Senior managers are paid to make tough decisions. Much rides on the outcome of those decisions, and executives are judged—quite rightly—on their overall success rate. But we believe that it is possible for executives—and companies—to significantly improve their chances of success by making one straightforward albeit not simple change: expanding their tool kit of decision support tools and understanding which tools work best for which decisions.
We see this constantly in our consulting and executive education work, and research bears out our impressions. Yet every business leader we have worked with over the past 20 years acknowledges that more and more decisions involve judgments that must be made with incomplete and uncertain information. The problem managers face is not a lack of appropriate tools.
A wide variety of tools—including case-based decision analysis, qualitative scenario analysis, and information markets—can be used for decisions made under high degrees of uncertainty. But the sheer variety can be overwhelming without clear guidance about when to use one tool or combination of tools over another. Absent such guidance, decision makers will continue to rely solely on the tools they know best in an honest but misguided attempt to impose logic and structure on their make-or-break decisions.
In the first half of this article, we describe a model for matching the decision-making tool to the decision at hand, on the basis of three factors: how well you understand the variables that will determine success, how well you can predict the range of possible outcomes, and how centralized the relevant information is. We make a strong case for increased use of case-based decision analysis which relies on multiple analogies and qualitative scenario analysis under conditions of uncertainty.
Inevitably, the model we propose simplifies a very complicated reality in order to uncover some important truths. As you ponder which tools are appropriate for a given context, you need to ask yourself two fundamental questions:.
You need to know whether you have a causal model—that is, a strong understanding of what critical success factors and economic conditions, in what combination, will lead to a successful outcome. Companies that repeatedly make similar decisions often have strong causal models. Consider a retailer that has launched outlets for years in one country, or one that has made many small acquisitions of adjacent competitors.
Some managers have a reasonably good idea of the critical success factors that matter, but not a complete picture—this would generally be true of a company developing a new product, for example. Do you understand what combination of critical success factors will determine whether your decision leads to a successful outcome?
More often, decision makers can identify a range of possible outcomes, both for specific success factors and for the decision as a whole. Often they can also predict the probability of those outcomes. Can you define the range of outcomes that could result from your decision, both in the aggregate and for each critical success factor? Many of these tools will be familiar. However, the tool we advocate using most, case-based decision analysis, is not yet widely used, partly because the more formal, rigorous versions of it are relatively new and partly because executives typically underestimate the degree of uncertainty they face.
They include discounted cash flow, expected rate of return, and net present value models. These tools analyze decisions by fully specifying possible outcomes and their probabilities. The tools include:. These tools inform decisions by developing a set of qualitative, representative scenarios of how the present may evolve into the future and identifying the likely consequences of the decision under consideration.
These tools provide a systematic approach to aggregating and synthesizing information from analogous past experiences and examples. In general, analogies that are most similar to the decision at hand are given more weight in determining the best choice. For example, it is natural to fixate on the analogous situation that best supports the action you would like to take, ignoring other cases that might provide a broader picture of possible strategies and their outcomes.
Case-based decision making provides a structured framework for synthesizing information from multiple analogous experiences and examples. These methods require decision makers to collect a sample of analogous cases, determine the results achieved in those cases, and assess how similar each case is to the decision at hand. The best decision, then, is the one that maximizes the similarity-weighted average of results in the analogous cases. Sometimes the analogy is close to home: Movie producers can compare a project with similar projects from the past; serial acquirers can do the same.
The action must also be appropriate to the capacities of the people who have to carry it out. A large U. To protect this money, top management decided to invest it locally in businesses which would: 1 contribute to the local economy, 2 not require imports from abroad, and 3 if successful, be the kind that could be sold to local investors if and when currency remittances became possible again. To establish these businesses, the company developed a simple chemical process to preserve a tropical fruit—a staple crop in both countries—which, up until then, had suffered serious spoilage in transit to its Western markets.
The business was a success in both countries. But in one country the local manager set the business up in such a manner that it required highly skilled and technically trained management of a kind not easily available in West Africa.
In the other country, the local manager thought through the capacities of the people who would eventually have to run the business. Consequently, he worked hard at making both the process and the business simple, and at staffing his operation from the start with local nationals right up to the top management level. A few years later it became possible again to transfer currency from these two countries.
But, though the business flourished, no buyer could be found for it in the first country. No one available locally had the necessary managerial and technical skills to run it, and so the business had to be liquidated at a loss. In the other country, so many local entrepreneurs were eager to buy the business that the company repatriated its original investment with a substantial profit. The chemical process and the business built on it were essentially the same in both places.
And what can they do? This action commitment becomes doubly important when people have to change their behavior, habits, or attitudes if a decision is to become effective. Here, the executive must make sure not only that the responsibility for the action is clearly assigned, but that the people assigned are capable of carrying it out.
Thus the decision maker has to make sure that the measurements, the standards for accomplishment, and the incentives of those charged with the action responsibility are changed simultaneously. Otherwise, the organization people will get caught in a paralyzing internal emotional conflict.
Consider these two examples:. Only the most effective executive can do what Vail did—build the execution of his decision into the decision itself.
But every executive can think through what action commitments a specific decision requires, what work assignments follow from it, and what people are available to carry it out.
Finally, information monitoring and reporting have to be built into the decision to provide continuous testing, against actual events, of the expectations that underlie the decisions. Decisions are made by people.
People are fallible; at best, their works do not last long. Even the best decision has a high probability of being wrong. Even the most effective one eventually becomes obsolete.
This surely needs no documentation. And every executive always builds organized feedback—reports, figures, studies—into his or her decision to monitor and report on it. Yet far too many decisions fail to achieve their anticipated results, or indeed ever to become effective, despite all these feedback reports. Just as the view from the Matterhorn cannot be visualized by studying a map of Switzerland one abstraction , a decision cannot be fully and accurately evaluated by studying a report.
That is because reports are, of necessity, abstractions. Effective decision makers know this and follow a rule which the military developed long ago. The commander who makes a decision does not depend on reports to see how it is being carried out. The commander or an aide goes and looks. The reason is not that effective decision makers or effective commanders distrust their subordinates. With the coming of the computer this feedback element will become even more important, for the decision maker will in all likelihood be even further removed from the scene of action.
Unless he or she accepts, as a matter of course, that he or she had better go out and look at the scene of action, he or she will be increasingly divorced from reality. All a computer can handle is abstractions. And abstractions can be relied on only if they are constantly checked against concrete results. Otherwise, they are certain to mislead. To go and look is also the best, if not the only way, for an executive to test whether the assumptions on which the decision has been made are still valid or whether they are becoming obsolete and need to be thought through again.
And the executive always has to expect the assumptions to become obsolete sooner or later. Reality never stands still very long. Failure to go out and look is the typical reason for persisting in a course of action long after it has ceased to be appropriate or even rational. This is true for business decisions as well as for governmental policies. Moreover, in any business I know, failure to go out and look at customers and markets, at competitors and their products, is also a major reason for poor, ineffectual, and wrong decisions.
Decision makers need organized information for feedback. They need reports and figures. But unless they build their feedback around direct exposure to reality—unless they discipline themselves to go out and look—they condemn themselves to a sterile dogmatism.
Decision making is only one of the tasks of an executive. It usually takes but a small fraction of his or her time. But to make the important decisions is the specific executive task.
Only an executive makes such decisions. An effective executive makes these decisions as a systematic process with clearly defined elements and in a distinct sequence of steps. Indeed, to be expected by virtue of position or knowledge to make decisions that have significant and positive impact on the entire organization, its performance, and its results characterizes the effective executive.
Dijksterhuis and his team found a similar pattern in the real world. When making simple purchases, such as clothes or kitchen accessories, shoppers were happier with their decisions a few weeks later if they had rationally weighed up the alternatives. For more complex purchases such as furniture, however, those who relied on their gut instinct ended up happier. The researchers conclude that this kind of unconscious decision-making can be successfully applied way beyond the shopping mall into areas including politics and management.
But before you throw away your lists of pros and cons, a word of caution. If the choice you face is highly emotive, your instincts may not serve you well. When asked to decide which was most urgently in need of management, most people chose crime, even when it was doing far less damage than the deer.
Arvai puts this down to the negative emotions that crime incites. You might think that emotions are the enemy of decision-making, but in fact they are integral to it. Our most basic emotions evolved to enable us to make rapid and unconscious choices in situations that threaten our survival.
Fear leads to flight or fight, disgust leads to avoidance. Yet the role of emotions in decision-making goes way deeper than these knee-jerk responses. Neurobiologist Antonio Damasio from the University of Southern California in Los Angeles has studied people with damage to only the emotional parts of their brains, and found that they were crippled by indecision, unable to make even the most basic choices, such as what to wear or eat.
Damasio speculates that this may be because our brains store emotional memories of past choices, which we use to inform present decisions. Emotions are clearly a crucial component in the neurobiology of choice, but whether they always allow us to make the right decisions is another matter. If you try to make choices under the influence of an emotion it can seriously affect the outcome.
Take anger. Daniel Fessler and colleagues from the University of California, Los Angeles, induced anger in a group of subjects by getting them to write an essay recalling an experience that made them see red. The researchers found that men, but not women, gambled more when they were angry Organizational Behavior and Human Decision Processes , vol 95, p In another experiment, Fessler and colleague Kevin Haley discovered that angry people were less generous in the ultimatum game — in which one person is given a sum of money and told to share it with an anonymous partner, who must accept the offer otherwise neither gets anything.
A third study by Nitika Garg, Jeffrey Inman and Vikas Mittal from the University of Chicago found that angry consumers were more likely to opt for the first thing they were offered rather than considering other alternatives.
It seems that anger can make us impetuous, selfish and risk-prone. Disgust also has some interesting effects.
Disgust also seems to make us more censorious in our moral judgements. In the most extreme example, people who had read a word that cued disgust went so far as to express moral censure of blameless Dan, a student councillor who was merely organising discussion meetings Psychological Science , vol 16, p All emotions affect our thinking and motivation, so it may be best to avoid making important decisions under their influence.
Yet strangely there is one emotion that seems to help us make good choices. In their study, the Chicago researchers found that sad people took time to consider the various alternatives on offer, and ended up making the best choices. In fact many studies show that depressed people have the most realistic take on the world. Have you ever had an argument with someone about a vexatious issue such as immigration or the death penalty and been frustrated because they only drew on evidence that supported their opinions and conveniently ignored anything to the contrary?
This is the ubiquitous confirmation bias. It can be infuriating in others, but we are all susceptible every time we weigh up evidence to guide our decision-making. If you doubt it, try this famous illustration of the confirmation bias called the Wason card selection task. Four cards are laid out each with a letter on one side and a number on the other.
Typically, 75 per cent of people pick the D and 5, reasoning that if these have a 5 and a D respectively on their flip sides, this confirms the rule. But look again. Although you are required to prove that if there is a D on one side, there is a 5 on the other, the statement says nothing about what letters might be on the reverse of a 5. So the 5 card is irrelevant. Instead of trying to confirm the theory, the way to test it is to try to disprove it. The confirmation bias is a problem if we believe we are making a decision by rationally weighing up alternatives, when in fact we already have a favoured option that we simply want to justify.
If you want to make good choices, you need to do more than latch on to facts and figures that support the option you already suspect is the best. Collecting as much information as possible can be very helpful at arriving to a decision, but an overload of information can leave you confused and misguided, and prevents you from following your intuition.
Remember, trusting your gut instincts is a major key to making good decisions. When making a decision and putting your plan into action you should have taken care to weigh all your valid options. Making a decision based upon an outcome that may not be plausible will not help you solve the problem. Time can be a futile friend. Sometimes it is good, and sometimes it is not.
When making major decisions, it beneficial to take your time in order to make the best choice from your options. But understanding the timing process is crucial because sometimes it is best to delay a decision, and other times delaying a response can cause more problems. There are also times when making a quick decision is advantageous because it allows you more time to make necessary changes should problems arise. In summary we all have to make many decisions throughout our daily lives.
Some of these decisions require little effort, while others require more time and deeper thought before coming to a final solution. Remember, there are five basic steps to good decision making. Why is those five the ideal number? Because a significant part of decision making skills is understanding and knowing a simple technique; and also regularly practicing that technique. When there are more steps than we can count on one hand, most people tend to either forget a step, or misconstrue the order in which the steps must be taken.
If you follow these five steps, and also remember the common pitfalls previously addressed, you will be well on your way to making good decisions for yourself. Kescia D. Previously published in Corporate Wellness Magazine, she is also an international author and speaker.
GrayKo Clinical Consultants, LLC is a health and wellness education company dedicated to providing quality education programs, workshops, in-services, and seminars tailored to individuals, groups, and corporate clients.
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