GSBS 6001

Managing Under Uncertainty

Decision making theories, models and processes

NEWCASTLE BUSINESS SCHOOL 2016

 Week 2 discussion
• What is the difference between a problem and a decision?
• How do you describe and define the term ‘decision’ to a
friend. Would you describe it differently to a colleague at
work?
• Explain the influence of context on decision making? Ensure
you refer to all ixfive factors.
• Identify and explain the 6 different types of decisions?
Your decision to enrol at UoN 3

Using the context of decision making, prepare the key

facts on the context of your decision to select where to
live?

Who
Where
When
How
Why
What type
 Overview 4

Workshop 3: Decision making theories,

Models and processes

Main themes:
• Approaches to decision making
• Decision making models
• Decision making processes

Key concepts and themes:

• Rational model
• Bounded rational model
• Incrementalism model
• Garbage-can model
• Process model
• Eight stage process model of decision making
Intended learning outcomes 5

 
Intended At the end of this workshop, students should be
Learning able to:
Outcomes 1. Compare and contrast the different
  approaches to decision making
2. Evaluate different decision making models
3. Describe and evaluate a rational decision
making process
Rationality in decision making
6

Rational v Non rational behaviour

• Rationality in decision making is interpreted:
o broadly
o subjectively
o disciplinarily
o relative

“rationality in the sense here intended is obviously a relative concept. Whether

a given action – or the decision to perform it – is rational will depend on the
objectives that the action is meant to achieve and on the relevant empirical
information available at the time of the decision. Broadly speaking, an action
will qualify as rational if, on the basis of the given information, it offers optimal
prospects of achieving its objectives”
(Hempel in Harrison,1999: 75)
Rationality in decision making
7
Rational v Non rational behavior

• Rationality in the decision maker needs to be viewed as a continuum of

rationality rather than a dichotomous rational-irrational classification

• Indeed, because of the medical connotations, we should use the term

‘non-rational’ rather than ‘irrational’

o Non-rational accepts that a person has all of their cognitive faculties but they
may not use them to some degree in making a decision
Two dominant decision making models
8

Our two dominant models are:

• Normative / rational / classical
• Descriptive / bounded rational / organisational

• Note:
The normative model assumes a rational person
The descriptive model assumes a non-rational
person

• Given there is a ‘continuum of rationality’ we can

have rational behaviour involving some non-
rational behaviour
The rational model
9

• Normative in nature / prescriptive / mechanistic

• Foundations are in the quantitative disciplines

Assumptions:
• All available information is available
• Decision maker has :
o only one objective
o Objectives that align with those of the organisation
o A clear well ordered and stable set of preferences of
alternatives from which to choose
o the ability to process information, calculate a
‘subjective expected utility’ and make a choice
o the ‘best’ option is the one with highest quantifiable
‘utility’ ie optimal output
The rational model ‘subjective expected utility’
explained 10

“Subjective”
It is a person’s own judgment

.2 Outcome 1 (+7)
“Expected”
The probability of an outcome occurring .5
Choice A Outcome 2 (-2)
eg. chance that outcome 3 will occur is
.9
90% if choice ‘A’ is chosen, 30% if choice
Outcome 3 (+1)
‘B’ is chosen

“Utility”
The value or happiness produced by Outcome 1 (+7)
.8
each option from value of expected
outcomes, determined quantitatively .2
Choice B Outcome 2 (-2)
.3
The Optimal or ‘Maximising’
Outcome 3 (+1)
Outcome in our example would be:
Choice ‘B’ has higher utility (value) than
choice ‘A’ Probability of Utility (expected
Choice ‘B’ expected utility is outcome occurring happiness)
(.8x7)+(.2x-2)+(.3x1)=6.4
© 2010 The McGraw-Hill Companies, Inc. All rights reserved
 Subjective Expected Utility:
Introduction of new menu item to café 11

Very popular menu item

.5 (+9)

Choice A:
Cup cakes .4 Moderately popular menu
made by item(+4)
supplier .1

Sales failure (-1)

Very popular menu item

.3 (+9)
Choice B:
Mini choc-
.6
hazelnut Moderately popular menu
cheese cakes item (+4)
made by .1
supplier
Sales failure (-1)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved

 The bounded rational model
12
• Foundations are with qualitative approaches
• Acknowledges that there are environmental and behavioural
constraints that affect a decision

Simon articulates 5 differences from the rational model

(Simon in Harrison 1999:154)
• Factored problems
o Due to the complexity of real life problems, humans factor (or divide)
problems into small pieces and deal with them one by one
• Satisficing
o Since complete information cannot be obtained, humans seek a course Herbert Simon
of action that is ‘good enough’ rather than ‘maximising utility’ ie they
satisfice
• Search
o Alternatives are generated sequentially and the search is aborted once
the first ‘good enough’ alternative is identified
• Uncertainty avoidance
o To avoid uncertainty, short term feedback is sought to enable change
with any emerging outcomes
• Repertoires
o Organisations tend to have 2nd, 3rd alternatives should the identified
‘satisficing’ alternative does not give the intended outcome
Influences to limitations

• Complete and accurate information

• Ability to evaluate
• Impossible to evaluate all information
• Humans are not rational
• Time is a finite resources
• Individual and group influences
Other models
14

Incrementalism

• A model almost entirely behavioural but categorised as a

‘political model’ by Harrison in his typology of decision
making models (Harrison 1999: 155)
• It is a model that employs a ‘compromise or bargaining
decision making strategy’ that aims for an outcome that is
acceptable to the many external stakeholders
• It is based on notion of ‘muddling through’ which is
Lindblom’s view on how decisions are made
• The criterion is that the decision will be as close to the
original decision and existing course of action
i.e. it is not an ‘outcome’ model but a ‘process’ model

(Right: Charles B Lindblom (disjointed incrementalism) (1963) and

James Brian Quinn (logical incrementalism) (1978))
Other models
15

Garbage Can Model

• Asserts that ‘cause and effect’ is unclear in decision making

• Suggests that four independent factors shape decisions in
this instance:
o perceptions of current problems facing the organisation
o potential solutions, ideas and actions that individuals
wish to champion
o decision making opportunities, meetings or committees
that are assigned to make a recommendation for action
o participants, individuals who are present at decision
making opportunities

• Decisions take place as a result of a random combination of

these four factors

(Right: Michael D Cohen, James D March & Johan P. Olsen,

authors of the seminal article ‘A Garbage Can Model of
Organisational Choice’ in 1972)
Other models
16

Process Model
• Harrison argues that a hybrid approach that takes the best
out of the rest and takes a strategic long term view is a type
of decision making process for the modern era
• He termed it a ‘process model’
• Similar in nature to the ‘bounded rationality’ model but is
longer term; involves a planning stage; and is not bound by
policy and procedure but uses it as a guide, thus enabling
innovation
• He sees such a model as the epitome of an interdisciplinary
decision making model

(Harrison 1999)
Other models
17

• Process model (Harrison, 1999 p. 40)

• The foundation of the model is “managerial objectives”, and

these can be hierarchical and multiple decision processes can
occur simultaneously.
 Decision Making Processes
18

• Decision making is a process , not an event

• By understanding it, decision makers can self-evaluate
and evaluate others
• In doing so, we acknowledge that it is a dynamic and
inter-related process, taking place over time, is
continuous and can direct and control the nature, degree
and pace of change in organisations
• A range of decision making process models have
emerged:
o Three stage models (Simon, 1960; Schrenk, 1969)
o Four stage models (Witte, 1972; Frederikson, 1971; Nutt,
1989)
o Five stage models (Janis, 1968)
o Six stage models (Harrison, 1999)
o Eight stage models (Eilon, 1979; Cooke & Slack 1991)

• For our purposes, we will adopt a most commonly used eight

stage model but first some work for you
Systematic decision making

Identify the problem

Establish the criteria

Allocate the weights

List alternatives

Analyse alternatives

Select alternative

Implement the decision

Evaluate the decision

The Eight Stage Decision Making Process Model
20

1. Identify
the
problem
2. Establish
8. Evaluate
the decision
decision
criteria

3. Allocate
7. Implement weights to
decision decision
criteria

4. Develop
6. Choose
and list
alternatives
alternatives

5. Analyse
alternatives
The Eight Stage Decision Making Process Model
21

1. Identify
the
problem
2. Establish
8.Evaluate
the decision
decision
criteria

Stage 1: Identify the problem

3. Allocate
7. Implement weights to
decision decision
• The ‘problem’ is the discrepancy between the criteria

‘current state of affairs’ and the ‘desired state of

affairs’
4. Develop
6. Choose
and list
alternatives
alternatives

5. Analyse
alternatives
• It is a subjective exercise
• Be careful to distinguish ‘problems’ from ‘symptoms
of problems’
• It involves the setting of ‘objectives’ ie a set of end-
points towards which the decision maker directs
their decision making
• The objectives are often more than one and need to
be prioritised
The Eight Stage Decision Making Process Model
22

1. Identify
the
problem

Stage 2: Establish decision criteria

2. Establish
8.Evaluate
the decision
decision
criteria

These are the criteria that will be used in

3. Allocate
• 7. Implement
decision
weights to
decision

determining choice
criteria

4. Develop
6. Choose
and list

Stage 3: Allocate weights to decision criteria

alternatives
alternatives

5. Analyse
alternatives

• Involves making a priority or priorities amongst the

decision criteria
• Priorities may be obvious, or may need to be
calculated
• Priorities may be equally as important as one
another or there may be a hierarchy
• A potentially subjective activity, in organization can
be guided by organizational goals or other
stakeholder or political motivations
The Eight Stage Decision Making Process Model
23

1. Identify
the
problem

Stage 4 Develop and List Alternatives 8.Evaluate

decision
2. Establish
the decision
criteria

• Different search models exist: 7. Implement

3. Allocate
weights to
o Undirected viewing ie viewing with no purpose decision decision
criteria

o Conditioned viewing ie non active but directed

exposure to an area of information 6. Choose
4. Develop
and list
alternatives
o Informal search ie unstructured and passive alternatives

5. Analyse
o Formal search ie structured and deliberate effort alternatives

(Aguiler in Harrison 1999: 48)

• The search activity will always be ‘bounded’ by constraints eg

time and money

• Search activity can be complex

o It involves searching for alternatives ‘in parallel’ rather than ‘in sequence’;
it involves multi-layered and multi-staged processes for evaluating the
attributes of alternatives’;
o It is subjective and decision maker bias is present
The Eight Stage Decision Making Process Model
24

Stage 5: Analyse the alternatives 1. Identify

the
problem
2. Establish
8.Evaluate
the decision
decision
criteria

• It involves reference to the identification and

weightings of the objectives and criteria 7. Implement
3. Allocate
weights to
decision decision
criteria
• A combination of ‘comparing and evaluating’ modes
take place: 6. Choose
4. Develop
and list
o Judgment mode alternatives
alternatives

5. Analyse
- decision makers makes a judgment based upon alternatives

experience, values, perception, intuition – it is a popular

choice for non-routine and uncertain decisions
o Bargaining mode
- decision maker bargains – it is popular when decision is
controversial or other stakeholders dominate (political
influence)
o Analytical mode
- decision maker carefully and objectively evaluates the
alternatives – most represented in the research literature but
equally least mode used by decision makers unless
decisions are routine and certain
(Mintzberg, Raisinghani & Theoret in Harrison 1999:52)
The Eight Stage Decision Making Process Model
25
Stage 6: Choose Alternatives 1. Identify
the
problem
2. Establish
8.Evaluate
the decision
• Problems typically arise where: decision
criteria

o One or more alternatives are equally attractive

3. Allocate
o No single alternative will meet the objectives/satisfy the 7. Implement
decision
weights to
decision

decision criteria criteria

o There are undesired consequences attached to a

preferred alternative 6. Choose
alternatives
4. Develop
and list
alternatives
o The choice of alternatives is too great 5. Analyse
alternatives
o No combination of alternatives will meet the
objectives/satisfy the decision criteria

Irrespective of the model used, research has suggested that certain characteristics of
the decision repeatedly have an affect on the decision maker’s choice: It is known as
the ‘contingency model of choice’,

The characteristics are:

unfamiliarity; ambiguity;
complexity; instability;
reversibility; significance;
accountability; time/money constraints

(Beach & Mitchell in Harrison 1999:60)

The Eight Stage Decision Making Process Model
26

Stage 7: Implementing decision 1. Identify

the
problem
2. Establish
8.Evaluate
the decision
decision
criteria

• The real value of a decision is only seen after it is

implemented 7. Implement
decision
3. Allocate
weights to
decision
criteria

• Success is seen as a good decision made and

4. Develop
successfully implemented: 6. Choose
alternatives
and list
alternatives

5. Analyse
alternatives

o It is subjective
o It is said to have three characteristics:
The decision
(i) remains viable following implementation;
(ii) manifests an acceptable degree of congruency
between the actual and the expected outcomes;
and
(iii) elicits enthusiasm and skill from those
implementing it
(Shell, Delbecq & Cummings in Harrison 1999:62
The Eight Stage Decision Making Process Model
27

1. Identify
the
problem

Stage 8: Evaluate decision 8.Evaluate

decision
2. Establish
the decision
criteria

• A system of control and follow up is critical 7. Implement

3. Allocate
weights to
decision decision
criteria

• Effective control systems need:

4. Develop
6. Choose
and list
alternatives
alternatives
o The establishment of standards/benchmarks 5. Analyse
alternatives
against which performance can be assessed

o Effective measurement of performance against

the standards/benchmarks

o Ability to correct deviations from the

standards/benchmarks

(Koonz & Weihrich in Harrison 1999: 64)

 US Airways 1549
28

• Identify what type of decision(s) were made by the captain of

the aircraft?
• Detail the context of the decision to land the plane in the
Hudson River
• Apply the principle of rational decision making model to the
decision
• Apply the bounded rationality model to the landing of the plane
on the Hudson River?
 29

GSBS 6001
Managing Under Uncertainty

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