Monday, November 26, 2007

How should decisions be made?

Lets begin by describing how individuals should behave in order to maximize or optimize a certain outcome. we call this the rational decision- making process.

The rational decision- making process

The optimizing decision maker is rational. that is he or she makes consistent value- maximizing choices within specified constraints. These choices are made following a six- step rational decision – making model. Moreover specific assumptions underlie this model.

The rational model

The six steps in the rational decision- making model are listed in the exhibit given below .

The model begins by defining the problem. as noted previously, a problem exists when there is a discrepancy between an existing and a desired state of affairs. if you calculate your monthly expenses and find you re spending $50 more than you allocate in your budget, you have defined the problem. many poor decisions can be traced to the decision maker overlooking a problem or defining the wrong problem.

Once a decision maker has defined the problem, he or she needs to identify the decision criteria that will be important in solving the problem. in this step, the decision maker determines what is relevant in making the decision. this step brings the decision makers interest, values, and similar personal preference into the process. identifying criteria is important because what one person thinks is relevant another person may not. also keep in mind that any factors not identified in this step are considered irrelevant to the decision maker.

The criteria identified are rarely all equal in importance. so the third step requires the decision maker to weight the previously identified criteria in order to give them the correct priority in the decision.

The fourth step requires the decision maker to generate possible alternatives that could succeed in resolving the problem. no attempt is made in this step to appraise these alternatives, only to list them.

Once the alternatives have been generated, the decision maker must critically analyze and evaluate each one. this is done by rating each alternative on each criterion.
the strength and weakness of each alternative become evident as they are compared with the criteria and weights established in the second and third steps.

The final step in this model requires computing the optimal decision .This is done by evaluating each alternative against the weighted criteria and selecting the alternative with the highest total score.

Assumption of the model

The rational decision-making model we just described contains a number of assumptions. let briefly online those assumptions.

1.Problem clarity. The problem is clear and unambiguous. the decision maker is assumed to have complete information regarding the decision situation.

2.Known Option. It is assumed the decision maker can identify all the relevant criteria and can list all the viable alternatives. furthermore, the decision maker is aware of all the possible consequences of each alternative.

3Clear preference. Rationality assumes that the criteria and alternative can be ranked and weighted to reflected their importance.

4Constant preference. Its assumed that the specific decision criteria are constant and that the weights assigned to them are stable over time.

5No time or cost constraints. The rational decision maker can obtained full information about criteria and alternative because its assumed that there are no time or cost constraints.

6Maximum payoff. The rational decision maker will choose the alternative that yields the highest perceived value.

Improving creativity in decision making

The rational decision maker needs creativity, that is the ability to produce novel and useful ideas. These are ideas that are different from what’s been done before but that are also appropriate to the problem or opportunity presented. why is creativity important to decision making? it allows the decision maker to more fully appraise and understand the problem, including seeing problem other cant see. however creativity’s most obvious value is in helping the decision maker identify all viable alternatives.

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