MBA Assignments Samples

THEORY OF
DECISION MAKING
PROCESS

Studying the decision-making process is today one of the
most popular research areas in management and
management in general. Since the process of making
decisions of an interdisciplinary character, theoretical
studies in this field have been dispersed through several
scientific disciplines, such as mathematics, statistics,
operational research economics, psychology and sociology.
What characterizes the study and development of these
disciplines is the conflict of outcome. In addition, two
theoretical directions were drawn from the point of view of
decision-making. One of them is marked as rational,
normative, or "closed", and is aimed at regulating rational
decision-making procedures. The other is marked as a
behaviorist, descriptive or "open", interested in ways people
really make decisions, whether that is rational or not.
Although there is a lot of variation within these two
approaches, we can distinguish two theories that are their
best representatives. These are the firm's theory and
behavioral theory. The characteristic of normative decision
theory is to define a process by which an ideally rational,
super intelligent individual will make decisions. They are
completely ignored by the problems faced by an individual
when making decisions. Since the assumption of this theory
is the ability to identify all possible options, this is the basic
characteristic of this decision-making system closeness,
deterministic decision-making, and a rational decisionmaking
approach. Decisions that have been made in this
way are routine decisions. Deciding on these characteristics
can be performed with the help of relevant information and
software, or with the help of a particular mathematical
model. The validity of a decision is evaluated on the basis
of the validity of the assumptions of the variable sizes in
the model or of their reflection of the real world. In order
for the mathematical model to faithfully reflect the nature
of the problem, all coefficients, parameters, target function
and system constraints need to be presented realistically.
The main reasons for accepting the normative decision
theory are: a) It has been shown that individuals are
motivated to be effective in achieving their goals, especially
when they can learn from their own experience.

Therefore, it is logical to describe the process of decision
making as a process of maximization. b) Competition favors
the rational behavior of individuals and organizations.
Optimal decisions increase the chances of survival in a
competitive environment, and only a small number of
individuals realize rationality in the entire market. The
firm's theory as a representative of the normative decision
theory examines how the firm can achieve the maximum
net income at given prices and a certain function of
production, assuming that the firm operates in the market
of perfect competition. Profit maximization is achieved by
optimum mix of input and output. The later development of
the firm's theory included the imperfect state of the market
(monopoly and oligopoly) but with the preservation of basic
theoretical settings. Critics of the firm's theory relied
primarily on the premise on the perfect information of the
decision maker. That is, the decision maker knows all the
alternatives when solving a particular problem, but also the
outcomes of each of the options. Theoreticians consider
that the decision maker, considering the level of knowledge
of the situation in which he finds, decides in the conditions
of uncertainty, risk and certainty, and the theory of the firm
presupposes that he always decides in the conditions of
certainty! Another criticism is the determination of the
function of the company's target. It is unrealistic to take
the maximum profit for the target function. Before we
could say there is a set of goals. Descriptive theory
emerged as an attempt to answer many questions related to
the character of real decision-making situations. Unlike
normative theory where the best way to make decisions is
prescribed, the descriptive theory is concerned with how
the decision-making process takes place, how the decision
maker behaves during each phase, collecting facts, learning
and changing perceptions. The basic characteristics of the
descriptive theory are that it is highly empirical, that it
belongs to social sciences that study individual behavior
without attempting to evaluate, alter or influence it. The
decision-making process emphasizes the impact of
individuals, their cultures, personal traits, perceptions and
roles in the organization as determinants of their personal
behavior as well as their role as members of a particular
group.

Individuals are interconnected in formal and informal
groups, depending on the position they occupy in the
organizational structure of the enterprise, as well as
personal affinities, so belonging to a particular group is
another basis of their behavior in the decision-making
process. The behavioral behavior of a company, as a
representative of the behavioral theoretical direction of the
decision-making process, stems from the fact that the
company is faced with a series of constraints such as
uncertainty of the environment and insufficient information
processing capacity. According to this theory, an enterprise
is an adaptively rational system with the following
characteristics: a) There are numerous system states and
the enterprise at any given time prefers one state to
another; b) There are external sources of interference that
cannot be controlled; c) There are numerous internal
decision-making variables, which are managed in
accordance with decision-making rules; d) The combination
of external interference and decision variables changes the
state of the system. So if a state of the system is defined,
then on the basis of external interference and decision we
can define the new state of the system; e) It is more likely
to use the decision-making rules that have led to the
preference in the past from the decision-making rules that
have resulted in unwanted state. Decision-making takes
place by solving a number of problems, with three
principles being respected: 1. Avoiding uncertainty; 2.
Maintaining the rules of decision making and 3. Using
simple rules. Descriptive decision making theory, although
it provides a major contribution to the study of the
decision-making process, has numerous limitations. The
limitations are primarily related to the fact that this theory
focuses too much attention on what is happening in the
decision-making reality, and not enough about how this
process should take place. It is difficult to define a goal
that would reflect the multivariate nature of company
goals. There is also the problem of insufficient attention
needed to define an appropriate information gathering
system. In recent years, research efforts have focused on
overcoming the differences between normative and
descriptive decision making theory and establishing a

unique theory for studying the decision-making process.
The new theoretical direction in this area is called a
perspective decision making theory. The prospective
decision-making theory is focused on seeking answers to
the question of what one needs to do to make a better
choice. It explores the ways in which an individual chooses
to make decisions, but not as an ideal, mythical way of
thinking, but rather adapted to real people. The difference
between normative, descriptive and perspective can be
explained also through the criterion of assessing their
validity. Normative models are evaluated based on
theoretical adequacy. Descriptive models are evaluated
from the standpoint of empirical validity. Perspective
models are evaluated from the point of view of ability to
really help in making quality decisions.
REFERENCES
Simon, H. A. (1979). Rational decision making in business
organizations, American Economic Review, 69(4), 493–513.
Simon, H. A. (1977). The new science of management
decision, 2nd Edition, Englewood Cliffs (NJ): Prentice Hall.
Kreitner, R. & Kinicki, A. (2001). Organizational behavior, 5th
Edition, Burr Ridge (IL): Irwin McGraw Hill.
Courtney, J. F. (2001). Decision-making and knowledge
management in inquiring organizations: Toward a new
decision-making paradigm for DSS, Decision Support
Systems, 31, 17–38.