In our habitual life, we make hundreds of decisions. Decisions could be as insignificant selection of clothes and watching TV channels as well as the choice of workplace, university or college at which to pursue an education. Due to the psychological factors, people often spend a disproportionate amount of attention to some decisions, ignoring the value of others. Many decisions are taken without proper systematic deliberation (Hammond, Keeney & Raiffa, 2002, p. 109). However, decision-making in management is a more structured process than in private life.
Management decision-making is the choice of alternatives, implemented by the leader as part of his official authority, competence, and is aimed at achieving the goals of the organization. There are four principles of individual decision-making:
- People facing trade-offs;
- Analysis of what people give up to get;
- Analysis of marginal benefits and costs;
- Review of incentives (Bazerman & Moore, 2008, p.147).
To understand better the nature of decision-making, let us examine the following example. In the next summer, it is approaching X City 100-years anniversary. City council decided to commemorate this date and, at the same time, to ensure the replenishment of the city budget.
They need to decide where to celebrate a holiday: out-of-doors or inside of the City Theater. Financial result of the holiday depends on the weather, which will be at this day. In good sunny weather the whole city will stay out-of-doors, festive event can gather a lot of participants, and the city budget can be replenished with a considerable sum of money. However, what happens if it rains on that day. The patriots of the city still stay out-of-doors, holiday stages, swings, and merry-go-rounds will not be empty, but the number of visitors celebrating under the umbrellas will be much less than in sunny weather.
The second variant is to celebrate in the City Theater. It is clear, that it is a winner in case of rain as to celebrate under the roof is obviously better than under the umbrellas. However, in the sunny weather, many residents of the city prefer to enjoy the sun, walk, or work in gardens but not to celebrate inside the building.
So, each of the two solutions has advantages and disadvantages. In order to make a decision we need the following quantitative information:
- What is the probability of sunny and/or rainy weather in the festival day;
- What are the financial results of the celebration under various combinations of the weather and the venue? There are four combinations: 1) sunny weather – out-of-doors; 2) rainy weather – under umbrellas; 3) in the theater when it is sunny; 4) and in the theater when it is raining.
The first question has to be answered by the meteorology centre, the second one by a group which consists of festival directors, accountants, and representatives of the trade companies. Before the next meeting, the city council should get the quantitative data.
When the data were obtained, the representatives of community start their discussion. One of the officials Mr. Brown says that it is necessary to get as much as possible in the worst case. The worst case is raining weather. The revenues in comparison with solar weather are reduced at any case no matter what decision will be taken. Mr. Brown continuous that city budget can earn 200 thousand in the rainy day out-of-doors, but having the celebration in the theater it can earn 500 thousand. Therefore, it is necessary to celebrate the city anniversary in the theater because they might earn at least 500 thousand.
Other representative Mr. Smith declares that Mr. Brown should not be so pessimistic. Majority of summer days are sunny, and the rain is only exception. Mr. Smith says that they should be optimistic and assumes that everything will be as they want that is it will be sunny day, they will celebrate out-of-doors and get a million to the city budget.
However, the third representative Mr. Douglas, Professor of Mathematics of the local university, an expert in probability theory, affirms that pessimist Mr. Brown and optimistic Mr. Smith discusses extreme case such as the worst and the best situation. It needs to approach the issue from all sides, and take into account both possibilities. Mr. Douglas says considering the first variant, the out-of-doors celebration, they get 1,000 thousand in 60% of cases (sunny weather), and 200 thousand in 40% of cases (rainy weather), then at the average 1000 x 0.6 + 200 x 0.4 = 600 + 80 = 680 thousand. For the second version, the similar calculation is 750 x 0.6 + 500 x 0.4 = 450 + 200 = 650 thousand. Therefore, it is necessary to celebrate the holiday out-of-doors.
At last, economist Mr. Green comes to the debate. He says that Mr. Douglas reasons as if they will be celebrating the City 100-years anniversary each year. However, they have to hold only one holiday, and it must be done in such way that nobody would regret about missed opportunities. If they decide to hold celebrations in the open air but it rains, they get 200 thousand instead of 500 thousand, that is the loss of profit is 500 – 200 = 300 thousand. During the celebration in the theater when the weather is solar, the loss of profits will be 1000 – 750 = 250 thousand, that is it will be lower. So, they should celebrate in the theater.
Let’s summarize the result. So far, four representatives made presentations; each gave compelling arguments in favor of their solution. In this case, the marginal benefits associated with both decisions would be the ticket price that depending on the different types of attractions. The marginal costs associated with both decisions would be number of rented holiday stages, swings, and merry-go-rounds (Weygandt, Kimmel, & Kieso, 2007, p. 316).
Decision-making is a hard and responsible work, the results of which affect the development of any public or private organization in the sequel. Decision developing is based on an analysis of the situation, in the process of which, individual should define the problem areas. In deciding, the individual should take into account the judgments of the value, which includes consideration of economic factors, technical suitability as well as social and purely human factors. To make right decision means to choose the one from a number of possible alternatives, in which the total value will be optimized with a glance of all these various factors.
- Bazerman, M. H. & Moore. D. A. (2008). Judgment in Managerial Decision Making (7th edition). New York: Wiley.
- Hammond, J. S., Keeney, R. L. & Raiffa, H. (2002). Smart Choices: A Practical Guide to Making Better Decisions. New York: Broadway.
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2007). Managerial Accounting: Tools for Business Decision Making. New York: Wiley.