MGT602 Decision-Making Models Assessment 3 Answer
In each and every phase of life, an individual or an entity needs to take decisions almost for everything. The decision-making process is important because a situation may present multiple alternatives or choices with each having its own set of pros and cons. Further, the chosen alternative may vary from one individual to another. This is because each individual is different and has different situations, perspective and requirements. Hence, the alternatives presented in front of an individual will have different set of pros and cons as compared to those for another individual. Once an alternative is selected and executed, the output, either negative or positive, will be dependent on the selection made. This explains the importance of the entire decision-making process and how a proper process for the same can guide an individual or an entity in the correct direction so as to maximise the benefits drawn from the selected course of action. Hence, proper decision-making process is important in every aspect of life so as to ensure that an efficient and optimum course of action has been selected.
The following report will discuss various models of decision-making process and also connect the available literature with the process of decision making that I follow in my role as
Models of Decision Making used Frequently
Broadly, there are two models of decision-making process which can be described as follows:
- Rational Decision-making Model: Perhaps the most relevant decision-making model, rational decision making refers to the human being’s reasoning power and application of the same to the basic problems of economics, that is scarcity of resources and allocation of resources. Hence, the economics and many theories of economics, including decision theory indicate the usage and application of the rational behaviour of human beings whereby they take decisions based on a rational process. Further, this holds true in every walk of life, be it personal or professional. The following are the steps that are typically followed in order to arrive at a rational decision. Further, the stricter the adherence to following steps, the better is the level of rationality in the process (Simon, 1978):
- Step 1: Identify the Problem: The first step in the rational process is to identify the core problem that needs a decision to be made. Although it seems intuitive, sometimes, the core problem itself is vague and not identified properly which leads to a sub optimum decision-making process. For example, when I started working and earning, I needed to commute daily to office but I did not have a vehicle. Hence, I started saving for a car and also looked for a car in my budget. However, the core problem was not buying a car but to find a reliable way of commuting to and from office.
- Step 2: Establish Decision Criteria: Once a problem has been identified clearly, the next step is to determine what factors need to be considered in the process of decision making. Again, it may seem simplistic but is very important and this is the step hat leads to different rational decisions by different people even when the core problem is same. This is because the factors that may be important criterion for one human being may not be the same for another. For example, in above example, I was not married, rather a bachelor. Also, I had just started working so I was on a shoestring budget. Hence, the important criteria were saving money and comfort while commuting. Also, reliability in commuting as well as safety was important criteria.
- Step 3: Weigh Decision Criteria: In the above step, a person will identify different factors that will determine the optimal solution to the identified core problem. However, not all the factors are equally important in the decision- making process. While some of the factors may be such that they are so important that they are non-negotiable, some of the other factors may be such that they are negotiable to certain extent such that even if they are not fulfilled completely, the decision will still be optimal. For example, when I decided to find a way to commute to office, out of the identified factors for optimal decision-making, the most important factors were that the selected option must be reliable and safe. Then the next important factor was that it should be in my budget. After that the least weightage was for comfort or luxury in the selected alternative.
- Step 4: Generate Alternatives: Once the core problem has been identified and the factors involved in decision making have been weighed as per their importance for the individual, the next step is to search for available alternatives. While some of the alternatives may be reasonably simple or common, some may need brainstorming, researching and gathering more information. Hence, in the case of above example, the alternatives that I thought of included public transportation, carpooling, hiring a cab, or buying a new car and buying a second-hand car.
- Step 5: Evaluate Alternatives: Once the alternatives have been generated, the next obvious step is to evaluate each of the alternatives on basis of weighed decision making criterion. In other words, a list of pros and cons for each alternative must be evaluated based on the weighed factors determined in previous steps. Hence, continuing the above example, while public transportation is cheap and reasonably reliable, it is not comfortable and may even pose safety issues in some areas. Carpooling is a little more comfortable but might be expensive for doing daily and also unreliable as some of the co-passengers may be late, absent etc. Hiring a cab was again less reliable and less safe and may even be more expensive. Buying a car, whether new or second-hand was comfortable, safe, reliable but very expensive and may be out of my budget as I just started working. It will also need repair and maintenance on periodic basis. To further evaluate the decision, I used the gathered information to arrive at exact monetary costs for each alternative.
- Step 6: Select the Best Alternative: This is the final step whereby the evaluated alternatives will be compared so as to arrive at the right combination for an individual. The final selected alternative may even be a combination of more than one alternative or even a new creative alternative that may have come up while evaluation or gathering information. For example, in above scenario, while buying a car seemed improbable at this stage due to budget constraint, I did want to get a car. However, I decided finally to save for a car and in the same time, I continued to commute through a combination of public transportation and hiring a cab, on day-to-day basis.
- Natural Decision Making: While the rational model of decision-making seems to be very logical, it is time consuming and takes a lot of effort. Particularly, in gathering information regarding the problem, researching alternatives etc. Some of the decisions in real life may be such that they may not permit the luxury of time for doing the research. In such cases, the individual usually takes instinctive or natural decisions as per the reactions. The individual will still try to be reasonable and rational but the time taken to decide is much less and hence, the decision may not be well-researched or thought-out. The individual will rely on the intuition, prior knowledge, experience and reasoning power to take such decisions. However, such decisions are subject to a strong sense of bias and prejudice. Further, the decisions may be based on information which may not be accurate or relevant for the problem at hand. The alternatives evaluated may not be comprehensive as they are limited to the knowledge of the decision maker at that instant. At the same time, such decisions can be taken on basis of intuitive or natural decision making where the value involved is low or risk is low, time available is limited or taking time to react will reduce the benefit drawn considerably (Nemeth & Klein, 2011).
NIC Asia Bank
NIC Asia Bank (NEPSE: NICA), the largest commercial bank of Nepal, was founded in 1998. The bank merged with the bank of Asia in 2013. The bank is reported to have more than 300 branches and covers most of Nepal.
Like any other bank, NIC Asia Bank also has an organizational structure where there is a Board of Members, that guides the decision-making process. Further, the CEO of the bank provides operational guidance so as to achieve the organizational objectives.
Since the banks are subject to high degree of compliance and regulatory rules, it is natural to set the guides for various processes in a bank. For example, the treasury desk of a bank will operate so as to take benefit from the current situation in the international markets. Hence, time is of essence when making trading and investment decisions at the treasury desk. However, this being said, the risk and value involved is very high. The final objective is to maximise attainment of organizational goals. For this purpose, the top members of the organization provide a guide to be followed by various employees working at the treasury desk. While taking decisions, the guide has to be followed bye ach of them so as to ensure consistent and optimum decision making. In this case, the top members have high degree of experience and they discuss amongst themselves regarding prevailing situations and arrive at the guidance through a rational decision-making process. Once the guidance has been provided to the employees, they are free to follow the natural model of decision making so as to capitalise on various opportunities that may have a time constraint. They can easily use the already determined guide and take decisions quickly. Additionally, sometimes the experienced treasury employees may take an action intuitively on natural instinct when they see a beneficial proposition. This can be done with the guidance and approval of the top members.
Similarly, as and when the bank needs to invest in an opportunity, it may ask the employees to draw out investment proposal for various available opportunities. Then the Board will discuss each of them so as to take a rational decision regarding appropriation of available funds that are limited in nature. Hence, through a rational decision-making process, the Board will arrive at the decision as to which investment opportunity is suitable for the bank.
Typically, a bank will sue various decision making tools and strategies so as to aid the decision making process. Some of them are:
- SWOT diagram (strength, weakness, opportunities and threats matrix): Typically used to asses the positioning of an organization. It can be NIC Asia bank itself or even the competitors. It helps to analyse how the bank is placed with respect to peers.
- Decision making diagram: Typically used to present the situation visually for easier and quicker understanding. It presents the decision tree diagram so as to assess what course of action will lead to what output.
- Break-even Analysis: Typically used when entering a new market or segment so as to assess the profitability. However, the technique needs predicted numbers of sales, costs etc. The analysis helps to determine the sales target that need to be achieved so as to recover all the costs.
Hence, it was seen that in real life situations, the most frequently used decision-making models are rational decision making model and natural decision-making model. Each has its pros and cons. While the natural decision-making model is most useful in situations which require quick action, rational decision-making model is suitable for high value decisions that involve huge value and high risk. However, a rational decision-making process needs time and resources so as to follow the various steps as discussed above. AT the same time, the natural decision-making is based on experience, instinct etc.
It was also seen that NIC Asia Bank has an organizational structure that promotes rational decision making. In order to take benefit of the investment opportunities that require quick decision making, the bank relies on expertise of the Board so as to guide the other employees in a timely manner. The Board, in turn, takes decisions through a combination of their experience and rational decision-making model.