flowchart TB
P[1. Identify<br/>the problem] --> C[2. Identify<br/>decision criteria]
C --> W[3. Weight<br/>the criteria]
W --> A[4. Develop<br/>alternatives]
A --> AN[5. Analyse<br/>alternatives]
AN --> S[6. Select an<br/>alternative]
S --> I[7. Implement<br/>the alternative]
I --> E[8. Evaluate<br/>effectiveness]
E -. feedback .-> P
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
5 Decision Making — Concept, Process, Techniques and Tools
5.1 What is a Decision?
Herbert Simon — winner of the 1978 Nobel Prize in Economics and the central figure in decision theory — described management as “synonymous with decision making” (Administrative Behavior, 1947). A decision is a choice among two or more alternatives. Decision making is the broader process that leads to that choice — identifying the problem, generating alternatives, evaluating them, and selecting one.
Koontz and Weihrich define decision making as “the selection of a course of action from among alternatives; it is the core of planning”. Stephen Robbins points out that every managerial function is, at its heart, a string of decisions — what to plan, how to organise, whom to staff, how to lead, when to control.
TipWorking Definitions
| Author | Definition | What it foregrounds |
|---|---|---|
| Herbert Simon | “Decision making includes the entire process of choice — identifying alternatives, weighing them, choosing among them, and acting.” | Process |
| George R. Terry | “The selection based on some criteria from two or more possible alternatives.” | Criteria |
| Peter Drucker | “Whatever a manager does, he does through making decisions.” | Centrality |
| Trewatha & Newport | “A process involving information, choice of alternative actions, implementation, and evaluation.” | Closed-loop |
5.1.1 Characteristics
TipSix features of a managerial decision
- Goal-oriented — every decision pursues an objective.
- Future-directed — decisions look forward, commit future action.
- Involves choice — at least two alternatives must exist.
- Rational (or boundedly so) — based on logic, judgement and limited information.
- Commits resources — money, time, people, attention.
- Has degrees of irreversibility — some are easily undone, others not.
NoteTagline
Doing nothing is also a decision — a decision to maintain the present course. There is no escape from decision-making.
5.2 Types of Decisions
5.2.1 Programmed and Non-programmed (Simon)
Herbert Simon’s most-tested distinction:
TipProgrammed vs Non-programmed Decisions
| Feature | Programmed | Non-programmed |
|---|---|---|
| Type of problem | Routine, repetitive, well-structured | Novel, unstructured, complex |
| Procedure | Established — rules, policies, SOPs | Custom — judgment, intuition, creativity |
| Where it occurs | Lower and middle levels | Top management |
| Time available | Short | Longer |
| Information | Mostly complete | Often incomplete |
| Cost of error | Low | High |
| Example | Reordering inventory | Entering a new country / acquisition |
5.2.2 Decisions by information availability — three states
TipCertainty, Risk and Uncertainty
| State | What we know | Tool family | Example |
|---|---|---|---|
| Certainty | All outcomes known with probability = 1 | Linear programming, assignment | Bond ladder of risk-free government securities |
| Risk | Outcomes known with assigned probabilities | Expected Monetary Value (EMV), decision trees | Insurance pricing, weather-bet farming |
| Uncertainty | Outcomes known but probabilities unknown | Maximax · Maximin · Minimax regret · Hurwicz · Laplace | New-technology launch in an untried market |
| Ambiguity (Knight, 1921) | Outcomes themselves unclear | Scenario planning, real options | Disruptive innovation, “unknown unknowns” |
NoteKnight’s distinction (1921)
Frank Knight (Topic 89 anchor) separated risk (insurable, with known probability) from uncertainty (un-insurable, no known probability). Decision-making under uncertainty uses the criterion-based tools listed below.
5.2.3 Other useful classifications
TipOther classifications
| Basis | Categories | Cue |
|---|---|---|
| Level | Strategic, Tactical, Operational | Time horizon and scope |
| Scope | Major, Minor | How much is committed |
| Persons involved | Individual, Group / Collective | Single signature vs committee |
| Anthony’s framework (1965) | Strategic planning, Management control, Operational control | A staircase from CEO to shop floor |
| Tactical vs Strategic | Means vs ends | Tactical implements; strategic chooses direction |
| Routine vs Crisis | Habitual vs emergency | Standard procedure vs ad-hoc judgment |
5.3 The Rational Decision-Making Process
The classical, prescriptive (normative) model assumes a rational manager — fully informed, goal-clear, optimising. Robbins’s eight-step version is the most-cited.
TipRobbins’s eight steps
| # | Step | What happens |
|---|---|---|
| 1 | Identify the problem | Diagnose the gap between actual and desired state |
| 2 | Identify decision criteria | What dimensions matter (cost, quality, time)? |
| 3 | Weight the criteria | Assign relative importance |
| 4 | Develop alternatives | Generate options |
| 5 | Analyse alternatives | Score each against weighted criteria |
| 6 | Select an alternative | The point of choice |
| 7 | Implement | Put the decision into action |
| 8 | Evaluate effectiveness | Did the decision solve the problem? — feedback to Step 1 |
5.3.1 Assumptions of the rational model
TipSix assumptions of perfect rationality
- Problem clarity — the decision-maker faces a known, unambiguous problem.
- Known options — all relevant alternatives can be identified.
- Clear preferences — criteria are stable and ordered.
- Constant preferences — preferences do not change during the decision.
- No time or cost constraints — full information is gathered.
- Maximum payoff — the decision-maker chooses the option with the highest perceived value.
These assumptions rarely hold. Simon’s Administrative Behavior (1947) replaced them with bounded rationality.
5.4 Bounded Rationality and Satisficing — Simon
Herbert Simon argued that in the real world managers face three limits: limited information, limited cognitive capacity, and limited time. They therefore cannot optimise — they satisfice: search alternatives sequentially and choose the first one that meets a good-enough threshold (the “level of aspiration”).
TipSimon’s three concepts
| Concept | What it says |
|---|---|
| Bounded rationality | Rationality is limited by information, cognition and time |
| Satisficing | Search ends when an acceptable alternative is found — not the optimal one |
| Administrative Man vs Economic Man | Economic Man optimises with full information; Administrative Man satisfices with what’s available |
::: {.callout-note title=“Drucker’s”1 % rule”“} Drucker observed that managers spend disproportionate time on small, routine decisions and too little on the few non-programmed, irreversible ones that actually matter. “The most common cause of executive failure is the inability to change when the position requires it.” :::
5.5 Intuitive and Behavioural Decision-Making
Intuitive decision-making — choices made on gut, experience and pattern-recognition — was rehabilitated by Gary Klein’s Sources of Power (1998), who showed that experienced firefighters, paramedics and grandmasters of chess routinely make excellent intuitive decisions through recognition-primed judgment.
Behavioural decision-making — pioneered by Daniel Kahneman and Amos Tversky — documented the cognitive biases that derail “rational” choice. Kahneman won the 2002 Nobel Prize in Economics. Key biases:
TipCommon decision biases — Kahneman, Tversky, Thaler
| Bias | What it is | Example |
|---|---|---|
| Anchoring | Over-rely on the first piece of information | Negotiator’s opening offer sets the range |
| Availability | Easier-to-recall events are over-weighted | Fear of flying after a news plane crash |
| Confirmation | Seek information that confirms prior belief | A CEO reading only optimistic forecasts |
| Overconfidence | Over-estimate one’s own knowledge | “I am sure this product will succeed” |
| Sunk-cost fallacy | Continue because of past investment | Pouring more money into a failing project |
| Framing | Same choice phrased differently produces different decisions | “90 % survival” vs “10 % mortality” |
| Loss aversion | Losses hurt about 2× as much as equivalent gains feel | Holding losing stocks too long |
| Hindsight | “I knew it all along” after the outcome is known | Easy criticism of past managers |
| Representativeness | Judge by resemblance, not base rate | Stereotyping a candidate |
| Groupthink (Janis, 1972) | Group cohesion suppresses dissent | Bay of Pigs invasion |
Kahneman’s Thinking, Fast and Slow (2011) framed the dual-process model — System 1 (fast, automatic, intuitive) and System 2 (slow, deliberate, analytical). Most everyday decisions are System 1; most exam-relevant biases stem from System 1 over-reach into System 2 territory.
5.6 Group Decision-Making
TipAdvantages and limitations of group decisions
| Advantages | Limitations |
|---|---|
| More information and viewpoints | Time-consuming |
| Increased acceptance of decision | Conformity pressure (groupthink) |
| Higher legitimacy | Dominance by a few members |
| Diversity of expertise | Ambiguous responsibility |
5.6.1 Group decision techniques
TipGroup decision techniques
| Technique | Author / origin | Mechanism |
|---|---|---|
| Brainstorming | Alex Osborn (1953) | Free idea generation; no criticism during ideation |
| Nominal Group Technique (NGT) | Delbecq & Van de Ven (1968) | Silent idea writing → round-robin → voting |
| Delphi technique | Helmer & Dalkey, RAND (1959) | Iterative anonymous expert questionnaires |
| Devil’s Advocate / Dialectical Inquiry | Mason & Mitroff (1981) | One member is assigned to oppose the prevailing view |
| Electronic meetings / GDSS | various | Anonymous typed input in a networked room |
NoteGroupthink — Irving Janis (1972)
Janis’s eight symptoms of groupthink: illusion of invulnerability · collective rationalisation · belief in inherent morality · stereotyping outsiders · pressure on dissenters · self-censorship · illusion of unanimity · mind-guards. Remedies: assign a devil’s advocate, invite outside experts, hold second-chance meetings, break large groups into independent sub-groups.
5.7 Quantitative Tools — Decisions Under Risk and Uncertainty
5.7.1 Under risk — Expected Monetary Value (EMV) and Decision Trees
When probabilities of outcomes are known, the Expected Monetary Value of an alternative is:
\[EMV = \sum_{i} p_i \cdot V_i\]
where pi is the probability of outcome i and Vi is the payoff under that outcome. The alternative with the highest EMV is chosen (assuming the decision-maker is risk-neutral).
TipWorked example — Decision tree
A firm chooses between launching Product A or Product B.
- Product A: 60 % chance of ₹10 cr profit; 40 % chance of ₹2 cr loss.
- Product B: 50 % chance of ₹15 cr profit; 50 % chance of ₹5 cr loss.
EMV(A) = 0.6 × 10 + 0.4 × (−2) = 6 − 0.8 = ₹5.2 cr. EMV(B) = 0.5 × 15 + 0.5 × (−5) = 7.5 − 2.5 = ₹5.0 cr.
A risk-neutral manager picks Product A (higher EMV by ₹0.2 cr).
5.7.2 Under uncertainty — Five classical criteria
When probabilities are not known, the manager picks a behavioural rule. The classical five:
TipFive decision rules under uncertainty
| Criterion | Rule | Disposition |
|---|---|---|
| Maximax | Pick the alternative whose best outcome is highest | Optimist |
| Maximin (Wald) | Pick the alternative whose worst outcome is least bad | Pessimist |
| Minimax Regret (Savage) | Compute regret table; pick alternative minimising max regret | Regret-averse |
| Hurwicz | Weight best with α and worst with (1−α); pick max of weighted scores | α-tunable |
| Laplace (Bayes-Laplace) | Assume all outcomes equally probable; pick max of averages | Neutral / insufficient reason |
5.7.3 Other quantitative techniques
TipA toolkit by problem class
| Technique | Best for | Anchor |
|---|---|---|
| Linear programming | Resource allocation with linear constraints | Dantzig (1947) — simplex method |
| Transportation & assignment | Routing supply → demand | Hitchcock; Hungarian method (Kuhn 1955) |
| Game theory | Competitive choices with rival players | von Neumann & Morgenstern (1944) |
| Queueing theory | Waiting-line problems | A.K. Erlang (1909) |
| Inventory models — EOQ | Order quantity that minimises holding + ordering cost | Harris (1913), Wilson (1934) |
| Simulation — Monte Carlo | Complex stochastic systems | Ulam, von Neumann (1940s) |
| PERT / CPM | Project scheduling | DuPont (CPM, 1957), US Navy (PERT, 1958) |
| Markov analysis | State-transition over time | Markov (1906) |
| Cost-Benefit Analysis | Public-investment evaluation | Dupuit (1844); modern: Mishan |
| Break-even analysis | Volume needed for zero profit | Walter Rautenstrauch |
5.8 The Vroom-Yetton-Jago Model — How Much to Involve Subordinates
Victor Vroom and Phillip Yetton (1973), later refined with Arthur Jago (1988), prescribed five decision styles based on subordinate involvement. The right style is chosen by answering a sequence of contingency questions (decision tree):
TipVroom-Yetton-Jago — five styles
| Style | Code | Subordinate involvement |
|---|---|---|
| Autocratic I | AI | Leader decides alone with current information |
| Autocratic II | AII | Leader collects information from subordinates, then decides alone |
| Consultative I | CI | Leader shares problem with each subordinate individually, then decides |
| Consultative II | CII | Leader shares problem with group together, then decides |
| Group / Joint | GII | Leader and group decide together by consensus |
5.9 Practice Questions
Q 01
Simon
Easy
"Management is synonymous with decision making." This view is associated with:
View solution
Correct Option: B
Herbert Simon, Administrative Behavior (1947). Simon won the 1978 Nobel Prize in Economics for his work on decision-making under bounded rationality.
Q 02
Programmed
Easy
Re-ordering office stationery when stock falls below the re-order level is best classified as a:
View solution
Correct Option: C
Routine, well-structured decisions handled by SOPs are programmed (Simon).
Q 03
Bounded Rationality
Medium
"Satisficing" — choosing the first alternative that meets a good-enough threshold — was introduced by:
View solution
Correct Option: B
Simon coined *satisficing* (satisfy + suffice) within his bounded-rationality framework — the "Administrative Man" satisfices, the "Economic Man" optimises.
Q 04
Information States
Medium
A decision in which the outcomes are known but the probabilities of those outcomes are unknown is a decision under:
View solution
Correct Option: C
Uncertainty — outcomes known, probabilities not. Risk = both known. Certainty = single outcome. Ambiguity (Knight) = outcomes themselves unclear.
Q 05
Decision Criteria
Medium
A manager who picks the alternative whose worst outcome is least bad is using the:
View solution
Correct Option: B
Maximin (Wald) is the pessimist's rule — "maximise the minimum". Maximax = optimist; Hurwicz = weighted blend; Laplace = equal probabilities.
Q 06
EMV
Hard
Project X has 0.7 chance of ₹20 lakh profit and 0.3 chance of ₹10 lakh loss. Its Expected Monetary Value (EMV) is:
View solution
Correct Option: C
EMV = 0.7 × 20 + 0.3 × (−10) = 14 − 3 = ₹11 lakh.
Q 07
Bias
Medium
A manager continues to invest in a failing project because a lot has already been spent. This is the:
View solution
Correct Option: C
The sunk-cost fallacy — letting past, unrecoverable costs drive future decisions. Economically irrational; psychologically common.
Q 08
Kahneman
Medium
In Kahneman's "Thinking, Fast and Slow", System 1 thinking is:
View solution
Correct Option: B
Daniel Kahneman (Nobel 2002): System 1 = fast, intuitive, automatic; System 2 = slow, deliberate, analytical.
Q 09
Groupthink
Medium
The concept of "groupthink" — group cohesion suppressing dissent — was articulated by:
View solution
Correct Option: A
Irving Janis, *Victims of Groupthink* (1972). Asch ran conformity experiments; Milgram studied obedience; Lewin pioneered group dynamics.
Q 10
Brainstorming
Easy
The technique of free, uncritical idea generation in a group was popularised by:
View solution
Correct Option: A
Alex Osborn, advertising executive, in Applied Imagination (1953). Delbecq → NGT; Helmer → Delphi; de Bono → Six Thinking Hats / lateral thinking.
Q 11
Delphi
Medium
The Delphi technique is best described as:
View solution
Correct Option: B
Delphi (Helmer & Dalkey, RAND, 1959): iterative *anonymous* expert questionnaires with controlled feedback — no face-to-face contact.
Q 12
NGT
Hard
In the Nominal Group Technique (NGT), the first step is:
View solution
Correct Option: C
NGT (Delbecq & Van de Ven, 1968): silent individual writing → round-robin presentation → discussion → vote.
Q 13
Bias
Medium
A negotiator who is anchored on the first offer made by the other side is exhibiting which bias?
View solution
Correct Option: A
Anchoring — over-reliance on the first piece of information. Tversky & Kahneman (1974) experiment with the "wheel of fortune" anchor.
Q 14
Match models
Hard
Match the decision-making model with its author:
| (i) | Bounded rationality | (a) | Janis |
| (ii) | Eight steps of rational decision | (b) | Simon |
| (iii) | Groupthink | (c) | Vroom-Yetton-Jago |
| (iv) | Five decision styles by participation | (d) | Robbins |
View solution
Correct Option: A
Simon — bounded rationality; Robbins — 8-step rational model; Janis — groupthink; Vroom-Yetton-Jago — five decision styles.
Q 15
OR tools
Medium
The simplex method of linear programming was developed in 1947 by:
View solution
Correct Option: A
George Dantzig at the US Air Force in 1947. Kantorovich & Koopmans shared the 1975 Nobel in Economics for linear-programming applications.
Q 16
Game Theory
Medium
The seminal work *Theory of Games and Economic Behavior* (1944) is by:
View solution
Correct Option: B
John von Neumann and Oskar Morgenstern (1944) founded modern game theory. Nash extended it with Nash Equilibrium (1950).
Q 17
Vroom-Yetton
Medium
In the Vroom-Yetton-Jago model, "GII" denotes:
View solution
Correct Option: D
Vroom-Yetton-Jago five styles: AI · AII · CI · CII · GII = group joint / consensus decision.
Q 18
Knight
Hard
The classical distinction between *risk* (insurable, with known probabilities) and *uncertainty* (un-insurable) was made in 1921 by:
View solution
Correct Option: B
Frank Knight, *Risk, Uncertainty and Profit* (1921). Knight argued that *entrepreneurial profit* is the reward for bearing *uncertainty*, not insurable risk.
Q 19
Klein
Hard
Gary Klein's research on firefighters, paramedics and chess grandmasters established the concept of:
View solution
Correct Option: A
Recognition-Primed Decision (RPD) — Klein's *Sources of Power* (1998). Experienced decision-makers recognise familiar patterns and act without formal alternative comparison.
Q 20
Robbins steps
Medium
In Robbins's eight-step rational decision-making model, the step that immediately follows "Identify the problem" is:
View solution
Correct Option: B
Robbins's sequence: Problem → Criteria → Weights → Alternatives → Analyse → Select → Implement → Evaluate.
5.9.1 Advanced Format Questions
AR 1Assertion-ReasonHard
A: Bounded rationality (Simon) limits decisions to satisficing.
R: Cognitive limits prevent comprehensive evaluation of all alternatives.
View solution
Correct Option: A
AR 2Assertion-ReasonMedium
A: Programmed decisions follow established rules.
R: They are typically used for non-routine strategic situations.
View solution
Correct Option: C
Programmed = routine, structured; non-programmed = strategic.
S 1Statement-basedMedium
Decision tools — which are correct? (i) Decision tree handles sequential decisions. (ii) Payoff matrix handles uncertainty. (iii) Linear programming optimises objectives. (iv) Delphi is quantitative.
View solution
Correct Option: A
Delphi is qualitative expert-consensus.
S 2Statement-basedHard
Decision-making under: (i) Certainty — known outcomes. (ii) Risk — known probabilities. (iii) Uncertainty — unknown probabilities. (iv) Conflict — opposing parties.
View solution
Correct Option: A
5.10 Quick Recall
ImportantQuick recall
- Simon — “management = decision making”; introduced programmed vs non-programmed and bounded rationality + satisficing (Administrative Behavior, 1947). Nobel 1978.
- Three information states: Certainty · Risk (EMV, decision trees) · Uncertainty (criteria below). Knight (1921) added ambiguity.
- Five rules under uncertainty: Maximax (optimist) · Maximin/Wald (pessimist) · Minimax Regret (Savage) · Hurwicz (α-weighted) · Laplace (equal probabilities).
- EMV = Σ pᵢ × Vᵢ. Picked when probabilities are known and decision-maker is risk-neutral.
- Robbins’s 8 steps: Problem · Criteria · Weights · Alternatives · Analyse · Select · Implement · Evaluate (with feedback loop).
- Bounded rationality = limits of info, cognition, time → satisficing. Administrative Man vs Economic Man.
- Kahneman & Tversky — biases (anchoring, availability, confirmation, sunk-cost, framing, loss aversion, hindsight, representativeness). Thinking, Fast and Slow (2011): System 1 (fast/intuitive) · System 2 (slow/analytical). Kahneman Nobel 2002.
- Group techniques: Brainstorming (Osborn 1953) · NGT (Delbecq–Van de Ven 1968) · Delphi (Helmer–Dalkey 1959) · Devil’s Advocate (Mason–Mitroff).
- Groupthink (Janis 1972) — 8 symptoms; remedies: devil’s advocate, outside experts, second-chance meetings.
- Klein (1998) — recognition-primed intuitive decisions in experts.
- OR tools: LP/Simplex (Dantzig 1947) · Game theory (von Neumann–Morgenstern 1944) · Queueing (Erlang 1909) · EOQ (Harris 1913) · PERT/CPM (1957–58) · Monte Carlo (1940s) · Markov chains (1906).
- Vroom-Yetton-Jago five decision styles: AI · AII · CI · CII · GII.