ZeePedia

DECISION MAKING:Theories on Decision Making, Steps in Rational Decision Making

<< PLANNING COMMISSION AND PLANNING DEVELOPMENT:Functions, Approval Authority
HUMAN RESOURCE MANAGEMENT (HRM):Importance of Human Resource, Recruitment >>
img
Introduction To Public Administration­MGT111
VU
LESSON 21
DECISION MAKING
At the end of the lecture the students will be able to under the relations between decision making
and planning:
-
Understand the importance of decision making to planning
-
Limitation of rational decision making process
-
Approaches to decision making
Definition
First of all we will define decision making. It is defined as the selection of course of action. It is the
core of planning. A plan cannot exist unless decision has been made.
Decision making is the most important action by managers.
Theories on Decision Making
There are many theories of decision making but we will discuss the following:
1.
Organizational Process Model
2.
Rationality in Decision Making
Organizational Process Model
All organization follows rules, procedures & system. Decisions in organizations are made according
to the procedures and systems that organizations have for example a centralized organization decisions will
come from top done. In organization where authority is dispersed participative decisions will be made. So
the processes and standard operating procedure (SOP) will determine the quality of decisions made.
Rationality in Decision Making
It is said that effective decision making must be rational. But what is rationality. When is a thinking
person deciding rationally? People deciding rationally are attempting to reach goals in a systematic way.
They collect all:
1)
relevant information,
2)
analyze information,
3)
evaluate and
4)
make choice
So these are 4 basic steps in making a rational decision. If we follow these steps can we make "best
decision"? Can we get all information for all alternatives.
Limited Rationality
People have worked on the issues pertaining to all information to be collected for all alternatives.
What has been analyzed is that it is humanly impossible to collect all information for all alternatives. A
manager must settle for limited rationality. Information is limited, time is limited and certainty is limited.
Therefore managers dislike risk and do not reach the best solution. The decision making is `satisfying', that
is, picking a course of action that is good enough
Steps in Rational Decision Making
1.
Search for alternatives: Given that we know our objectives, the first step in decision
making is to search for alternatives. Search for alternatives is based on the concept of
`limiting' factor. The Principle of the limiting factor' is to recognize and overcome factors
that stand critically in the way of goals; the best course of action can be selected.
2.
Evaluation of Alternatives: the next step in decision making is to evaluate and select one
that contributes best to the goals
76
img
Introduction To Public Administration­MGT111
VU
When deciding about one alternative, managers can use three basic approaches:
1.
Experience
2.
Experimentation
3.
Research and Analysis
Usually mangers use their experience and judgment to select an alternative. Experience and
judgment is really reliance on the past.
The other method by which managers select alternatives is experimentation, i.e., managers would
try an alternative and see its results.
The 3rd method is arriving at alternatives through researching and analysis. The interrelationship
between the 3 methods is shown in Figure 1.
Figure 1
Experimentation
How to Select
Reliance on the
Choice made
from among
past
alternatives
Research and
Analysis
Basis for Selecting from Among Alternative Courses of Action
Types of Decision
It would be better to know the types of decision that organizations usually take. These are:
1.
Programmed
2.
Non Programmed
1. Programmed
A programmed decision is structured or repetitive or routine decision. Example: Reordering of
standard inventory item, checking at a check post
77
img
Introduction To Public Administration­MGT111
VU
2. Non-Programmed
Non-programmed decisions are used for unstructured, novel and ill-defined situations of non
recurring nature. Example: introduction of new product in the market,
Figure 2
Non Programmed
Un- Structured
Highest Level
Lowest
Programmed
Structured
Level
Nature of Problems and Decision making in Organization
Figure 2 attempts to explain the problems that organizations may be confronted with and the level
at which decisions will be made. At the lowest level in hierarchy structured and programmed decisions are
made. Whereas non-programmed and unstructured decisions are made at the highest level in organization.
Decision Making Situations
All decisions are made in some degree of uncertainty. Uncertainty is related to the unknown future.
Certainty varies from relative certainty to uncertainty. With increase in uncertainty the risk increases. This
increase in risk is based on the degree of information about future. The distant the decision is to be made in
future more uncertain is the situation.
There are two methods by which quality of decision and certainty can be improved. These are:
1.
Mathematical model (objective probabilities)
2.
Judgement and experience (subjective probabilities)
Approaches to Decision making
A number of modern techniques are used to improve the quality of decision making under normal
conditions of uncertainty. The most important are:
1.
Risk Analysis
2.
Decision tree
3.
Preference theory
1. Risk Analysis: An intelligent decision maker would like to know the size of risk they are taking in
deciding to choose a course of action.
Example: There is a situation where you have to take decision and you have worked out the
probabilities of gains i.e., for situation 1 the gain is zero and the probability you will have zero gains is 90%.
Looked other way there is 10% probability that you will not have zero gains. The highest gain is 35 points
and the probability is 40%. So as decision maker you will decide which gains to pick? Where the probably of
gains is high? The probability of gain is highest where gain is 10 and probability 80%. But the probability of
high gain (35) is only 40%. A manager who is not risk averse will go for last gain.
78
img
Introduction To Public Administration­MGT111
VU
Gain
0 10 15 20 25 30 35
Probability.90 .80 .70 .65 .60 .50 .40
of achieving this gain
2. Decision Tree: A decision tree approach makes it possible to see major alternatives and the
subsequent decisions may depend on events in future. Figure 3 is depicting a decision tree for an
organization to choose between either have permanent security staff of its own or to contract out
security service. For each choice the cost of success and failure is worked out. If the decision to
have permanent security staff is taken, then the successful implementation will give gain of Rs.100,
000 and failure will cost Rs.200, 000. So in the final analysis we see contracting out as giving more
gains.
Success
100000
Permanent Security
200000
Failure
200000
Success
200000
Contracting
100000
Failure
100000
3. Preference or utility theory explains individual attitude toward risk. Some people are willing to take
small risk (risk averters), others are willing to take greater risk (gambler)
Example: If there are 60% chance of being right and having 20 gains or 40% chance of being
wrong and have 30 gains. Would the person take the risk of taking that decision for 40 chances and having
higher gains?
Factors Affecting Decision-Making Process
Following are some of the factors that influence decision making:
1.
Personal Differences: People have different personality, experiences and perception and that
influences their decision making.
2.
Role of Knowledge: The knowledge of people varies, therefore, individual managers will
make decision on the amount of knowledge they possess.
3.
Institutional Factors: Institutional factors such as organization structure, procedure and
system affect decision making.
Concepts
Rational decision:
a systematic and sequential process of making decisions and
achieving objectives.
Limited rationality:
managers have limited time and information therefore their
79
Table of Contents:
  1. INTRODUCTION:Institutions of State, Individualism
  2. EVOLUTION OF PUBLIC ADMINISTRATION:Classical School, The Shovelling Experiment
  3. CLASSICAL SCHOOL OF THOUGHTS – I:Theory of Bureaucracy, Human Relation Approach
  4. CLASSICAL SCHOOL OF THOUGHTS – II:Contributors of This Approach
  5. HUMAN RELATIONS SCHOOLS:Behavioural School, System Schools
  6. POWER AND POLITICS:Conflict- as Positive and Negative, Reactions of Managers, Three Dimensional Typology
  7. HISTORY OF PUBLIC ADMINISTRATION – I:Moghul Period, British Period
  8. HISTORY OF PUBLIC ADMINISTRATION – II
  9. CIVIL SERVICE:What are the Functions Performed by the Government?
  10. CIVIL SERVICE REFORMS:Implementation of the Reforms, Categories of the Civil Service
  11. 1973 CONSTITUTION OF PAKISTAN:The Republic of Pakistan, Definition of the State
  12. STRUCTURE OF GOVERNMENT:Rules of Business, Conclusion
  13. PUBLIC AND PRIVATE ADMINISTRATION:The Public Interest, Ambiguity, Less Efficient
  14. ORGANIZATION:Formal Organizations, Departmentalization
  15. DEPARTMENTALIZATION:Departmentalization by Enterprise Function, Departments by Product
  16. POWER AND AUTHORITY:Nature of Relationship, Delegation of Functional Authority
  17. DELEGATION OF AUTHORITY:The Art of Delegation, Coordination
  18. PLANNING – I:Four Major Aspects of Planning, Types of Plans
  19. PLANNING – II:Planning ProcessThree principles of plans
  20. PLANNING COMMISSION AND PLANNING DEVELOPMENT:Functions, Approval Authority
  21. DECISION MAKING:Theories on Decision Making, Steps in Rational Decision Making
  22. HUMAN RESOURCE MANAGEMENT (HRM):Importance of Human Resource, Recruitment
  23. SELECTION PROCESS AND TRAINING:Levels at Which Selection takes Place, Training and Development
  24. PERFORMANCE APPRAISAL:Formal Appraisals, Informal Appraisals
  25. SELECTION AND TRAINING AND PUBLIC ORGANIZATIONS:Performance Evaluation,
  26. PUBLIC FINANCE:Background, Components of Public Finance, Dissimilarities
  27. BUDGET:Components of Public Income, Use of Taxes, Types of Taxation
  28. PUBLIC BUDGET:Incremental Budget, Annual Budget Statement, Budget Preparation
  29. NATIONAL FINANCE COMMISSION:Fiscal Federalism Defined, Multiple Criteria
  30. ADMINISTRATIVE CONTROL:Types of Accountability, Internal Control, External Control
  31. AUDIT:Economy, Effectiveness, Objectives of Performance Audit, Concepts
  32. MOTIVATION:Assumptions about Motivation, Early ViewsThree Needs
  33. MOTIVATION AND LEADERSHIP:Reinforcement Theory, Leadership, The Trait Approach
  34. LEADERSHIP:Contingency Approaches, Personal Characteristics of Employees
  35. TEAM – I:Formal & Informal teams, Functions of Informal Groups, Characteristics of Teams
  36. TEAM – II:Team Cohesiveness, Four ways to Cohesiveness, Communication
  37. COMMUNICATION – I:Types of Communication, How to Improve Communication
  38. COMMUNICATION – II:Factors in Organizational Communication, Negotiating To Manage Conflicts
  39. DISTRICT ADMINISTRATION:The British Period, After Independence, The Issues
  40. DEVOLUTION PLAN – I:Country Information, Tiers or Level of Government
  41. DEVOLUTION PLAN – II:Aim of Devolution Plan, Administrative Reforms, Separation of powers
  42. POLITICAL REFORMS:District, Tehsil, Functions of Union Council, Fiscal Reforms
  43. NEW PUBLIC MANAGEMENT (NPM):Strategy, Beginning of Management Approach
  44. MANAGERIAL PROGRAMME AGENDA – I
  45. MANAGERIAL PROGRAMME AGENDA – II:Theoretical Bases of Management, Critique on Management