholders is relatively less, they can influence the decision regarding payment of high rate of dividend versus high reserves. Powerful dealers influence the corporation regarding the terms and conditions of trade.
In view of these factors, corporations do a juggling act to meet the demands of various stakeholders. The corporation should balance through political compromise the competiting demands of different stakeholders in making decisions. This process helps for a coalition of interests that will support the decision.
This is a descriptive theory suggesting a decision making within the alternatives available. Decisions are made through a mutual negotiations and consultation among all the stakeholders who affect and/or are affected by the decision. The negotiations/consultations are based on the rule of the power sharing game between the organisation and the stakeholders.
The decision-maker being a human being is a mix of the rational and the emotional. Environment is a mixture of analysable and chaotic change and pressures. Therefore, decisions are made in a typically human way, using the rational, conscious analysis and intuitive, unconscious ‘gut feeling’ in light of political realities. Blending of these prescriptive and descriptive approaches helps to understand how decision-makers operate.
Decision Making – Models of Decision Making Process: Econologic Model, Social Model and Bounded Rationality Model
The models of decision making behaviour deal with rationality-of-choice ranging from complete rationality to complete irrationality. These models have quite different assumptions about decision maker.
The following models of decision-making process and behaviour are important:
1. Econologic Model
2. Social Model
3. Bounded Rationality Model
1. Econologic Model:
This is an earliest approach to model decision processes, which comes from the classical economic model. The model rests on two assumptions- (a) It assumes decision maker is perfectly and economically rational; and (b) It assumes that decision makers attempt to maximize outcomes in an orderly and sequential process.
The model assumes the following conditions regarding the decision-making activities:
i. The decision will be completely rational in the means ends sense.
ii. There is a complete and consistent system of preferences which allow a choice among the alternatives.
iii. There is complete awareness of all the possible alternatives.
iv. There are no limits to the complexity of computations that can be performed to determine the best alternatives.
v. Probability calculations are neither frightening nor mysterious.
In addition, the econologic model assumes that:
i. Goals to be achieved in any decision situation are obvious or predetermined;
ii. Perfect information is freely available;
iii. People can mentally store the information in some stable form;
iv. People can rank all the consequences in a consistent fashion for purpose of identifying the preferred alternative.
Econologic model suggests the following steps in the decision process:
1. Symptoms of the problem or difficulty are discovered.
2. The problem is identified and defined and the goal to be reached is determined.
3. Criteria (objectives) are developed, against which alternative solutions may be evaluated.
4. All possible courses of action are recognized.
5. The consequences of each course of action as well as the likelihood of occurrence of each are considered.
6. Each course of action is then evaluated by comparing with decision criteria, and best alternative is selected.
7. Decision is acted upon or implemented. This process is shown in Figure 7.3.
This is an idealistic or a normative model which describes how decision makers “ought to” behave. The main virtue of the model is in predicting economic market conditions and prices rather than actual human behaviour. It has intuitive appeal. It guides decision makers regarding how to improve the quality of decision making.
However, the assumptions of this model are not valid. It does not describe how decisions are actually made. In fact, decision makers rarely have access to perfect informations. Thus, knowing all possible alternatives and their consequences is not possible. Furthermore, it is equally impossible to have a tremendous mental capacity for remembering and storing huge information as the model assumes.
2. Social Model:
The social model is at the opposite extreme from the econologic model. This is based on the psychological concepts of human behaviour. Sigmund Freud says that “humans are bundles of feelings, emotions, and instincts and their behaviour is guided largely by their unconscious desires.” According to this model, social influences have a significant impact on decision-making behaviour.
Sometimes, social pressures and influences may cause managers to make irrational decisions. Being human beings, decision makers are influenced in their choice even by small things such as format of information. Thus, the concept of rationality is not necessarily applied with management decision making. Sometimes, management behaviour seems to be irrational but still may be very realistic.
3. Bounded Rationality Model:
In contrast to econologic model. Herbert Simon proposed the bounded rationality model, also known as the administrative man model. As the name implies, this model does not assume perfect rationality in the decision behaviour. Instead, it is assumed that people seek a kind of bounded (or limited) rationality in decisions.
According to this model, the decision behaviour can best be described in terms of following mechanisms:
i. Bounded Rationality:
According to the notion of bounded rationality, “The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problem whose solution is required for objectively rational behaviour in the real world – or even for a reasonable approximation to such objective rationality.”
Thus, bounded rationality implies that- (a) Decisions will always be based upon an incomplete understanding of the problem situation; (b) All possible alternative solution cannot be generated; (c) It is impossible to foresee and predict accurately all of the outcomes associated with each alternative; (d) The ultimate decision will be based upon some criterion other than maximization or optimization. Thus, this model acknowledges the real-world limitations on managers’ decision making. It holds that decision makers must work within conditions that provide a bounded rationality.
Whereas the econologic model focuses on the decision maker as an optimiser, this model sees him as a “satisficer”. It says that people, while they may seek this best solution, usually settle for much less due to their limited information processing capabilities. They end up satisficing because they do not have the ability to maximize. In other words, a decision maker continues to generate and evaluate alternatives until one alternative that is satisfactory or “good enough” to be acceptable is identified.
Managers attempt to satisfice, rather than maximize due to- (a) dynamic objectives, (b) imperfect information, (c) time and cost constraints, (d) less quantified preference ordering and (e) effects of environmental forces. Examples of satisficing criteria may be ‘adequate profit’, ‘share of the market’ or ‘fair price’.
iii. Sequential Attention to Alternative Solutions:
People examine possible solution sequentially. They identify various (instead of all) alternatives and evaluate one at a time. When an acceptable solution is found, the search is discontinued.
iv. Use of Heuristics:
Simon contends that managers often follow rules of thumb, or heuristics, when making decision. A heuristic is a rule that guides the search for alternatives. Managers use heuristics to reduce large problems to manageable size so that satisficing solutions can be acquired rapidly. It is helpful in looking for obvious solutions or previous solutions that worked in similar situation.
This principle says that “if what has worked in the past proves unsatisfactory, the satisficer will resort to a new solution.” This implies that the search for alternatives is confined to the area closest to the problem.
vi. Procedural Rationality:
This concept implies that managers need to design rational procedures for coping with problems and deciding upon solutions. These procedures must be designed to focus manager’s attention upon key aspects of the problem and permit managers to bring to bear their insight, creativity, and experience in generating a manageable number of solutions.
Based on above propositions, the process of decision making according to bounded rationality model can be outlined as follows:
1. Set the goal to be pursued or define the problem to be solved.
2. Establish an appropriate level of aspiration or criterion level (to know that a solution is sufficiently 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 individual alternative is unacceptable, initiate search for a new alternative solution (repeat step 3-5).
7. If the identified alternative is acceptable- (a), implement the solution (b).
8. Following implementation, evaluate the ease with which the goal was (or was not) attained (a), and raise or lower the level of aspiration accordingly on future decisions of this type (b). The model is shown in Figure 7.4.
This is realistic model of decision making. The econologic model provides a useful framework of how decisions should be made, while the bounded rationality model gives a good description of how decisions actually are made. There are many economic, social, and structural constraints which prevent maximization in practice.
This model accepts the bounds of rationality, having the real-world approach. Simon claims that his model is based on common sense, introspective knowledge, and research of judgmental processes from the behavioural sciences. However, the model still lacks empirical verification.
Decision Making – Styles of Decision-Making
Managers approach decision-making in varied ways. Often, the decision-making style adopted by managers will reflect their personality. For example, some managers are cautious and favour solutions that carry little risk, while others are adventurous and favour decisions which carry a high risk. Similarly, some managers are decisive and reach conclusions swiftly while others take a long time and will not come to a conclusion until all the information is available.
Perfectionists tend to make decisions slowly. Rigid people often fail to consider all alternative solutions – especially those solutions which include novel elements. Intelligence has a major impact on decision-making. Generally, intelligent people make better decisions more quickly because they process a wide range of information speedily. However, a combination of intelligence and perfectionism can slow down the decision-making process. Such people like to gather vast quantities of information and analyse it exhaustively. Sometimes this can lead to “paralysis by analysis”.
Rowe, Boulgarides and McGrath (1994) considered all these aspects and came to the conclusion that there are two main dimensions which govern decision style. The first dimension deals with tolerance for ambiguity. Some managers like to deal with situations where the objectives are clear, the alternatives are easily understood and the information is objective. These managers dislike ambiguity. They value order and consistency. Other managers are happy to deal with situations that are ill-defined and which can be tackled in a large number of ways.
They have a tendency to see problems in a wider perspective and they revel in the freedom which ambiguity may give. The second dimension concerns rationality. Some managers are very rational and stick to reasoning with objective information. They make their decisions in a logical and sequential way. Others are more intuitive and go by their “gut feelings”. They tackle a problem from many angles and may use unorthodox, even zany, methods. Rowe, Bulgarides and McGrath used a combination of these two dimensions to identify four decision-making styles.
A manager with an analytical style will collect as much data as possible – preferably objective data from a management information system. She or he will consider the alternatives in a clinical, objective way and try to choose the optimum solution. Their decisions will usually be technically very competent.
A manager with a conceptual style will try to see a problem in perspective and will try to understand the general principles that will give a broad approach. They will collect a large amount of data but they will use information obtained from people as well as that obtained from a management information system.
Their decisions will often be unusual and creative. A manager with a directive style will often appear efficient and practical. They usually make decisions very quickly because they simplify the situation, deal with a restricted range of information and consider only a narrow range of conventional alternatives. A manager with a behavioural style is usually concerned with other people’s feelings and the impact a decision has upon colleagues and employees. They obtain the majority of their information by talking to others on a one-to-one basis.
It must be emphasised that few people are pure examples of these four styles. Managers may tend towards one of the styles but they will generally adopt other styles when the situation demands. In fact, the situation in which a decision is taken has a considerable influence upon the style that is appropriate. Vroom and Jago (1988) tried to be more specific. Their work involves three main components- an analysis of decision styles, an analysis of decision situations and a procedure for linking styles and situations.
Vroom and Jago did not use the classification of management styles developed by Rowe, Boulgarides and McGrath.
Instead they developed their own classification based upon how autocratic or democratic a manager was:
(a) A very autocratic manager (A1) makes decisions entirely on their own using the information available.
(b) A fairly autocratic manager (A2) makes decisions on their own but will obtain information from subordinates.
(c) A fairly consultative manager (C1) discusses decisions with individual subordinates and will obtain their ideas. However, this manager will make the decision on their own and the decision may or may not incorporate the views of subordinates.
(d) A very consultative manager (C2) discusses decisions with subordinates as a group. However, the decision will be made by the manager on their own and it may or may not incorporate the views of subordinates.
(e) A very democratic manager (G2) is very group oriented. The group will play a major part in identifying the problem, diagnosing the situation, suggesting alternatives and choosing the final course of action. This manager accepts and implements the alternative chosen by the group.
When Vroom and Jago examined decision situations they identified eight important situational variables which are:
(a) The requirement for decision to be technically correct (DQ)
(b) The importance of employee commitment (DC)
(c) The adequacy of the leader’s information (LI)
(d) The structure of the problem (DS)
(e) Probability of employees’ commitment to autocratic decision (EC)
(f) Degree to which employees’ goals are congruent with those of the organisation (EG)
(g) The probability that employees will disagree among themselves over the preferred alternative (ED)
(h) The degree to which employees have enough information to make a good decision (El)
Note- the abbreviations have been changed from Vroom and Jago’s diagram in order to make it clear which factors relate to the Decision (D), the Leader (L) or the employee (E).
Vroom and Jago simplified these characteristics into two levels- high or low. They were then able to draw up the algorithm shown in Figure 6.5 to identify the appropriate decision style.
Vroom and Jago’s diagram is very elegant but it is probably too complex to be of much use to practising managers. Two very general conclusions may be that structured decisions and employee commitment may slightly favour autocratic styles.
Decision Making – Tools and Techniques: Operation Research, Linear Programming, Game Theory and Queuing Theory
Tools and techniques of decision making include:
i. Operations Research
ii. Linear Programming
iii. Game Theory
iv. Queuing Theory
i. Operations Research:
Operations research is the application of specific methods, tools and techniques to operations of systems with optimum solution to the problems. Operations research presents in the logical approach to a real problem, by quantifying the variables to the problem. It concentrates on goals in a problem area, hurdles to the solution, overcoming the hurdles in reaching the goal. It quantifies all these variables in the process.
ii. Linear Programming:
Linear programming helps in making decisions with regard to optimum allocation of resources viz., financial, human, material, machines, space, time etc., among various purposes. It is a mathematical technique with objective function establishing proportional relationships between/among variables. It establishes the linear relationship that additional input produces the output in the same proportion.
iii. Game Theory:
Game theory is the logic of rational decisions. It provides solutions for competitive problems taking into considerations the situations, the probable actions by the competitors, expected outcome and choosing a right action.
iv. Queuing Theory:
Queuing theory deals with ques or waiting lines of a group of items ready to receive the service or operation in the process. Queuing theory presents a mathematical solution to the problem of long queue versus a short/nil queue. This theory considers cost associated, outcome expected, time and alternate use of resources.
The characters involved in the decision making are:
(i) Number of servers waiting at the service stations,
(ii) Capacity and efficiency of the servers,
(iii) Number of service facilities,
(iv) Average arrival rate,
(v) Average service rate,
(vi) Average length of queue,
(vii) Average waiting time and
(viii) Average time spent in the system.
Decision Making – Personal Phase of Decision-Making: Intelligence, Education, Experience, Courage, Motivation, Forecasting Ability and Self Confidence
Decision-maker may not take the best decision in all cases. Next, there is no method available to him to test his decision to find out whether it is the best or right one. There is a need of definite policies and criteria in an organisation to test a decision as to its goodness or to its rightness. A structured organisation has definite policies and criteria.
Generally, the manager is a decision-maker in an organisation. Two managers do not take same decision even though the same data are supplied to them. So, there are some differences in decision-making. These are due to personal characteristics and qualities of managers.
The existence of different characteristics and qualities in managers is due to the following:
Here, intelligence is the ability of using common sense in decision-making. So, the intelligence is not concerned with formal education. Highly educated persons do not take best decisions in all cases. There is a need of perception of quality managers to take the best decisions.
Education develops the broad outlook of the decision-maker. Higher education is different from good education. A good education helps the decision-maker to take best decision even in complex situations rather than higher education. Higher education is nothing but getting master degree from a recognised educational institution.
In other words, good education is acquiring thorough knowledge in a particular area of subject-matter. At the same time, the level of knowledge may not increase correspondingly to the long years of education. If a person has inner urge to learn more and more, he will become an expert in taking decisions.
The experience of an individual can improve the decision-making ability. Decision-maker can survive only when he has skill for original thinking. Decision maker should use his personal experience in taking a decision.
The decision-maker should have courage to take and implement a decision. The very success of decision depends upon the courage of the decision-maker.
Everybody wants recognition for their action. Likewise, a person who takes a decision wants to have it by his colleagues. If it is not so, he will not take even a simple decision in future. Recognition of a decision is a motivation tonic to the decision maker. Next, the decision-maker does not expect both criticism and suggestions.
6. Forecasting Ability:
The quality of a decision depends upon the forecasting ability of the decision-maker. If the decision-maker has the forecasting ability, even decisions made in a hurried manner may produce good results at times. Besides, he may use the available opportunities and avoid problematic situations. In this way, the need for taking additional decisions is also avoided.
First, the decision-maker has correctness of his decision. Then, he will place the decision before others to be accepted. The self-confident decision-maker can take decision as and when required. On the other hand, if the decision-maker has no self-confidence, he will make delay in the decision-making process and it will make the situation go from bad to worse. So, there is a need of self-confidence on the part of a decision-maker.
Decision Making – Common Problems: Bounded Rationality, Procrastination, Anchoring, Escalation of Commitment, Groupthink and Communication Failure
It is rare for the decision-making paradigm to be followed in its pure form. Sometimes certain phases will be omitted. Often it is necessary to cycle through the paradigm several times before the best decision is made. Frequently other factors intervene to create decision-making faults.
The most frequent faults are probably-
1. Bounded rationality,
4. Escalation of commitment
6. Communication Failure
1. Bounded Rationality:
The decision-making paradigm is based on the assumption that people are rational and logical. However, experts such as Simon (1955), Bromiley (1999) and Agnew and Brown (1986) have argued that human beings find it difficult to be totally objective and when managers make decisions they do so in a “bounded rationality” – in other words a rationality that is limited by human frailty.
The rationality of managers can be bounded by a number of factors. It can be bounded by cognitive overload. A decision may involve a great deal of information which is too much for a human being to remember and understand. Under these circumstances the decision-maker may try to simplify the situation and use “rules of thumb” called heuristics.
Heuristics are simplifications and shortcuts that appear to help complex decisions. Typical everyday examples of heuristics are “never schedule activities for more than two-thirds of the time available” or “always allow a 20 per cent overrun on building projects”.
Many other factors may prevent people from behaving totally rationally. Logical reasoning may be distorted by attitudes, emotions and intuitions. The ability to reason logically may also be bounded by pressure and stress.
Procrastination is the tendency to delay decisions without a valid reason. It is sometimes called dithering and is personified as the “thief of time”. Procrastination usually results in indecisiveness and may make a problem more difficult because it has extra time to grow. Procrastination often arises from a fear of failure.
It is most prevalent in organisations with a “blame culture” where avoiding mistakes is more important than achieving success. Probably the most effective way of overcoming procrastination is to divide a decision into smaller stages and to set a deadline for the completion of each smaller stage.
Avoiding procrastination does not mean that decisions must be rushed. It means that unnecessary delays should be avoided. Impulsive decisions are as bad as delayed ones. In most circumstances it is appropriate to allow time to “sleep” on a decision so that it can be subjected to a reasonable period of reflective thought. Procrastination only arises when a decision is delayed for several days without the prospect of new information.
Anchoring refers to a tendency by decision-makers to give undue importance to information that is received early. It is sometimes called the “primacy effect”. Early information tends to act as the standard by which other information is assessed. If later information is contradictory it will tend to be ignored or dismissed. Unfortunately, early information is often inaccurate because it was assembled in a hurry, without the time to perform cross-checks to ensure that it is comprehensive.
4. Escalation of Commitment:
A decision may be made on the basis of early information; but as more facts emerge the original decision becomes untenable. By this time a decision-maker may have invested a considerable time, effort and prestige in the original decision. To abandon it may appear to be a waste of past commitment and be disloyal to their advisers. They may feel that abandoning the original decision would cause them loss of face.
Consequently, they may become more and more determined to commit resources to ensuring the success of their initial decision. Up to a point, this may be justified. If a little extra effort is able to produce success then it is reasonable to give a little extra effort. The problem is that a little extra effort may not achieve success – it may require just a little more effort and so on – ad infinitum!
There comes a point where it is necessary to cut one’s losses and follow another course of action. Some of the worst decisions in history have been the result of the escalation of commitment. In the 1970s America escalated its commitment to the Vietnam war long after it was apparent that the initial decision was flawed.
Many government projects have been continued to the point of absurdity because politicians are reluctant to admit mistakes and cut taxpayer’s losses. Generally, it is better to avoid these situations by taking a leaf from the book of stock market investors and setting a “stoploss” – a clear point at which they will sell their investment and accept whatever losses they may have incurred.
Participative decision-making has many advantages. A wider range of knowledge or experience and the synergy between members may produce ideas of better quality. However, participative decision-making has a number of disadvantages- it takes extra time, dominant members may distort discussions and the goals of individuals may detract from the goals of the organisation. A further problem with participative decision making is the phenomena of groupthink.
Groupthink is a mentality among members of a decision team to suppress their own disbelief in order to show solidarity and maintain agreement at any cost. Members suspend their critical judgements which could lead to a better decision. Groupthink is particularly prevalent in closely knit groups, whose members come from similar backgrounds and who share similar goals. It is also prevalent in groups that have a high regard for each other.
Groupthink is partly produced by the desire to conform. Dissenting members may suspend their personal judgement in favour of what they see as the consensus of the group. Unfortunately, other members may be doing the same. An illusion of agreement is created. Those who question this apparent agreement may be ridiculed or have their loyalty questioned.
Groupthink often impairs a group’s ability to generate a wide range of alternatives and to evaluate them effectively. Many disastrous political decisions such as the Watergate cover-up, the Bay of Pigs Invasion and the 1986 Challenger Launch Disaster have been attributed to the negative influence of groupthink.
The effects of groupthink can be so catastrophic that a number of counter-measures have been devised Some organisations only take major decisions after appointing a devil’s advocate who challenges assumptions and assertions. This forces decision-makers to consider a wider range of solutions.
A similar technique is the use of multiple advocates where individuals are charged with arguing minority and dissenting viewpoints. Multiple advocacy is used by several governments to ensure that decisions are well argued and take a number of different perspectives into account.
6. Communication Failure:
The final fault in decision-making is failure of communication. It is obvious that a decision needs to be communicated to those involved in its implementation. It is slightly less obvious that it should also be communicated to those, such as suppliers, customers and stakeholders, who will also be affected by the decision. Communication should not be confined to the actual decision. The need, the diagnosis and the range of alternatives underlying the decision must be explained. Particular effort is needed to explain the advantages and the disadvantages of the chosen alternative.
Decision Making – Administrative Problems: Accuracy, Environmental for Decision, Timely Decision, Communication of Decision, Implementation and a Few Others
The decision-maker should analyse the situation. The reason is that if the decision is taken by analysing the situation, the problem can be easily solved. The correctness of information for analysis will help taking accurate decision.
2. Environment for Decision:
Organisational and physical environments are responsible for effective decision. Mutual co-operation and proper understanding among employees are necessary for creating a satisfactory environment. Such a congenial good environment will lead to taking effective decisions.
3. Timely Decision:
Time plays an important role in decision-making. If any decision is taken without considering time, that will not be considered a business decision. Besides, the decision will be a waste if the decision-maker fails to take timely decision.
4. Communication of Decision:
The decision-maker should communicate the decisions to needy persons. The language selected by the decision-maker should be known to the persons to whom the decisions are communicated. Simple and unambiguous words are used while communicating the decisions.
5. Participative Decision-Making:
The extent of participation of workers in decision-making depends upon the willingness of the top management.
The top management people think that they have monopoly in decision-making and the dignity of top management is affected if the workers participate in decision-making. Even suggestions are not invited from the workers while taking a decision. But it is necessary to allow workers to play their role while taking a decision.
The decision-maker has responsibility to implement a decision. If not, there is no use of taking a decision. The decision-maker should get the co-operation of his subordinates to implement a decision. The decision-maker explains the importance of implementation of a decision. He should convince the subordinates. He may lose many of his so-called friends while implementing a decision. But, he should be firm in the implementation. He should consider only the welfare of his organization.