The main approaches to decision making are as follows:
1. Classical Approach To Decision Making
Classical approach is also known as prescriptive, rational or normative model. It specifies how decision should be made to achieve the desired outcome. Under classical approach, decisions are made rationally and directed toward a single and stable goal. It is applied in certainty condition which the decision maker has full information relating to the problem and also knows all the alternative solutions. It is an ideal way in making decision. It is rational in the sense that it is scientific, systematic and step-by-step process. This model assumes the manager as a rational economic man who makes decisions to meet the economic interest of the organization. Classical approach is based on the following assumptions:
- The decision maker has clear and well-defined goal to be achieved.
- All the problems are precisely defined.
- All alternative courses of action and their potential consequences are known.
- The decision maker can rank the entire alternatives on the basis of their preferred consequences.
- The decision maker can select the alternative that maximizes outcome.
The classical model is supposed to be idealistic and rational but it is rarely found in practice. Therefore, this approach has many criticisms. It is known by normative theory rather than descriptive theory. Generally, managers operate under the condition of risk and uncertainty rather than the certainty condition. in many situations, complete goal stability can never be realized due to continuous environmental changes. It is applied only in the close system and not practicable in real life situations where environment is changing rapidly.
2. Behavioral Approach To Decision Making
Behavioral approach is also known as descriptive approach and administrative model. This theory is proposed by Herbert A Simon, a well known economist, in which he attempts to explain how decisions are made in real life situations. Managers have limited and simplified view of problems because they do not have full information about the problems, do not possess knowledge of all possible alternative solutions, do not have the ability to process environmental and technological information and do not have sufficient time and resources to conduct an exhaustive search for alternative solutions to the problems. Therefore, this model is based on two concepts: bounded rationality and satisfying.
Bounded Rationality: Simon believed that managers are bound by limited mental capacity and emotion as well as by environmental factors over which they have no control. Real life challenges, time and resource limitations, political pressure and other internal and external factors force the manager to work under the condition of bounded rationality. Therefore, the manager cannot take perfectly rational decision.
Satisfying: It is the selection of a course of action whose consequences are good enough. Bounded rationality forces managers to accept decisions that are only good enough, rather than ideal. Such managerial decisions become rational but within the limits of managers' ability and availability of information. Managers make decisions based on alternatives that are satisfactory. The examples of satisfying decisions are fair price, reasonable profit, adequate market share, proper quality products etc.
3. Implicit Favorite Model/Retrospective Approach To Decision Making
This approach is applicable in non-programmed decisions. In this approach, the manager first choose an alternative solution to the problem and highlights its strength, and compare with other alternatives and then identifies its drawbacks. This is done with a view to proving that the alternative selected by him is the best solution to the given problem. However, another alternative which seems to be similar to the implicit favorite is short listed and is taken as second confirmation candidate. This approach can be observed in the purchase of various favorite items in which a customer gives arguments in favor of his choice on the basis of norms such as price, quality, appearance, easily availability, after-sales service etc. to reject other items of same utility.
