Decision Making


Decision making generally consists of some kind of individually or institutionally established process to select one alternative from a list of alternatives. Some decisions occur regularly whereas other decisions occur at irregular and unplanned times. Additionally, some decisions are made in environments where the majority, if not all, of factors are known whereas other times the majority of factors are unknown. The classical model of decision making operates under the premises that decision makers have access to complete and perfect information, operate in an environment where no uncertainty exists, can rationally and logically evaluate all possible outcomes and consequences thereby identifying the most effective choice. Below is a grid outlining steps within the rational decision making process as described above.

Step

Detail

Example

1

Recognizing and defining the decision situation

Some stimulus indicates that a decision must be made. The stimulus may be positive or negative

A plant manager sees that employee turnover has increased by 5 percent

2

Identifying alternatives

Both obvious and creative alternatives are desired. In general, the more important the decision, the more alternatives should be generated

The plant manager can increase wages, increase benefits, or change hiring standards

3

Evaluating alternatives

Each alternative is evaluated to determine its feasibility, its satisfactoriness, and its consequences

Increasing benefits may not be feasible. Increasing wages and changing hiring standards may satisfy all conditions

4

Selecting the best alternative

Consider all situational factors and choose the alternative that best fits the manager’s situation

Changing hiring standards will take an extended period of time to cut turnover, so increase wages

5

Implementing the chosen alternative

The chosen alternative is implemented into the organizational system

The plant manager may need permission from corporate headquarters. The human resource department establishes a new wage structure

6

Following up and evaluating the results

At some time in the future, the manager should ascertain the extent to which the alternative chosen in step 4 and implemented in step 5 has worked

The plant manager notes that, six months later, turnover dropped to its previous level

Griffin (2013). Management. Mason, OH: South-Western Cengage Learning.

While the process described above would be ideal decision makers do not generally enjoy the luxury of being removed from uncertainty, emotion, and bias when it comes to fielding ideas, arguments and alternatives in the decision making process. A more realistic decision making process can be described as a manager using the information available which is often incomplete and imperfect, the manager being constrained by certain levels of rationality, and the manager’s tendency to select an alternative that meets a minimum amount of criteria for the decision at hand and not necessary continue to look for a more robust and optimal outcome. Generally speaking, here are some high-level tips provided in a short, online article from the Harvard Business Review blog that provides some decision making tips.

Timing

Often times we find ourselves thrust into a decision because of some kind of stimulus as mentioned previously. At such moments it may be helpful to ask “Is a decision needed right this moment?” or “Will I be okay to think this over and revisit the situation later?” In our culture we tend to default to immediacy and want to solve, or fix, something the moment it comes to our attention there may be an issue. Or, in other words, we don’t like to leave decisions lying around left undecided! A good rule of thumb is to begin the decision making process by asking “Why now?” If the matter at hand truly requires action then by all means proceed. But if the situation does not have an element of immediacy you can approach the situation free from impulse. Often times a rushed and impulsive decision lacks input from reason and will often lead to a bad choice. To coin an old phrase: There’s a time and a place for everything. This may be the place to make the decision but not necessarily right now. Be sure to ask “Why now?” before making a decision.

Heuristics and Biases

We all have experiences both personal and historical and certain associations with emotions to those experiences. These associations frame the way in which we view the world and form judgments and make decisions. It is very helpful to be aware of our internal biases which may hinder good decision making. These associations are often referred to heuristics and biases. Heuristics are the mental shortcuts that we all have made based on our experiences to reduce the amount of time we spend on cognitive exercises. However, in making those mental shortcuts we may have falsely concluded a cause and effect-type relationship in certain situations which are referred to as biases. Heuristics and biases  tend to negatively impact our ability to make good decisions. Here’s a list of common heuristics and biases to become familiar with. Ask yourself if you recognize any of these in your thought structure or in your decision making process.

Heuristics usually give reasonably good results quickly & easily but can fail unpredictably. Heuristics can also fail in predictable ways; these are the biases or “hidden traps.”

Name

Heuristic

Bias

Framing Viewing a need in the real world as a “problem” you can work on solving Mistaking your view of the problem for the real need.
Anchoring & Adjustment Assuming a starting point and thinking about adjustments from there Being overly dominated by the assumed starting point
Status Quo “Business as Usual”
“If it ain’t broke, don’t fix it”
Bias against anything new
Sunk Cost Treating the resources already spent on one alternative as an estimate of the resources you’ll have to spend all over again to start a new one. Treating the resources already spent on one alternative as a real cost of abandoning it for something better
Confirmation If you’re leaning towards an action, see if you can prove it’s a good one. If you only look for supporting evidence, you could miss a fatal flaw
Cognitive Overconfidence Decisiveness
Refusal to be haunted by doubt
Self delusion
Prudent Estimation “Conservative Estimates” Missed opportunities
Especially dangerous in group problem solving
Risk Aversion “A bird in the hand is worth two in the bush”
Avoid probability of ruin
Missed opportunities
Risk aversion is attractive for individual but bad for the economy as a whole
Selective Perception Knowing what you’re looking for None so blind as those who will not see
Recallability
(“Availability”)
If an idea doesn’t fit in with the obvious data, it’s surely suspect Non-obvious things can be most important, or even most common.
Guessing at patterns Quickly spotting the trend or the big picture “Outguessing randomness” — seeing patterns that don’t exist
Representativeness
Ativeness
“If it looks like a duck and walks like a duck and quacks like a duck” Ignoring the base rate can lead to serious preventable errors
Most likely scenario Avoids wasting time on possibilities that probably won’t happen Rare events can be the most important
Optimism Go for the gold! Chasing after dreams, ignoring risks
Pessimism Avoid unpleasant surprises missed opportunities

Retrieved from: http://www2.gsu.edu/~dscthw/x130/Heuristics-biases.html

Here’s another table which provides suggestions for taming individual heuristics and biases.

Framing Gains versus losses. Reference points and wealth effects Don’t automatically accept initial framing. Strive for objective, neutral framing. Would a different frame change your thinking? Challenge other people’s framings
Anchoring and Adjustment Is population of Mexico >35M or <35M?
Insufficient adjustments. Anchoring of subjective probability distributions. Conjunctive & disjunctive events
Use multiple perspectives. Think first, ask questions later.     Consult diverse sources. Don’t anchor your advisers. Be especially wary of anchors in negotiations
Status Quo
(“Business as Usual”)
Sins of omission, sins of commission. Effect of number of alternative Maybe status quo really is best. Remind yourself of your objectives. Look for alternatives. Evaluate status quo as if it weren’t. Don’t exaggerate switching costs. Time changes things. Avoid the “donkey between two bales of hay” trap
Sunk Cost “Throwing good money after bad” Listen to people not involved in original decision. Know thyself (Socrates). Reassign responsibility. Reward good decision making, not lucky results
Confirmation “If A then B; .B; therefore A”
Jumping to conclusions. “Accept” null hypothesis vs. “fail to reject”
Examine all evidence with equal rigor. Use a Devil’s Advocate. Know thyself. Don’t ask leading questions
Overconfidence Illusion of control Triple estimate: First optimistic, then likely, and last pessimistic. Truth in labeling
Prudence
(The flip side of overconfidence)
“Conservative estimates”
Recallability
(“Availability”)
Biases due to the retrievability of instances. Biases due to the effectiveness of a search set. Biases of imaginability. Illusory correlation
concreteness
Look for objective statistics: Do the numbers!
Ignoring base rate
(“Representativeness”)
Insensitivity to prior probability of outcomes. Insensitivity to sample size. Misperceptions of chance. Expectation of local representativeness of sequences. Gambler’s fallacy. Law of small numbers. Regression to the mean. Conjunction fallacy Bayes Theorem: Do the math
Outguessing Randomness Hindsight biases. Insensitivity to predictability. Misconceptions of regression. The illusion of validity (overconfidence) Confidence Intervals & Hypothesis Tests: Do the math!
Selective Perception Effect of role or expertise. “Editing” of memory. Leveling or flattening. Sharpening. Rationalization.. Heterogeneous Groups:
The power of diversity

Retrieved from: http://sofia.whalen3.org/heuristics.html

Now with some background in heuristics and biases here’s a link you can follow to take a quick online quiz. How did you score? Do you understand some of the basic mental flaws and traps we create for ourselves?

Emotions

Let’s talk about emotions. We all have them and whether we like to admit it or not our emotions usually cloud the way we think and act. When it comes to decision making emotions aren’t good or bad. They just are. We can’t stop ourselves from having emotions so the best thing to do is to acknowledge them. Emotions are a fact of life and we win by acknowledging them, not by denying them, and especially not by condemning them, or yourself, for their existence. So own up! “I’m angry! Now, why am I angry? What do I want to do about the cause of my anger?” Before making a decision ask yourself at least this one question: “How do I feel?” By start with a framework you can know what emotion you’re dealing with and it won’t dictate the decision making path.

  • “Am I sad?” Am I immobile, color the world more negative, pessimistic?
  • “Am I mad?” Am I overreacting? I should wait before making a decision. Acting on rage & frenzy generally has harmful, destructive, and negative outcomes.
  • “Am I glad?” Do I tend to paint the world overly optimistic, rosy, or discount potential downsides?
  • “Am I afraid/scared?” Am I under reacting? Do I feel paralyzed by fear or feeling risk averse?

Awareness about how we feel is and of itself a tremendous victory and brings clarity into our individual personal decision making processes. Once we’ve reached a setting of awareness, understanding and control of our emotions we’re able to remove emotions from the decision making process. Godfrey (2009) lists two overall approaches to decision making listing two main roles: Advocacy and Inquiry. When emotions plays a predominant part in the participants decision making process that individual will play the role of an advocate (not objective). Conversely, if emotions are acknowledged and under control the participant’s decision making process will be more like that of an inquiry (objective)

Self-test

If you’ve got a pretty good handle on these you can also take an online quiz about your overall decision making ability. How good are you?

By Michael J. Albright

Organizational Plans


Managers use three major types of planning to accomplish corresponding organizational goals. Each one is a layer supporting the one above and as such, managers at multiple levels, must work together to ensure that each plan works in harmony to support the others.

Strategic

Strategic plans are geared toward achieving the strategic, or high level, goals for the organization. The following video gives an overview of the strategic planning process.

Do you want to know where your organization currently stands compared to high-growth companies? The following website is geared toward business owners with more than 5 employees and their department managers. It will give a red, amber, or green assessment in seven different categories. A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is one tool that can be used to identify the internal and external factors that influence and impact your organization. The following video will show you how to perform an effective SWOT analysis for your organization.

Do you want a template to help you lay out your own strategic business plan? This document will do just that.

Tactical

Tactical plans are developed to address specific areas of the strategic plan. Mid-level managers must realize that their tactical plans do not stand independently, but must be coordinated with other tactical plans of the organization. Are you confused between strategic and tactical plans? The following video will help you decide if you are struggling with strategic planning or tactical planning.

Is your business struggling with a strategy problem or is it tactical?

Now that you know if you need to focus on tactical planning or strategic planning the following video will give you 5 key insights to effective planning.

Do you need help actually developing your tactical business plan? If so this website should help, giving you a template and 5 simple steps to creating your own plan.

Operational

Operational plans are developed to address specific areas of the tactical plan. Lower level managers develop very narrowly focused plans that fall within two categories, single-use plans, and standing plans. Single-use plans are just as they sound, developed to achieve a specific goal that is nonrecurring. These are accomplished using programs and projects. Standing plans such as policies, standing operating procedures (SOP), and rules and regulations are plans developed for situations of an ongoing nature. The following video will show you how to develop an operations plan for your business.

Do you need help creating an operating plan? This tool can help.

By Kevin Waldroup 

Organizational Goals


Why should your organization set goals? To start, they get everyone in your organization moving in the same direction. Once they know where the organization is headed and the importance of getting there managers can develop functional plans. Given goals, and plans to support them, members of your organization will be more motivated, and that should be rewarded. Goals also give management the ability to evaluate the successes and failures of their efforts and also set new goals. Strategic Strategic goals are set by the CEO and supporting board of directors for the organization. They generally cover a length of time spanning multiple years, and benefit the entire organization, rather than a specific department or project. Tactical Tactical goals are set by midlevel management and are set to for a department to support the strategic goals of the organization. These goals are often set for a time period longer than one year. Operational Operational level goals are set by lower-level managers and generally focus on narrow and specific ways to achieve an aspect of a tactical plan. These are usually accomplished in a year or less.

By Kevin Waldroup