usman decision theory

8/6/2019 Usman Decision Theory

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Decisions are processes by which a managerseeks to achieve some desired state. They aremeans rather than ends. Making a decisioninvolves making a choice between the

alternatives. Decisions could be a) engineeringor scientific or b) management.

Decision making is the sequential process ofthought and deliberation that results in adecision.


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The process of decision making is same in both thetypes of decisions and involves

a) defining the problem

b) gathering facts related to the problem c) comparing these with right or wrong criteria

based on knowledge and experience and thentaking the best course of action

Management decision making a more of an art than ascience.


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Management decisions are tough becausemanagement problems are wider in scope and they

are related to human behavior which is most

unpredictable.

Management decisions could be either

a) programmed or

b) Non programmed.


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While Programmed decisions are repetitive and

routine in nature and provide solutions to

structured problems the Non programmed

decisions are of non routine or unique in nature

and attempt to provide solutions to complex andunstructured problems

Top Broad, unstructured, infrequent, uncertaintyMiddle Both structured and unstructured

Lower Frequent, structured, repetitive,

routine, certainty

Programmed decisions

Un Programmed decisions

Manage

men

t

Leve

l


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a

Identify & define

The problem

Develop

alternatives

Evaluate

alternatives

Select

alternatives

Evaluate

& control

Implementdecision

Certainty Risk Uncertainty

Gather

Information

Rev

ise


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The evaluation of alternatives is basedon alternative outcome relationship.

The three possible conditions are Certainty

Risk and

Uncertainty


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1. Certainty : The decision maker has a completeknowledge of the outcome of each alternative.

2. Risk : The decision maker has some probabilistic

estimate of the outcome of each decision.Condition of risk occurs when the decisionmaker has enough information to allow the useof probability in evaluating the alternatives.

Probability of occurrence of an is event is theexpectancy of event happening.


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Probability can be assigned based on

a. Logic or deduction: This is Objective probability.

This reflects the historical evidence. Ex. Gettinghead/tail for a tossed coin. Or getting a numberon rolling dice etc.

b. Past experience is with empirical evidence.


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c. Subjective estimate due to intelligence orintuition.

When the decision maker has access toprobability information, the criterion fordecision making is to maximize s the expectedvalue of the decision.


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3. Uncertainty : The decision maker (dm) hasabsolutely no knowledge of the probability ofoutcome of each alternative.

When no information exists the personalitycharacteristics of the decision maker becomemore important for determining which decisionis made. The following five characteristics

describe what most of the dms do.


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a. Optimistic Decisions

b. Pessimistic Decisions

c. Realistic decisions.

d. Regret minimizing Decisions.

e. Insufficient Reasoner


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a. Optimistic Decisions The DM thinkoptimistically about the event that influencedecisions. They choose the alternative thatmaximizes the outcome

b. Pessimistic Decisions They believe that worstpossible outcome will occur no matter what

they do. They estimate the worst outcomesassociated with each alternative and select thebest of these worst outcomes.


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c. Realistic Decisions. They take the middle path

neither optimistic nor pessimistic.

d. Regret minimizing Decisions. They want to

minimize the dissonance they experience after

the fact.

e. Insufficient Reason Decisions. These are also

called eqi-probable decision maker. They assumethat all the possible outcomes have equal chance

of occurring.


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Individual differences influence the decision making process.The four individual differences which have a significantimpact of the decision making process are

1. Values: Values are the guidelines that a person uses whenconfronted with a situation in which a choice has to bemade. Values are acquired early in life and are a basic partof individuals thought. Value judgment is involved at everystage in the process of decision making. They are reflectedin the decision makers behavior before making thedecision, in making the decision and in putting the decisioninto effect.


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2. Personality : Decision makers are influenced bymany psychological forces both conscious andsubconscious. These are strongly reflected indecision making under uncertainty. Personality

traits of the decision maker combine withsituational and interact ional variables influence thedecision making process.


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3. Propensity for risk: (Risk taking capacity ) This is aspecific aspect of personality which stronglyinfluences the process of making decision.

4. Potential for dissonance : Traditionally researchershave focused much of their attention on the forces andinfluences on the decision maker before a decision ismade.

Utility of the alternatives is the criterion for decision

making. Value of the decision is dependent on theutility. Recently Behavioral scientists have focusedtheir attention on post decision anxiety or cognitivedissonance experienced by the decision maker


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Such anxiety is related to lack of consistency or harmonyamong individuals various cognitions (attitudes, beliefsand so on) Individuals are likely to use one or more ofthe following to reduce their dissonance

a. Seek information that supports their decision.b. selectively perceive information that supports the

decision

c. adopt a less favorable view of the foregone alternatives.

d. Exaggerate the importance of positive aspects of thedecision


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usman decision theory

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