Decision Making

Topics: Decision making, Decision theory, Risk Pages: 7 (1821 words) Published: August 20, 2013
Managers are frequently referred to as decision makers. Managers make decisions about every aspect of the organisation, including strategy, structure, control systems, responses to the environment and human resources. Decision making is not easy. It is done in the face of constantly changing conditions, unclear information and conflicting points of view.

Types of decisions and problems

A decision is a choice made from available alternatives. Decision making is the process of identifying problems and opportunities and then resolving them. Decision making involves effort both before and after the actual choice.

Programmed and non-programmed decisions
Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed and applied in the future. Once managers formulate decision rules, employees and others can make decisions, thus freeing managers for other tasks. Non-programmed decisions are made in response to situations that: • are unique

• are poorly defined
• are largely unstructured
• have important consequences for the organisation.
Non-programmed decisions often involve strategic planning because uncertainty is great and decisions are complex. Routine decision rules for solving the problem do not exist.

Certainty, risk, uncertainty and ambiguity
Managers try to obtain information about decision alternatives that will reduce decision uncertainty. Every decision situation can be organised on a scale according to the availability of information and the possibility of failure. The four positions on the scale are (see Exhibit A page 272): • Certainty. All the information the decision maker needs is fully available. Few decisions are certain in the real world. Most contain risk or uncertainty. • Risk. A decision has clear-cut objectives and good information available. However, the future outcomes associated with each alternative are subject to chance. • Uncertainty. Managers know which goals they wish to achieve but information about alternatives and future outcomes is incomplete. Factors that may affect a decision, such as price, production costs, volume, or future interest rates, are difficult to analyse and predict. • Ambiguity. The objectives to be achieved or the problems to be solved are unclear; alternatives are difficult to define; and information about outcomes is unavailable. Ambiguity is by far the most difficult decision situation.

Decision-making models

The approach managers use to make decisions usually falls into one of three categories – classical model, administrative model, or political model. The choice of approach used depends on: • the manager’s personal preference

• whether the decision is programmed or non-programmed
• the extent of certainty, risk, uncertainty or ambiguity.

Classical model
The classical model of decision making is based on the assumption that managers should make logical, economically sensible decisions that will be in the best economic interests of the organisation. This is a normative model, meaning it defines how a decision maker should make decisions. It represents an ‘ideal’ model of decision making that is often unattainable by real people in real organisations. The classical model works best when applied to programmed decisions and to decisions characterised by certainty or risk, because relevant information is available and probabilities can be calculated.

Administrative model
The administrative model describes how managers actually make decisions in difficult situations, such as those characterised by uncertainty and ambiguity. Many management decisions are not sufficiently programmable to lend themselves to any degree of quantification. Thus managers are unable to make economically rational decisions even if they want to. The administrative model is descriptive, meaning it describes how managers actually make decisions in complex situations rather than how they should make decisions...
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