Decision Making Process

Identify and Define the Problem

Identifying, defining, and understanding a problem is essential to analyzing and choosing between alternatives.

Learning Objectives

Express the importance of properly framing and defining the problem prior to pursuing a decision

Key Takeaways

Key Points

  • Decision makers must first make sure that they completely understand the problem.
  • It is a good idea to be able to look at a decision from multiple perspectives. This can be accomplished through selecting a group of people who will look at and define the problem from different perspectives.
  • Data should be gathered on how the current problem is affecting people now. Some examples of important data to gather include efficiency levels, satisfaction levels, and output metrics.

Key Terms

  • Output metrics: Standards or data points that showm the rate and speed of production over a certain period of time.

Decision making is a central responsibility of managers and leaders. It requires defining the issue or the problem and identifying the factors related to it. Doing so helps create a clear understanding of what needs to be decided and can influence the choice between alternatives.

An important aspect of any decision is its purpose, or objective. This is different from identifying a specific decision outcome; rather, it has to do with the motivation to make the decision in the first place. For instance, customer complaints can imply the need to change aspects of how service is delivered, so decisions must be made to address them. Factors that are not related to service delivery would not be in consideration in that decision.

There are a number of ways to define a problem, such as creating a team to tackle it and gathering relevant data by interviewing employees and customers.

Developing a Group to Define the Problem

It is a good idea to be able to approach decision definition from different perspectives. Doing so can capture dimensions of the issue that might otherwise have been overlooked. Involving two or more people can bring different information, knowledge, and experience to a decision. This can be accomplished through forming a group to consider and define the problem or issue, and then to frame the decision based on their collective ideas. Having a shared definition and understanding of a decision helps the decision-making process by creating focus for discussions and making them more efficient.

Gathering Data to Define the Decision

Most decisions require a good understanding of the current state in order to understand all implications of the potential choices. For this reason it can be valuable to consider the views of all parties that will be affected by the decision. These may include customers, employees, or suppliers. Data should be gathered on how the current problem is affecting people now. Some examples of important data to gather include efficiency levels, satisfaction levels, and output metrics. Interviews, focus groups, or other qualitative methods of data collection can be used to identify existing conditions that may be connected to the decision in question. As much information as possible should be gathered to build confidence that a decision has been accurately and appropriately formulated before additional analysis and assessment of alternatives begin.

Generate Alternatives

Identifying a range of potential choices is essential to any decision-making process.

Learning Objectives

Discuss methods for identifying alternatives and why doing so is an important part of decision making.

Key Takeaways

Key Points

  • Decision makers should identify the many alternative choices they face before beginning to conduct analysis for a decision.
  • A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes and resource costs. A decision tree can help lay out the alternatives and determine the best ones to consider.
  • When dealing with information in decision analysis, there are often biases and errors in judgment, such as the fact that people pay more attention to information that is easily available.
  • It is important for a decision maker to receive plenty of input from others to avoid any bias.

Key Terms

  • decision tree: A visualization of a complex decision-making situation in which the possible decisions and their likely outcomes are organized in the form of a graph that resembles a tree.
  • bias: An inclination towards something; predisposition, partiality, prejudice, preference, predilection.

Once a decision has been defined, the next step is to identify the alternatives for decision makers to select from. It is rare for there to be only one alternative; in fact, a goal should be to identify as many different alternatives as possible without making too narrow a distinction between them. The decision maker can then narrow the list based on analysis, resource limitations, or time constraints. Often, doing nothing is an alternative worthy of consideration.

Brainstorming

Brainstorming is a good technique for identifying alternatives. Making lists of possible combinations of actions can generate ideas that can be shaped into alternatives. Often this is best done with a small group of people with different perspectives, knowledge, and experience. A formal approach to capturing the results of brainstorming can help make sure options are not overlooked.

Another way to evaluate alternatives is through a decision tree.

Decision Trees

A decision tree is a decision support tool that uses a structured graphical depiction of alternatives. This method creates a visual depiction of choices so decision makers can have a clearer understanding of them. Decision trees help divide larger decisions into smaller ones and are useful for uncovering all available options.

Decision trees have a starting point and then branch out, with each branch representing a different event, action, or outcome. Resource costs, benefits, and probabilities can be recorded by each option.

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Applied decision tree: Decision trees can improve investment decisions by optimizing them for maximum payoff.

Decision trees have three types of nodes at each part of the diagram:

  • Decision nodes: these are the alternatives themselves and represent the point where a decision must be made.
  • Change nodes: these are points where choices must be made; in their simplest form these may be represented by Yes/No or Go/No Go options.
  • Conclusion or end nodes: these are the points that appear when there are no more alternatives or choices to be made, and they state the outcome of a particular decision branch.

When generating alternatives, decision makers use information gathered by defining the problem. The list of alternatives can then only be as good, complete, and accurate as the quality of that data. Overlooking factors or dimensions of an issue or problem can mean missing viable alternatives. The alternatives identified become the basis for subsequent analysis and ultimately the decision itself.

Evaluate Alternatives

In order to eliminate bias in a decision, one can use tools such as influence diagrams and decision trees to evaluate alternatives.

Learning Objectives

Model potential decision alternatives through utilizing pro/con analysis, influence diagrams, decision trees and Bayesian networks

Key Takeaways

Key Points

  • There are a few tools available to decision makers that can be used to help quantify the potential alternatives to and outcomes of a decision. These tools include a simple pro-and-con analysis, an influence diagram, and a decision tree.
  • A decision tree is used to lay out the alternatives and then assign a utility, or a relative value of importance, to a particular alternative.
  • Another tool that decision makers can use to quantify a decision is an influence diagram, which is a compact graphical and mathematical representation of a decision situation.

Key Terms

  • Bayesian network: A probabilistic model that represents a set of random variables and their conditional dependencies (e.g., a Bayesian network could calculate the probabilities between symptoms and a disease).
  • decision tree: A visualization of a complex decision-making situation in which the possible decisions and their likely outcomes are organized in the form of a graph that resembles a tree.

When a decision maker has successfully and accurately defined the problem and generated alternatives, he or she can then conduct analysis useful to evaluating and assessing each. This typically involves analysis of quantitative data such as costs or revenues. Qualitative data is also used to be sure that considerations such as consistency with strategy, effects on relationships, or ethical implications are taken into account.

A first step in analysis is identifying all the sources of data needed to understand the various alternatives and their potential outcomes. Finding this data often involves research if relevant data do not exist. The results of data analysis are typically gathered, summarized, and synthesized as the basis for discussions and deliberations by decision makers.

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Influence diagram example: This is a simple example of an influence diagram used to evaluate the alternatives of a decision.

There are a few approaches that can be used to help structure the analysis and assessment of potential decision alternatives. These range from simple tools such as lists of pros and cons to more complex models such as decision trees and influence diagrams, which can capture more variables and include more data.

A decision tree specifies alternatives visually and creates paths of subdecisions to be made or uncertainties to be considered in order to estimate the outcome of a given choice. It includes a value for each alternative, such as a financial outcome, and notes the probabilities that each outcome will occur. Decision trees sometime include the results of financial analysis such as net present value, which determines the present or current value of a stream of incoming cash flows that a project will bring in sometime in the future. One limitation to using decision trees is that they can become highly complicated as decisions become more complex or outcomes involve greater numbers of variables.

Another tool that decision makers can use to analyze alternatives is an influence diagram. An influence diagram is a compact graphical and mathematical representation of a decision situation. It groups sets of variables into things that are known and factors that are uncertain and links them to the choice to be made and the criteria for assessing it. Influence diagrams are directly applicable in group decisions because they allow incomplete sharing of information among team members to be modeled and for estimates to be made explicitly.

In the scenario depicted by the influence diagram above, a person is choosing between vacation alternatives. Her goal is a satisfactory vacation, which will be influenced by how good the weather is. She cannot have direct knowledge at the time of the decision what the weather will be, but she can gather information on the weather forecast or other climate patterns to help her make the choice of vacation location.

Determine a Course

A good decision maker will always try to eliminate personal biases and understand his personal risk tolerance when determining a course.

Learning Objectives

Evaluate the importance of bias and prospect theory in effectively ensuring decision makers arrive at the ideal option

Key Takeaways

Key Points

  • Decision makers should use clear selection criteria to evaluate and choose among alternatives.
  • Bias is inherent in making decisions, but decision makers should do their best to identify emotional and other personal factors that may affect their judgment and adjust their deliberations to take biases into account.
  • Prospect theory identifies aversion to loss as a common bias that can cause people to overstate the downside of alternatives.

Key Terms

  • bias: The human tendency to make systematic decisions in certain circumstances based on cognitive factors rather than evidence; an inclination or prejudice toward something.

Once decision alternatives have been identified and analyzed, the decision maker is ready to make a choice. To do so it is important to have a set of criteria against which to evaluate and even rank the alternatives. Selection criteria might include total cost, time to implement, risk, and the organization ‘s ability to successfully implement the decision. Categorizing criteria in terms of importance helps to differentiate between options that might have similar disadvantages but different advantages, or vice versa. For example, consider two alternatives that are equally risky, but one will cost more and the other will take longer to implement. In this case, the decision would depend on whether cost or time is more important. On occasion, decision makers may believe they do not have sufficient information about a particular alternative, so additional analysis may be needed.

Decision makers should do their best to minimize their biases, or preconceived ideas about which alternative is preferable, until they complete the analysis. The benefit of using data to support decisions is that when analysis is done correctly it is objective and factual, not based on emotions or subjective preferences. While it is natural to have biases based on experience or feelings, it is important for managers and leaders to recognize them and take steps to keep them from butting their judgment. People may be unable to eliminate all of their biases, especially when it comes to their tolerance for risk. It is therefore important to be explicit about assumptions and biases to the extent possible, so that people involved in making the decision are aware of them and can adjust their deliberations accordingly.

Bias and Prospect Theory

One of the best-known theories about bias in decision making is Kahneman and Tversky’s prospect theory. Prospect theory is based on the notion that people think about decisions in terms of potential gains and losses and tend to be more averse to losses than they are favorable to gains. This means that decision makers may overstate the downside of an alternative, since they have a greater fear of negative consequences. As a result, people are biased toward less risky decisions, even when the benefits of a different alternative would outweigh the risks of the chosen one. Prospect theory also suggests that people consider how others would benefit or be hurt by the outcome of their decision. This contradicts traditional economic theory, which states that individuals make decisions based only on their own well-being.

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Prospect theory and risk aversion: This graph represents Kahneman and Tversky’s theory. The distance between the x-axis and the curve is smaller in the positive direction (i.e., for positive outcomes, or gains) than it is in the negative direction (i.e., for negative outcomes, or losses). This means that people’s positive value of gains is less than people’s negative value of losses. In other words, people are more sensitive to possible risk than to possible gain.

Implement the Course

Implementing a decision requires the decision maker to make and execute a plan of action.

Learning Objectives

Describe the three central steps to effectively implementing a decision upon the selection of a particular perspective or course

Key Takeaways

Key Points

  • Three essential actions to implementing a decision include creating an implementation plan, informing stakeholders, and executing the plan.
  • It is common to adjust a plan once the work of implementing a decision begins. Throughout the implementation of the decision, there may be situations and issues that the decision maker did not consider initially.
  • During the implementation phase, decision makers should be aware that they may be persuaded by pressures from stakeholders and employees to change the decision that they have made or to reconsider their decision.

Key Terms

  • stakeholder: A person or group that affects or can be affected by an organization’s actions.

After all of the alternatives have been analyzed and one has been selected, it is time to implement the decision. Three essential actions to implementing a decision are: developing a plan, communicating with stakeholders, and executing the plan (which includes assessing outcomes and making adjustments as needed).

Developing a Plan

A decision is reached with a certain objective in mind. Once it is made, managers identify the steps needed to reach that objective. These can include listing necessary actions and activities, considering required financial and other resources, and making a schedule for completing the work. The more thought that goes into developing a plan, the less likely it is that important factors will be overlooked.

Communicating with Stakeholders

An implementation plan requires the involvement of different people, and the consequences of decisions affect various stakeholders. For these reasons it is important to have a plan for communicating important information related to the decision and its implementation. This usually involves talking with employees, but may also mean letting customers or suppliers know about the decision and any effects it may have on them.

Executing the Plan

Accomplishing the decision’s objective requires completing the steps outlined in the implementation plan. Once this work is underway, managers assess progress and may identify areas for improvement. Circumstances can change or new issues might arise that had not been thought of during the planning process. These may require additions to, or other changes in, the plan. Because most decisions are made under conditions of uncertainty, as time passes what was once unknown can become known. Where estimates were incorrect or the unexpected happens, adjustments need to be made to the implementation plans. If the new facts are significant enough, it can even require reconsideration of the decision.

During the implementation phase, decision makers should be aware that they may be persuaded by pressures from stakeholders and employees to change their decision, or to reconsider. A few of these pressures include coercive pressures and normative pressures. Coercive pressures come from the social sanctions that can be applied if one does not act in socially legitimate ways. Normative pressures arise from broad social values, and they concern what people think they should do. Both coercive and normative pressures will likely be felt by the decision maker during the implementation of the decision, especially if the decision is an unpopular one. However, the decision maker should fall back on the analyses that originally brought them to the decision and strive not to be swayed by these pressures.

Evaluate the Results

Decision makers must evaluate the results of a decision to improve the processes and outcomes of future decisions.

Learning Objectives

Recognize the appraisal stage and the development of future insights as the final stage in the decision-making process

Key Takeaways

Key Points

  • Evaluation is the final step of the formal decision process. Evaluating outcomes may help the decision maker learn lessons that will improve her decision-making abilities.
  • Self-esteem is an important factor in evaluating results because it may lead to decision makers viewing the results of their decision with favorable bias. This can cause people to filter out or discount information that might show the decision in an unfavorable light.
  • It can also be valuable to assess the process by which a decision was made to make future decisions more effective.

Key Terms

  • appraisal: A judgment or assessment—especially a formal one—of the value of something.
  • insight: An extended understanding of a subject resulting from identification of relationships and behaviors within a model, context, or scenario.

After a decision has been made and implemented it is important to assess both the outcome of the decision and the process by which the decision was reached. Doing so confirms whether the decision actually led to the desired outcomes and also provides important information that can benefit future decision making. Learning from experience is important to continuous improvement and effectiveness.

Evaluating Outcomes

The objective of evaluating outcomes is for the decision maker to develop insight into the decision. Many of the lessons developed in this stage come out of examining the implications of the decision. Insight can be obtained by referencing key business metrics such as increased revenue, lowered costs, larger market share, or greater consumer awareness. One can also consider whether a decision had the desired effect. For example, a decision to hold additional training seminars may have been intended to make it more convenient for people to learn a new technology. However, if overall attendance did not increase, then the decision may not have addressed the underlying cause of why people did not go to training events. Once the outcome of a decision is known, the results may imply a need to revise the decision and try again.

When decision outcomes are not clearly measurable or have ambiguous results—some parts good, some bad—is not uncommon for people to emphasize the favorable data and discount the negative. Maintaining self-esteem also may cause decision makers to attribute good outcomes to their actions and bad outcomes to factors outside their control. This type of bias can limit an honest assessment of what went right and what didn’t, and thus reduce what can be learned by carefully evaluating outcomes.

Appraising the Decision Process

It can also be valuable for decision makers to step back and examine the process by which a decision was made. Often they can learn lessons that will benefit future decisions. If the decision was made by a group, having a conversation with all participants is often worthwhile. Whether enough information was gathered and whether its quality was high enough are two questions that should be considered. How the decision maker dealt with uncertainty or bias can be examined in the face of the results that have transpired. If estimates were off, or it becomes clear that emotions played too large a role in making a choice, it is important to learn from those mistakes so they won’t happen again. Finally, it is important to question whether all the relevant parties contributed information and knowledge needed for the decision, and whether everyone who should have been involved was given the chance to participate.