Introduction to Decision Making

Bringing back Steve Jobs to be CEO of Apple in 1997 is regarded as one of the greatest business decisions of all time. He had been forced out of the company he founded by its board of directors in 1985 after a power struggle with its CEO. Experiencing losses and stagnating market share, Apple looked to Jobs to turn the company around. His commitment to innovation in technology and design led to breakthrough products including the iPod and iPhone, which helped make Apple one of the most valuable companies on Earth.

Conversely, one of the worst business decisions ever was the merger between AOL and Time Warner in 2001. The combination of a then-leading Internet company with a global media enterprise was predicted to create synergies around content and advertising as well as significant cost savings and thus to create great returns for shareholders. The opposite happened as the combination failed to achieve any of the anticipated benefits. Time Warner … Read the rest

Rational Decision Making

The rational model of decision making makes three assumptions about decision makers: that they are rational, evaluative, and maximizing. Rational means they have the ability to apply reason and exercise judgment. They are evaluative in the sense that they place a value on everything and have preferences. Finally, they seek to maximize their choice to derive the highest value at the lowest cost for the things they care most about. Models simplify, however, and we know that decision making in practice can look quite different. That rationality may be bounded by the availability of high quality information; evaluation may include both quantitative and qualitative factors as well as objective and subjective ones; and sometime we choose alternatives that satisfy rather than maximize because we are happy with “good enough” rather than needing to have “the best.”

Decision making follows a process that is generally linear in that it progresses through a series of steps. This is true whether one takes … Read the rest

Cognitive Bias in Decision Making

Since leaders and managers should aim to make decisions on a rational basis following a deliberate, analytical process, reducing bias in the decision making process is essential. This means taking an approach to decision making that recognizes biases exist and that takes steps to counteract them. Simply telling yourself to “slow down and make better decisions” may not always be sufficient. This reading reviews several tactics and practices to keep in mind as ways to structure and manage the decision making process to minimize the influence of bias.

Carving out time for reflection can counteract bias. Even spending a short time thinking about the task ahead and potential biases can significantly improve decisions. Reflection encourages deliberation and builds in time to be more critical of data and conclusions and to promote more thorough analysis.

One simple way to overcome bias is to switch from evaluating options one at a time to evaluating them simultaneously. For example, rather than considering an … Read the rest

Emotions and Decision Making

We make decisions to achieve some emotional state – to become happy or satisfied, to avoid disappointment or regret. It is the anticipation of some future state of feeling that influences the choice. These are known as expected emotions, the ones we hope to experience. The emotions we actually experience while considering a decision also affect our judgment. These are known as immediate emotions.  At the simplest level, our emotions affect the decision making process when we ask “How do I feel about this?” and then base a choice on those feelings. Some decisions are more likely than others to elicit an emotion. For example, deciding your current mood may strongly influence where you decide to eat dinner but it is less likely to affect the brand of toothpaste you purchase.

The research literature identifies six universal emotions: happiness, surprise, fear, sadness, anger, and disgust. Each of these, and the moods they can create, has the potential to affect the … Read the rest

Motivation and Decision Making

Motivation and emotion are closely linked when it comes to decision making. Often it is the desire to achieve or avoid a certain emotional state that drives a choice. Risk aversion is one example; people tend to prefer choices that decrease the probability that something negative will happen.

Motivational bias occurs when judgment is influenced by the desirability or undesirability of consequences or outcomes. This type of “motivated reasoning” causes people to interpret data and information in the most favorable light for outcomes they desire and in the least favorable for ones they wish to avoid. For example, a banker rewarded based on the number of loans that are approved may provide an overoptimistic assessment of an applicant’s ability to repay the loan. The influence of the motivator may be conscious, as when the banker deliberately interprets the data optimistically, or unconscious as part of the general approach to how the banker does her job.

Motivation drives goal-setting and the … Read the rest

Ethics and Decision Making

There are two ways to think about the relevance of ethics to decision making. The first is making decisions that are ethical; that is, choosing alternatives that are consistent with a set of moral values, norms, and standards. Take a marketing associate who wants to learn consumer opinions about her company’s products. She believes that people will give more honest responses if she says she represents an independent research firm. Her company may be better off if she misrepresents herself, but would doing so be ethical? In a society that values not lying, deciding to disclose her employer’s name is an example of making an ethical decision.

The second way ethics relates to decision making is that some choices involve ethical dilemmas; these involve instances where there are competing claims on what is the “right” thing to do. For example, a hospital may consider closing a costly neighborhood-based clinic for fiscal reasons. Doing so would help the hospital maintain its … Read the rest

Analytics and Decision Making

Over the past decade, an increasing number of organizations have started to use decision support systems to predict behavior and results. Predictive analytics enables managers to make decisions about how to allocate resources and take other steps that are most likely to lead to positive results. This approach uses historical data to identify predictive variables. For example, predictive analytics is used in higher education to flag students who are at risk of flunking out based on the pattern of courses and grades that match those of students that have previously had trouble. Those students can then be targeted for support from advisers or tutors. Another example comes from Netflix, the movie rental company. One way Netflix uses analytics is to make recommendations to customers based on their viewing history; this provides additional value to customers and helps with customer retention. Another way the company uses analytics is to predict the number of customers that will want to view each film … Read the rest

Decision Support Systems

Many organizations use information technology to improve the effectiveness of their decision making. Known as decision support systems (DSS), these software products transform data into useful information such as statistical tables and comparative results reports (e.g., year-over-year performance). They allow for more objective decision making, improve management control, decrease the need for training through automation, and facilitate communication.

A DSS is made up of a database, a model, and a user-interface provides analysis and answers that help managers make choices. The database consists of structured records such as sales and cost figures. The model links variables that represents an understanding of cause and effect relationships; for example, if wages are increased, the labor cost per unit goes up. The user interface is how decision makers interact with the system; for example, the fields where they enter queries or the series of steps they take to produce graphs, charts, and reports.

Decision support systems are used in a wide variety of … Read the rest