Business Decision Process

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Business Decision Process
2
Overview

• Steps in rational decision making
• Tests of rationality?
• Types of organizational decisions

3
Steps in Rational Decision Making in a
Choice problem

• Define the problem
• Generate alternative solutions
• Identify criteria for choosing between solutions
• Weight the criteria
• Rate each alternative on each decision
• Compute the optimal decision

4
Are people rational?

• Decision makers forego best solution in favor of
  one that is acceptable or reasonable. They
  satisfice
• People often lack sufficient data on problem,
  alternatives and criteria.
• They have limited amount of working memory to
  store and process data.
• Yet, they make decisions using heuristics

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Heuristics

• A heuristic is a mental short-cut in judgment
  and decision making
• They are essential for living in an uncertain
  world
• Rule of thumb
• Mechanisms to cope with in a complex world
• But can lead to faulty beliefs and suboptimal
  decisions

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Example uses of heuristics

• One negative comment outweighs many positive
  comments (e.g. Online purchases)
• Information from direct perception given more
  importance than secondary data that has greater
  evidential value (my impressions of India)
• Case histories and anecdotes have greater impact
  than more informative abstract statistical data
  (e.g. Mitsubishi Montero safety tests)

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Availability Heuristic

• What is readily available in memory influences
  the peoples judgments
• Which is more harmful health?
• Speeding?
• Smoking?
• Peoples choice may be influenced by
• Their closeness of victims of either
• Vividness of their experience in dealing with
  either
• People tend to make judgments using
  retrievability of information

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Problem 1

• The following 10 corporations were ranked by
  Fortune magazine to be among the largest 500
  US-based firms according to sales revenue for
  2003
• Group A Reebok Intl, Hilton Hotels, Starbucks,
  RadioShack, Hershey Foods
• Group B CoconoPhillips, American International
  Group, McKesson, Amerisource Bergen, The Altria
  Group
• Which group of companies has the largest total
  sales revenue?

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Your answer to Problem 1

• Correct answer Group B
• You chose Group A, because of familiarity of the
  names of companies in Group A
• Availability heuristic and resulting bias

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Problem 2

• In four pages of a novel (about 2000) words, how
  many words would you expect to find the form _ _
  _ _ ing (seven-letter words that end with ing)?
• Choices 0 1-2 3-4 5-7 8-10 11-15 16

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Problem 2 (contd)

• In four pages of a novel (about 2000) words, how
  many words would you expect to find the form _ _
  _ _ _ n _ (seven-letter words with n in the sixth
  position)?
• Choices 0 1-2 3-4 5-7 8-10 11-15 16

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Retrievability

• Did you respond with higher number for Problem 2a
  than for 2b?
• Retrievability of 7-letter words ending with
  ing apparently easier than 7-letter words with
  n as the 6th letter.
• Retrievability is exploited by business
• Upscale retailers in the same mall
• Multiple gas-stations at an intersection
• Pharmacists in the same intersection (12th Street
  and Main)

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Problem 3

• How would you respond to Is marijuana use
  related to delinquency?
• Typically, people start by recalling marijuana
  users who are delinquent
• Correct way to make a judgment is to use four
  sets of people

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Problem 4

• Mark is finishing his MBA at a prestigious
  university. He is very interested in the arts
  and at one time considered a career as a
  musician. Where is he more likely to take a job?
• In arts management
• With a consulting firm

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Problem 4

• Did you choose A?
• Your image of an arts management person might
  have influenced your decision
• You forgot the base-rate
• Proportionately more MBAs work for consulting
  firms than Arts management

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Problem 5

• You have started buying stocks on the Internet,
  beginning with five different stocks. Each stock
  goes down soon after you purchase. As you
  prepare to make a sixth purchase, you reason that
  it should be more successful, since the last five
  were lemons. After all, the odds favor making
  at least one successful pick in six decisions.
  This thinking is
• Correct
• Incorrect

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Problem 5

• Answer Incorrect
• Performance of 6th stock is independent of the
  performance of other five stocks
• Gamblers fallacy
• Perceives higher chance of winning after a long
  streak of losses

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Are people rational?

• Decision makers forego best solution in favor of
  one that is acceptable or reasonable. They
  satisfice
• People often lack sufficient data on problem,
  alternatives and criteria.
• They have limited amount of working memory to
  store and process data.
• Yet, they make decisions using heuristics

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How to make decisions

• Herb Simon (1916 2001)
• Researcher in cognitive psychology, computer
  science, public administration, economics and
  philosophy
• Won Nobel price for economics in 1978 for his
  work on decision-making in organizations

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Simons 3-stage model

• Intelligence
• Design
• Choice

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Stage 1 - Intelligence

• Gathering intelligence about the decision problem
• Requirements gathering and analyzing requirements
• E.g. Wanting a solution to transport problem

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Stage 2 - Design

• Create solutions
• Must have more than one alternative solutions
• Find or create or develop alternatives
• E.g. What choices do we have for solving the
  transportation problem?

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Stage 3 - Choice

• Consider the alternatives and their attributes
  and make a choice
• Select a choice or alternative for implementation
• Eg. How to choose between various alternatives?

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Evaluating decisions

• Is the problem solved?
• Are the objectives achieved?
• Is the solution acceptable by the users?
• Is there no conflict of interest?
• Do users perceive usefulness of the solution?
• Do the users use the solution?

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Managerial Decisions

• The decision can be classified based on the level
  of the organization
• Decisions can be classified based on the context
  of the decision

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Decisions categorized by Levels within an
organization
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Operational performance decisions
Day-to-day decisions
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Operational control decisions
Related to effectiveness of Operations
monitoring and Correcting deviations
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Management control decisions
Decisions related to allocation of resources
analyzing buyer and supplier behavior
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Strategic planning decisions
Establishing broad policiesEvaluating investment
proposals
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