Models Of Decision Making

MODELS OF DECISION MAKING

Prepared by:

Farhin Panwala (MBA SEM-1) 1

DECISION MAKING Is the selection of course of action from two or more alternatives, the decision making process is a sequence of steps leading to that selection

2

Major Types of Models 1) Rational Model of Decision Making. 2) Non-Rational Models

3

1) Rational Model of Decision Making.  Herbert Simon has described different types of rationality.  The concept of rationality is defined in terms of

objective & intelligent action.  It is usually characterized by behavioural nexus between ends & means.  If appropriate means are chosen to reach desired ends, the decision is rational.

4

Rationality =  Ability to follow  Systematical  Logical &  Thorough approach in decision making.

5

Simon observed some Problems in using this chain to identify rationality.  The ends to be attained by the choice of a behaviour alternative are often incompletely or incorrectly stated through failure to

consider the alternative end that could be reached by selection of another behaviour.  In actual situation, complete separation of means for tomorrow or what might be an end for a particular level or manager may be means for a higher-level manager. 6

Benefits of Rationality  Complete access to information & knowledge on all     

elements of the decision environment. Clear sequential scheme. Deep knowledge of problems. Availability of wide range of alternatives from which he can pick and choose on the basis of their outcomes. No constraints on the decision maker’s freedom & ability to make the best choice. Decision maker can cope with all the environmental factors without any problem. 7

RATIONALITY IN DECISION MAKING Models of decision making 1. Economic man model

2. Administrative man model

8

According to Herbert Simon , Rational Economic model is one which efficiently and effectively assures the attainment of the goals for which the means are selected  It states that the decision-maker is an economic being who tries to take the maximum advantage

by selecting the best or the optimum solution to a problem.  It follows a normative approach, as it is idealistic and advocates perfect and fully scientific decision-making.

9

1) Economic Man model  Adam smith  Fully rational or logical when making work related decisions  Full idea of problem  Formulates his goals consciously  Scientific thinking  Knowledgeable and analyses information intelligently

 An OPTIMAL DECISION which maximizes return / minimize cost 10

Assumptions of the Rational Economic Model 1. The decision-maker has a clear and well-defined goal. 2. The decision-maker is fully objective and rational and 3. 4.

5. 6.

not influenced by emotions. The decision-maker understands the problem clearly and precisely. He knows all the alternatives and their consequences. He has full knowledge and can analyse the alternatives intelligently. He can rank all the alternatives according to the preference and knows which consequence is best. He has full freedom to choose the alternative which he thinks will optimise the decision. 11

Limitations of Rational Economic Man Model 1) Inadequate goal assumption. 2) Vaguely defined problems. 3) Inadequate knowledge.

4) Influence of power groups having considerable influence

over the managers decisions. 5) Dynamic environment which keeps on changing with time disturbs this model's working.

12

2) Administrative Man Model  Herbert Simon  Economic man model is narrative &

Administrative man model is descriptive.

 Describe how a manager should make

decisions  Managers rarely behave in scientific manner 13

1. Practical problems Bounded Rationality 1. 2. 3. 4. 5. 6. 7. 8.

No scientific way of and identifying and analyzing novel and unstructured problems Not possible to formulate explicit goals (vague assumptions mixed with personal values) goals become distorted Lack of complete information Limited skill of manager Lack of time for exhaustive search Environment is uncertain, complex, probabilistic rather than deterministic Organizational constraints do not allow complete rationality forces of stability, continuity often prevail upon forces of change & challenge Decision both influenced by both reason and emotions Manager content when decision which do not make undue demand on times talent 14

2. Satisfying  The satisfying model, developed in the 1950s by Novel Prize winning economist Herbert Simon, holds that managers seek alternatives

only until they find one that looks satisfactory, rather than seeking the optimal decision.

15

Challenges to the Rational Model 1. Decision-Making Mechanism  

Decision Maker does not have information about all the alternatives. Even for a single alternative, he may not have all the relevant information. He make assumptions about some aspects of the decision.

16

2. Human Factor in Decision Making  First, the choice is an ordering of a kind of personal preference, & a decision maker cannot eliminate his personal preference altogether.  Second, choice depends on various qualitative information & its interpretation is likely to be personalized.  Major Factors that affects rationality a) Personal Value System b) Perception c) Political & Power Behaviour

17

2) Non-Rational Models  The non-rational models of managerial decision making suggest that informationgathering and processing limitations make it

difficult for managers to make optimal decisions.

18

1) The incremental model holds that managers make the smallest response possible that will reduce the problem to at least a tolerable level.  a. Managers can make decisions without processing a great deal of information.  b. Incremental strategies are usually more effective in the short run than in the long run. 2) The garbage-can model of decision making holds that managers behave in virtually a random pattern in making non-programmed decisions.  a. Factors that determine decisions include the particular individuals involved in the decisions, their interests and favourite solutions to problems, as well as any opportunities they stumble upon.  b. The garbage-can approach is often used in the absence of solid strategic management and can lead to severe problems. 19

The GARBAGE-CAN strategy is effective in the following situations:

 When the managers have no specific goal preferences,  When the means of achieving goals are

unclear, &  When there are frequent changes in the participants involved in decision making.

20

21