Impact of information on decision-making

From CEOpedia | Management online
Jump to: navigation, search

The quantity and quality of the information affects the efficiency and rationality of decisions. Choosing appropriate criteria for the selection of options (making a decision) is one of the fundamental problems of decision theory. One of the first selection criteria was established by the mainstream quantitative approach (operations research) and is on the search for the optimal solution, best under given circumstances.

The decision making process can be described as a process of transformation of information. Therefore, when considering the decision managers must take into account the issues of information processes, or more broadly, information and analysis of decision-making. This approach leads to following interpretation of the decision:

  • Information is a kind of material for decision
  • Any decision is also information for subsequent decisions
  • The decision is information that causes action taken by subordinates or decisions of other managers.

Most of the information needed for managers is used to plan and control operations and to realization of their responsibility. Depending on the level in the hierarchy nature of the information needed by managers differs. Top management takes strategic decisions on major long-term perspective, and also formulate general objectives of the organization. At this level most useful information is obtained from the environment, and partly from inside information. Middle management makes tactical decisions and implements the policy set by the chief executives. They need internal and external information for both control and planning. Lower-level management (operational) mainly deals with current affairs, and therefore requires detailed inside information. Because the decision-making is a process of information processing, managers can be regarded as entities selecting and processing the information to make a decision.

Role of information in management

  • The information is necessary for the effective leadership, in particular, the control function
  • The quality of information affects the efficiency of decision making
  • Lack of information can lead to serious problems and prevent the success of the organization
  • IT tools should be used as supporting of the work of managers in organizations.

Information and decision criteria

H. Simon defines concept. of limited rationality, it occurs when the decision maker is seeking to achieve "satisfaction", and not "maximize" or "optimize". "Satisfaction" means the acceptance of satisfactory result, achieving "satisfactory" result ends the collection of information process, and leads directly to generate solutions. In a strict sense, the optimal solutions, can be calculated only for problems of a quantitative nature. They are related to the local extremes of functions describing the decision problem. In any other case, to use the term "optimal" is only a metaphor.

Rationality of decision

In theory and practice, the decision also uses the concept of a rational solution. Rationality is treated as a feature of conscious action involving the adjustment of the intended purpose, as well as the conditions for its implementation. There are two basic types of rationality - methodological and substantive rationality.

Action is rational if it is methodologically suited to the knowledge of fact, recognized as objective truth and therefore constituting the basis for the search for solutions for decision-making. In other words, we can say that the action is based on the subjective knowledge of reality.

Substantive rationality means that the operation is tailored to the objective truth, that is, in fact, the existing measures, the conditions and relationships that exist between them. In economics, the decision is rational if it leads to maximizing results in relation to the effort. In other terms, the economic rationality of the decision maker, involves striving to maximize the utility function of the chosen options.

All of these demands on the selection criteria are based on the assumption that the decision-making manager has the ability to assemble and process of all information related to the decision-making problem. Modern information systems allow for the collection of large amounts of data, but the real decision-making situations are more complex than even the most complex models. Therefore, decision makers rarely can follow demands for optimization, or even rationality. One can only speak of bounded rationality. The only options that can be sought in the decision making process are satisfactory solutions. Both of these concepts have been introduced to the theory and practice of decision by H. Simon [1991], for which he was awarded the 1978 Nobel Prize in economics.

See also:

References

  • McLeod, R., & Schell, G. (2001). Management Information Systems 8/e. Chapter-17" Marketing Information System" published in.
  • Newell, A., & Simon, H. A. (1972). Human problem solving (Vol. 104, No. 9). Englewood Cliffs, NJ: Prentice-Hall.
  • O'Brien, J., Marakas, G. M., Hills, T. M. G., & Lalit, M. R. (2006). Management information systems.
  • Simon, H. A. (1971). Designing organizations for an information-rich world. Computers, communication, and the public interest, 37, 40-41.
  • Simon, H. A. (1978). Information-processing theory of human problem solving. Handbook of learning and cognitive processes, 5, 271-295.

Author: Krzysztof Wozniak