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Decision making

 
Accounting Dictionary: Decision-Making

Purposeful selection from among a set of alternatives in light of a given objective. Decision-making is not a separate function of management. In fact, decision-making is intertwined with the other functions, such as Planning, Coordinating, and Controlling. These functions all require that decisions be made. For example, at the outset, management must make a critical decision as to which of several strategies would be followed. Such a decision is often called a strategic decision because of its long-term impact on the organization. Also, managers must make scores of lesser decisions, tactical and operational, all of which are important to the organization's well-being.

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Business Encyclopedia: Decision Making
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Decision making, also referred to as problem solving, is the process of recognizing a problem or opportunity and finding a solution to it. Decisions are made by everyone involved in the business world, but managers typically face the most decisions on a daily basis. Many of these decisions are relatively simple and routine, such as ordering production supplies, choosing the discount rate for an order, or deciding the annual raise of an employee. These routine types of decisions are known as programmed decisions, because the decision maker already knows what the solution and outcome will be. However, managers are also faced with decisions that can drastically affect the future outcomes of the business. These types of decisions are known as nonprogrammed decisions, because neither the appropriate solution nor the potential outcome is known. Examples of nonprogrammed decisions include merging with another company, creating a newproduct, or expanding production facilities.

Decision making typically follows a six-step process:

  1. Identify the problem or opportunity
  2. Gather relevant information
  3. Develop as many alternatives as possible
  4. Evaluate alternatives to decide which is best
  5. Decide on and implement the best alternative
  6. Follow-up on the decision

In step 1, the decision maker must be sure he or she has an accurate grasp of the situation. The need to make a decision has occurred because there is a difference between the desired outcome and what is actually occurring. Before proceeding to step 2, it is important to pinpoint the actual cause of the situation, which may not always be obviously apparent.

In step 2, the decision maker gathers as much information as possible because having all the facts gives the decision maker a much better chance of making the appropriate decision. When an uninformed decision is made, the outcome is usually not very positive, so it is important to have all the facts before proceeding.

In step 3, the decision maker attempts to come up with as many alternatives as possible. A technique known as "brainstorming," whereby group members offer any and all ideas even if they sound totally ridiculous, is often used in this step.

In step 4, the alternatives are evaluated and the best one is selected. The process of evaluating the alternatives usually starts by narrowing the choices down to two or three and then choosing the best one. This step is usually the most difficult, because there are often many variables to consider. The decision maker must attempt to select the alternative that will be the most effective given the available amount of information, the legal obstacles, the public relations issues, the financial implications, and the time constraints on making the decision. Often the decision maker is faced with a problem for which there is no apparent good solution at the moment. When this happens, the decision maker must make the best choice available at the time but continue to look for a better option in the future.

Once the decision has been made, step 5 is performed. Implementation often requires some additional planning time as well as the understanding and cooperation of the people involved. Communication is very important in the implementation step, because most people are resistant to change simply because they do not understand why it is necessary. In order to ensure smooth implementation of the decision, the decision maker should communicate the reasons behind the decision to the people involved.

In step 6, after the decision has been implemented, the decision maker must follow-up on the decision to see if it is working successfully. If the decision that was implemented has corrected the difference between the actual and desired outcome, the decision is considered successful. However, if the implemented decision has not produced the desired result, once again a decision must be made. The decision maker can decide to give the decision more time to work, choose another of the generated alternatives, or start the whole process over from the beginning.

Strategic, Tactical, and Operational Decisions

People at different levels in a company have different types of decision-making responsibilities. Strategic decisions, which affect the long-term direction of the entire company, are typically made by top managers. Examples of strategic decisions might be to focus efforts on a newproduct or to increase production output. These types of decisions are often complex and the outcomes uncertain, because available information is often limited. Managers at this level must often depend on past experiences and their instincts when making strategic decisions.

Tactical decisions, which focus on more intermediate-term issues, are typically made by middle managers. The purpose of decisions made at this level is to help move the company closer to reaching the strategic goal. Examples of tactical decisions might be to pick an advertising agency to promote a newproduct or to provide an incentive plan to employees to encourage increased production.

Operational decisions focus on day-to-day activities within the company and are typically made by lower-level managers. Decisions made at this level help to ensure that daily activities proceed smoothly and therefore help to move the company toward reaching the strategic goal. Examples of operational decisions include scheduling employees, handling employee conflicts, and purchasing rawmaterials needed for production.

It should be noted that in many "flatter" organizations, where the middle management level has been eliminated, both tactical and operational decisions are made by lower-level management and/or teams of employees.

Group Decisions

Group decision making has many benefits as well as some disadvantages. The obvious benefit is that there is more input and therefore more possible solutions to the situation can be generated.

Another advantage is that there is shared responsibility for the decision and its outcome, so one person does not have total responsibility for making a decision. The disadvantages are that it often takes a long time to reach a group consen sus and that group members may have to com promise in order to reach a consensus. Many businesses have created problem-solving teams whose purpose is to find ways to improve specific work activities.

Bibliography

Boone, Louis E., and Kurtz, David L. (1999). Contemporary Business, 9th ed. Orlando, FL: Harcourt Brace College Publishers.

Bounds, Gregory M., and Lamb, Charles W., Jr. (1998). Business. Cincinnati, OH: South-Western College Publishing.

Clancy, Kevin J., and Shulman, Robert S. (1994). Marketing Myths That are Killing Business: The Cure for Death Wish Marketing. New York: McGraw-Hill.

French, Wendell L. (1998). Human Resources Management. New York: Houghton Mifflin.

Madura, Jeff. (1998). Introduction to Business. Cincinnati, OH: South-Western College Publishing.

Nickels, William G., McHugh, James M., and McHugh, Susan M. (1999). Understanding Business, 5th ed. Boston: Irwin McGraw-Hill.

Pride, William M., Hughes, Robert J., and Kapoor, Jack R. (1999). Business, 6th ed. New York: Houghton Mifflin.

[Article by: MARCY SATTERWHITE]

Dental Dictionary: decision-making
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n

The process of coming to a conclusion or making a judgment.

Wikipedia: Decision making
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Sample flowchart representing the decision process to add a new article to Wikipedia.

Decision making can be regarded as an outcome of mental processes (cognitive process) leading to the selection of a course of action among several alternatives. Every decision making process produces a final choice.[1] The output can be an action or an opinion of choice.

Contents

Overview

Human performance in decision making terms has been the subject of active research from several perspectives. From a psychological perspective, it is necessary to examine individual decisions in the context of a set of needs, preferences an individual has and values they seek. From a cognitive perspective, the decision making process must be regarded as a continuous process integrated in the interaction with the environment. From a normative perspective, the analysis of individual decisions is concerned with the logic of decision making and rationality and the invariant choice it leads to.[2]

Yet, at another level, it might be regarded as a problem solving activity which is terminated when a satisfactory solution is found. Therefore, decision making is a reasoning or emotional process which can be rational or irrational, can be based on explicit assumptions or tacit assumptions.

Logical decision making is an important part of all science-based professions, where specialists apply their knowledge in a given area to making informed decisions. For example, medical decision making often involves making a diagnosis and selecting an appropriate treatment. Some research using naturalistic methods shows, however, that in situations with higher time pressure, higher stakes, or increased ambiguities, experts use intuitive decision making rather than structured approaches, following a recognition primed decision approach to fit a set of indicators into the expert's experience and immediately arrive at a satisfactory course of action without weighing alternatives. Recent robust decision efforts have formally integrated uncertainty into the decision making process. However, Decision Analysis, recognized and included uncertainties with a structured and rationally justifiable method of decision making since its conception in 1964.

Everyday techniques

Some of the decision making techniques people use in everyday life include:

  • Listing the advantages and disadvantages of each option, popularized by Plato and Benjamin Franklin
  • Choosing the alternative with the highest probability-weighted utility for each alternative (see Decision Analysis)
  • Accepting the first option that seems like it might achieve the desired result
  • Acquiesce to a person in authority or an "expert"
  • Flipping a coin, cutting a deck of playing cards, and other random or coincidence methods
  • Prayer, tarot cards, astrology, augurs, revelation, or other forms of divination

Cognitive and personal biases

Biases can creep into our decision making processes. Many different people have made a decision about the same question (e.g. "Should I have a doctor look at this troubling breast cancer symptom I've discovered?" "Why did I ignore the evidence that the project was going over budget?") and then craft potential cognitive interventions aimed at improving decision making outcomes.

Below is a list of some of the more commonly debated cognitive biases.

  • Selective search for evidence (a.k.a. Confirmation bias in psychology) (Scott Plous, 1993) – We tend to be willing to gather facts that support certain conclusions but disregard other facts that support different conclusions. Individuals who are highly defensive in this manner show significantly greater left prefrontal cortex activity as measured by EEG than do less defensive individuals.[3]
  • Premature termination of search for evidence – We tend to accept the first alternative that looks like it might work.
  • Inertia – Unwillingness to change thought patterns that we have used in the past in the face of new circumstances.
  • Selective perception – We actively screen-out information that we do not think is important. (See prejudice.) In one demonstration of this effect, discounting of arguments with which one disagrees (by judging them as untrue or irrelevant) was decreased by selective activation of right prefrontal cortex.[4]
  • Wishful thinking or optimism bias – We tend to want to see things in a positive light and this can distort our perception and thinking.[5]
  • Choice-supportive bias occurs when we distort our memories of chosen and rejected options to make the chosen options seem relatively more attractive.
  • Recency – We tend to place more attention on more recent information and either ignore or forget more distant information. (See semantic priming.) The opposite effect in the first set of data or other information is termed Primacy effect (Plous, 1993).
  • Repetition bias – A willingness to believe what we have been told most often and by the greatest number of different of sources.
  • Anchoring and adjustment – Decisions are unduly influenced by initial information that shapes our view of subsequent information.
  • Group thinkPeer pressure to conform to the opinions held by the group.
  • Source credibility bias – We reject something if we have a bias against the person, organization, or group to which the person belongs: We are inclined to accept a statement by someone we like. (See prejudice.)
  • Incremental decision making and escalating commitment – We look at a decision as a small step in a process and this tends to perpetuate a series of similar decisions. This can be contrasted with zero-based decision making. (See slippery slope.)
  • Attribution asymmetry – We tend to attribute our success to our abilities and talents, but we attribute our failures to bad luck and external factors. We attribute other's success to good luck, and their failures to their mistakes.
  • Role fulfillment (Self Fulfilling Prophecy) – We conform to the decision making expectations that others have of someone in our position.
  • Underestimating uncertainty and the illusion of control – We tend to underestimate future uncertainty because we tend to believe we have more control over events than we really do. We believe we have control to minimize potential problems in our decisions.

Cognitive styles

Influence of Briggs Myers type

According to behavioralist Isabel Briggs Myers, a person's decision making process depends to a significant degree on their cognitive style.[6] Myers developed a set of four bi-polar dimensions, called the Myers-Briggs Type Indicator (MBTI). The terminal points on these dimensions are: thinking and feeling; extroversion and introversion; judgment and perception; and sensing and intuition. She claimed that a person's decision making style correlates well with how they score on these four dimensions. For example, someone who scored near the thinking, extroversion, sensing, and judgment ends of the dimensions would tend to have a logical, analytical, objective, critical, and empirical decision making style.

Other studies suggest that these national or cross-cultural differences exist across entire societies. For example, Maris Martinsons has found that American, Japanese and Chinese business leaders each exhibit a distinctive national style of decision making.[7]

Optimizing vs. satisficing

Herbert Simon coined the phrase "bounded rationality" to express the idea that human decision-making is limited by available information, available time, and the information-processing ability of the mind. Simon also defined two cognitive styles: maximizers try to make an optimal decision, whereas satisficers simply try to find a solution that is "good enough". Maximizers tend to take longer making decisions due to the need to maximize performance across all variables and make tradeoffs carefully; they also tend to more often regret their decisions.[8]

Combinatoral vs. positional

Styles and methods of decision making were elaborated by the founder of Predispositioning Theory, Aron Katsenelinboigen. In his analysis on styles and methods Katsenelinboigen referred to the game of chess, saying that “chess does disclose various methods of operation, notably the creation of predisposition—methods which may be applicable to other, more complex systems.”[9]

In his book Katsenelinboigen states that apart from the methods (reactive and selective) and sub-methods (randomization, predispositioning, programming), there are two major styles – positional and combinational. Both styles are utilized in the game of chess. According to Katsenelinboigen, the two styles reflect two basic approaches to the uncertainty: deterministic (combinational style) and indeterministic (positional style). Katsenelinboigen’s definition of the two styles are the following.

The combinational style is characterized by

  • a very narrow, clearly defined, primarily material goal, and
  • a program that links the initial position with the final outcome.

In defining the combinational style in chess, Katsenelinboigen writes:

The combinational style features a clearly formulated limited objective, namely the capture of material (the main constituent element of a chess position). The objective is implemented via a well defined and in some cases in a unique sequence of moves aimed at reaching the set goal. As a rule, this sequence leaves no options for the opponent. Finding a combinational objective allows the player to focus all his energies on efficient execution, that is, the player’s analysis may be limited to the pieces directly partaking in the combination. This approach is the crux of the combination and the combinational style of play.[9]

The positional style is distinguished by

  • a positional goal and
  • a formation of semi-complete linkages between the initial step and final outcome.

“Unlike the combinational player, the positional player is occupied, first and foremost, with the elaboration of the position that will allow him to develop in the unknown future. In playing the positional style, the player must evaluate relational and material parameters as independent variables. ( … ) The positional style gives the player the opportunity to develop a position until it becomes pregnant with a combination. However, the combination is not the final goal of the positional player—it helps him to achieve the desirable, keeping in mind a predisposition for the future development. The Pyrrhic victory is the best example of one’s inability to think positionally.”[10]

The positional style serves to

a) create a predisposition to the future development of the position;
b) induce the environment in a certain way;
c) absorb an unexpected outcome in one’s favor;
d) avoid the negative aspects of unexpected outcomes.

The positional style gives the player the opportunity to develop a position until it becomes pregnant with a combination. Katsenelinboigen writes:
“As the game progressed and defense became more sophisticated the combinational style of play declined. . . . The positional style of chess does not eliminate the combinational one with its attempt to see the entire program of action in advance. The positional style merely prepares the transformation to a combination when the latter becomes feasible.”[11]

Neuroscience perspective

The anterior cingulate cortex (ACC), orbitofrontal cortex (and the overlapping ventromedial prefrontal cortex) are brain regions involved in decision making processes. A recent neuroimaging study,[12] found distinctive patterns of neural activation in these regions depending on whether decisions were made on the basis of personal volition or following directions from someone else. Patients with damage to the ventromedial prefrontal cortex have difficulty making advantageous decisions[13].

A recent study[14] involving Rhesus monkeys found that neurons in the parietal cortex not only represent the formation of a decision but also signal the degree of certainty (or "confidence") associated with the decision. Another recent study[15] found that lesions to the ACC in the macaque resulted in impaired decision making in the long run of reinforcement guided tasks suggesting that the ACC is responsible for evaluating past reinforcement information and guiding future action.

Emotion appears to aid the decision making process: Decision making often occurs in the face of uncertainty about whether one's choices will lead to benefit or harm (see also Risk). The somatic-marker hypothesis is a neurobiological theory of how decisions are made in the face of uncertain outcome. This theory holds that such decisions are aided by emotions, in the form of bodily states, that are elicited during the deliberation of future consequences and that mark different options for behavior as being advantageous or disadvantageous. This process involves an interplay between neural systems that elicit emotional/bodily states and neural systems that map these emotional/bodily states.[16]


See also

References

  1. ^ James Reason (1990). Human Error. Ashgate. ISBN 1840141042. 
  2. ^ Daniel Kahneman, Amos Tversky (2000). Choice, Values, Frames. The Cambridge University Press. ISBN 0521621720. 
  3. ^ Blackhart, G. C., & Kline, J. P. (2005). Individual differences in anterior EEG asymmetry between high and low defensive individuals during a rumination/distraction task. Personality and Individual Differences, 39, 427–437.
  4. ^ Drake, R. A. (1993). Processing persuasive arguments: 2. Discounting of truth and relevance as a function of agreement and manipulated activation asymmetry. Journal of Research in Personality, 27, 184–196.
  5. ^ Chua, E. F., Rand-Giovannetti, E., Schacter, D. L., Albert, M., & Sperling, R. A. (2004). Dissociating confidence and accuracy: Functional magnetic resonance imaging shows origins of the subjective memory experience. Journal of Cognitive Neuroscience, 16, 1131–1142.
  6. ^ Isabel Briggs Myers|Myers, I. (1962) Introduction to Type: A description of the theory and applications of the Myers-Briggs type indicator, Consulting Psychologists Press, Palo Alto Ca., 1962.
  7. ^ Martinsons, Maris G., Comparing the Decision Styles of American, Chinese and Japanese Business Leaders. Best Paper Proceedings of Academy of Management Meetings, Washington, DC, August 2001 [1]
  8. ^ http://www.pri.org/science/science-behind-making-decisions1407.html
  9. ^ a b Katsenelinboigen, Aron. The Concept of Indeterminism and Its Applications: Economics, Social Systems, Ethics, Artificial Intelligence, and Aesthetics Praeger: Westport, Connecticut, 1997, p.6)
  10. ^ V. Ulea, The Concept of Dramatic Genre and The Comedy of A New Type. Chess, Literature, and Film. Southern Illinois University Press, 2002, pp. 17–18])
  11. ^ Selected Topics in Indeterministic Systems Intersystems Publications: California, 1989, p. 21
  12. ^ Interactions between decision making and performance monitoring within prefrontal cortex
  13. ^ Damasio, AR (1994). Descarte's Error: Emotion, reason and the human brain. New York: Picador. ISBN 0333656563. 
  14. ^ Roozbeh Kiani and Michael N. Shadlen, Representation of Confidence Associated with a Decision by Neurons in the Parietal Cortex
  15. ^ Kennerly, et al. (2006)
  16. ^ Nasir Naqvi, et al. "The Role of Emotion in Decision Making: A Cognitive Neuroscience Perspective", Current Directions in Psychological Science, doi:10.1111/j.1467-8721.2006.00448.x

Further reading

  • Facione, P. and Facione, N., Thinking and Reasoning in Human Decision Making, The California Academic Press / Insight Assessment, 2007
  • Plous, S. The Psychology of Judgement and Decision Making New York: McGraw-Hill, 1993
  • Ullman, D. G., Making Robust Decisions Trafford, 2006
  • Levin, Mark Sh., Composite Systems Decisions, New York: Springer, 2006.

External links


Translations: Decision-making
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Dansk (Danish)
n. - besluttende organer

Nederlands (Dutch)
besluitvorming

Français (French)
n. - processus décisionnel

Deutsch (German)
n. - Beschlußfassung

Ελληνική (Greek)
n. - λήψη αποφάσεων

Italiano (Italian)
processo decisionale

Português (Portuguese)
n. - tomada (f) de decisão

Русский (Russian)
принятие решения

Español (Spanish)
n. - toma de decisiones

Svenska (Swedish)
n. - beslutsfattande

中文(简体)(Chinese (Simplified))
决策

中文(繁體)(Chinese (Traditional))
n. - 決策

한국어 (Korean)
n. - 결정하는

日本語 (Japanese)
n. - 決定を下だすこと, 判断

العربيه (Arabic)
‏(الاسم) اتخاذ قرار‏

עברית (Hebrew)
n. - ‮קבלת החלטות‬


 
 

 

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Accounting Dictionary. Dictionary of Accounting Terms. Copyright © 2005 by Barron's Educational Series, Inc. All rights reserved.  Read more
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