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Chapter 14: Fundamentals of Decision-making

Define decision-making and explain the role of decision-making for managers and employees

• Decision-making can be defined as the process of defining problems, gathering information, generating alternative ideas and choosing a cause of action.
• Decision-making plays an important role in management of the business and employees.
• Managers need to ensure that they always make effective decisions to accomplish the goal of the business.
• Decision-making gives direction to the business and takes part in the process of planning where managers need to make a decision on what kind of resources to be used to increase the productivity and profitability of the organisation.

Explain the conditions of certainty, risk and uncertainty under which decisions are

made.

1. Certainty

• The condition under which individuals are fully informed about a problem, specify certainty of certain events, identify alternative solutions and state the probability of each solution reaching the desired result. Making the decision relatively easy.

2. Risk

• The condition under which individuals can define a problem, specify the certainty of certain events, identify alternative solutions and state the probability of each solution leading to the desired result
• There are two types of probability. The first is the objective probability and the second is the subjective probability.

3. Uncertainty

• The condition under which the individual doesn’t have the necessary information to assign probabilities to the outcomes of alternative solutions. An individual may not even be able to define the problem much less identify alternative solutions and possible outcomes. Managers have to make assumptions from which to forge the decision even though it’ll be wrong if the assumptions are incorrect.

Describe the characteristics of routine, adaptive and innovative decisions

1. Routine decisions

• Standard choices made in response to relatively well-defined and common problems with alternative solutions.
• Ways to make routine decisions is often covered by established rules
• Example: where to put the spoons when you take them out of the dishwasher

2. Adaptive decisions

• Choices made in response to a combination of moderately unusual problems with alternative solutions.
• These decisions often involve improving upon past routine decisions
• Example: enhancing the value of the product to the customer through improved and adapted new features

3. Innovative decisions

• Choices based on the discovery and identification of unusual and ambiguous problems and the development of unique alternative solutions.
• Example: Debonairs started a free delivery process to any location, which indicates an increase in customer base.  

Explain how goals affect decision-making

Goals affect decision-making greatly because before making a decision you have to consider the fact that whatever decision is taken, it will determine whether or not is it going to help achieve the goals that have already been set out.

As soon as you decide to put extra effort on something, a lot will be at stake. This includes a rise in unethical behaviour, over-focus on one area while neglecting other parts just so that the goal can be accomplished

Compare and contrast the rational, bounded rationality and political models of decision-making.

1. Rational Model

• Prescribes a series of steps people should follow to increase the likelihood that their decisions will be logical and sound. It permits maximum achievements of goals.

• Step 1: define and diagnose the problem
• Step 2: Set goals
• Step 3: Searching for solutions
• Step 4: Compare and evaluate solution
• Step 5: Choose a solution
• Step 6: Implement
• Step 7: Follow up and control

2. Bounded Rationality Model

• It emphasises the limitations of rationality and provides a better picture of the day-to-day decision making process. It basically explains why most people make different decisions with the same information.
• Bounded Rationality Model refers to an individual’s tendencies to:

• Select less than the best goal
• Engage in a limited search for alternative solutions
• Have inadequate or misinterpreted information

• Information-processing biases

• Availability bias
• Selective perception bias
• Concrete Information bias
• Law of small number bias
• Gamblers Fallacy bias

3. Political Model

• Describes the decision-making process in terms of interest and goals of powerful external and internal stakeholders.
• To have power is to have control of these factors:

Definition of the problem

Choice of the goals

Divergence in solutions