Management Decision Making: Overview
Decision making plays a significant role in an organization. It is the function of managers of company. The failure or success of a company or any other organization primarily depends on management quality which drives the organization. It is the responsibility of managers to make decisions for moving the organization upwards on the path of success and for achievement of goals. Decision-making is a continuous and dynamic activity which impacts all the other activities of organization.There are various techniques employed for purposes of decision making and the techniques used depends on the subject on which decision is required to be taken and the level of manager by whom decision is taken. In the current fast-growing era, it is important to take the decisions after considering various factors that may influence the decision or its implementation. The decision makers must ensure that they do no spend much time on decision making but must take effective decisions which would practically deliver best outcomes. All the actions of management of company relates directly to their decision-making processes.
The term ‘decide’ refers to arriving at a conclusion or resolution as to what the company and its members are expected to do in upcoming circumstances. The process of decision making is a requisite part of life of manager wherein he is required to take decisions on almost everyday basis to ensure the success of organization and for achieving its objectives. The process of decision making is not limited to taking decision as to what is to be done but also its implementation. The application of organizational strategies requires decisions at each level and the successful implementation of strategies is a result of effective decision making on part of managers and supervisors. Similarly, the failure of effective implementation of organizational strategy is also a result of decisions made by managers and supervisors. Thus, the process of decision-making forms the basis for all the organization strategies and managerial activities in an organization.
The aim of this report is to discuss the importance of decision making in an organization while outlining the key aspects of management decision making. The report offers an analytical study of the impact of decision making on functions of company. It covers three important factors that can affect the decision-making of people. The report elaborates the heuristics that can speed up the decision-making, the common biases and their role in decision-making, and last is social influences and how they impact the decision-making of people.
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Heuristics that can assist the decision maker in speeding up the decision-making process
The term ‘Heuristic’ is a Greek word which means ‘to discover’. It is an approach for solving the problems which considers an individual’s personal experiences. It is a mental shortcut which helps individuals in solving their problems and make judgements efficiently and quickly. It is also known as ‘rule of thumb’. This strategy shorten the time of decision-making and allow people to functionwithout making them stop constantly for thinking about their consequent actions. These are very helpful in most situations but at times also lead to cognitive biases.
Different theories have been suggested by psychologists as to why an organization rely on heuristics. These are as follows:
- Reduction of Efforts:The heuristic approach reduces the amount of mental effort required to make decisions and choices. This theory states that heuristic is utilized by people as a type of cognitive laziness.
- Substitution of Attributes:It is a psychological process to underline various perceptual illusions and cognitive biases.This attribute is used by an individual when he has to take a decision which is complex. So, instead of deciding on the targeted complex attribute, he substitutes the attribute with a more easily calculated heuristic attribute.
- Fast and frugal: There are arguments present that the heuristic approach is biased but they are accurate. In other words, heuristics are used because they are usually correct and fast.
Heuristics plays an important part in both decision making and problem solving. When there is a need to solve a problem or take a decision, then the individuals with the task in hand move to the mental shortcuts as they need quick solutions. The brains are not capable of processing all the information available in the world and if each and every aspect is analysed, then one would never reach a possible outcome. Therefore, for coping up with the tremendous amount of information available and to speed-up the processes of decision making, the brain relies on the available mental strategies so that there remains no need to spend endless hours to analyse the detail. Heuristics allows the individuals to think the possible outcomes of problems for which they have to take decisions and help them in arriving at a solution.
Types of Heuristics
The most common types of heuristic are discussed as under:
- The availability heuristic: This approach involves decision making based on the belief that it is easy to bring something to mind. When an individual attempts to decide something, then there are number of related examples and facts that comes t his mind. The individual can surely decide or judge these outcomes as frequently occurring or common. It is because they are available in the memory readily. For example- if an individual is making decisions about flying by air but then recalls various accidents of airlines, he might feel that travelling by air would be too dangerous and may give up this idea and instead travel by road or rail. This sudden occurrence of incidents of accidents while thinking of travelling by air is availability heuristic.
- The representativeness heuristic: This approach involves decision making by comparison of most representative mental prototype with the present situation. We use representative heuristic when making judgements.More specifically, representatives estimate the likelihood of a circumstance by comparing it to an existing prototype which is already present in his mind. This approach helps in making judgements quickly but may also lead to errors. When decisions are made based on representatives, it is more likely to believe that the event will occur which may be overestimating. The fact is just because an object or event is representative does not mean that te probability is high. This can be related to an example of trying to decide if a person is trustworthy or not, then the aspects of individuals can be compared to the mental examples that one holds about that person.
- The affect heuristic: Under this approach, the decisions are made by the heuristics based on theemotions that the decision-maker is experiencing at the time of making decisions. His decisions are strongly influenced by his emotions.For this approach, a basic tendency is that people believe that a decision shall bring higher benefits and lower risks particularly when they are in happy mood and on the other hand, when they are in a bad mood, they focus on the downsides of decisions rather than its potential benefits. Therefore, it can be said that their decisions are highly influenced by current emotions and circumstances.
Heuristics tend to make life easier and make quick decisions which are mostly correct and accurate. However, it is important to be aware that the way in which heuristics work may introduce potential biases to the decisions. These may further help in making more accurate and better decisions.
Topic: What is a heuristic?
Source: Cherry, 2018.
Common Biases that can skew the decision-making process
Biases in decision making may lead to erroneous judgements and failed business outcomes. The decision making in a business is impacted by the available data to a great extent. The available data do not guarantee its relevancy and therefore it may lead to biased decisions. Further, there are several factors which may impact the data negatively or positively and therefore, its reliability may fluctuate from time to time. As a result, it becomes crucial for the decision makers to use that data and draw the inferences from them.
The various types of cognitive and data bias that most commonly challenge the decision-making processes of an organization are as follows:
- Confirmation Bias:Confirmation biasis a term used for something which do not occur as a result of lack of availability of data. This is a phenomenon where the data analysists and scientists tend to be more leaned towards the data which is more aligned with their opinions, views and beliefs. This type of bias is most commonly found among managers and decision makers in an organization who are used to assigning weight to information and evidence which is more aligned with their ow perceptions. This may lead to bad business outcomes which is why a decision maker must look forward for disconfirming evidence.
- Availability Heuristic: It is also known as availability bias and it is something which every decision maker must watch out for as its manifestation is fine-drawn. It is the way in which the decision makers make inferences on the recent information or readily available data. The decision here are based on the belief that the data which is readily available is the most relevant data. Mostly it is in the case of news, which many a times consists a huge disparity between what actually happened and what was covered. This approach lead to narrow inference of data as it relies on only readily available data.
- Simpson’s paradox:It is also called Simpson’s bias and is probably the most underestimated and overlooked among all other biases. It is important to know that the data may be seen fine to the naked eye but only a data scientist may be able to read between the lines. During analysis, when a pattern is analysed is different groups, only then it can be found that there is presence of dominance of any particular trend. However, when these trends are analysed cumulatively, the outcomes lead to completely opposite results. These different outcomes can result in misconceptions and incorrect conclusions and mask the true data value. This is the reason why whenever there is an increase in the available data, the analyst and decision maker must be more conscious.
- Overfitting and Underfitting: Among the data scientists, there exists a common misconception that a model which is overly complex passes several trends of data and due to this it brings out accurate results. However, when parameters of large quantity are assessed, and added to the model data, it results in minor fluctuations and unnecessary noise. Due to this, the main trends get ignored and lead to the poor predictive analysis. In this case, the data analysts try to fit the data which is non-linear to data which is linear which results in biases and skewed outcomes.
- Anchoring Effect: This type of bias may also be called as relativity trap. It is a tendency where the decision maker contrast and compare only a limited number of sets of items. It is called anchoring effect because the decision makers here tend to fix on a number or value which gets compared to everything else. An example that can be considered here is that when a person is shopping in a store which is on sale, then the such customers shall be influenced by the difference in price but not the overall price of the product. It is why when given a choice of the prices, the customers tend to choose a price which is not very high and not very cheap.
- Projection Bias: In this, a basic tendency of human is discussed. It is a common tendency of decision makers and others to think and believe that most of the people think like them, even if there exists no justification for it. This is a cognitive shortcoming which results in biased decisions as the decision maker thinks that people not only thinks like him but also agree to him thinking and opinions. It is a bias where a deciding person thinks that there exists a consensus on all the matters and therefore they estimate themselves to be typical and normal. When the members of a fringe or radical group are influenced by this thought that people outside the group think just like them, then that falls under projection bias category.
These biases are impediment to the accurate decision making can therefore can lead to ineffective outcomes. The business leaders and mangers must remain alert to this parament.
Social influences that might skew the decision-making process
It is one of the debating topic that whether or not the decision-making is affected by the social environment. Many a time, people ignore their opinion and take decisions by getting influenced by other’s opinions. In an organisation, people follow the judgments of others even if they gives inappropriate decisions. This is a very common case when economic decisions are made.There are both directly and indirectly influencing elements, such as social interactions through social media, cultural norms, and mass media (Solomon, et.al, 2014). The influence of these factors are collectively known as social influence. These can be of two category, namely direct and indirect. If an individual directly affects the decision-making of other, then it comes under direct social influence. This can be done either by persuasion or coercion. On the other hand, the indirect social influence is one of the subtle and prime psychological process that is associated with amount of information available related to other’s course of action. The impact of social influences is very huge in the field, such as political polls, stock markets, aid campaigns, cultural market, panic stampedes, etc. For instance, the herding attitude of any financial actor can cause financial bubble. They can control the whole system and manoeuvre it in a positive direction like increase in the tax compliance rate (Pettigrew, 2014).
It is considered that a person make opinions by being a part of an interaction network that is characterised by social acquaintances. In one of the study published in the Journal of Social, Cognitive, and Affective Neuroscience highlighted the extent to which the social norms influences the decision-making. The mass media is the major source of information for people as well as for society. It has some great powers to influence individual’s attitudes, behaviours, and attitudes can be changed. When an organisation changes its equipment and old practices, and employ new techniques, these can be communicated to the target market by making use of mass media. It can provide necessary information and skills to change people’s opinion. Furthermore, the social media platforms, such as YouTube, Facebook, etc., have made the world closer and smaller (Papadakis, et.al, 2014). It has converted the whole world into a big global village. Organisations can advertise their products and services in different countries at the same time, thereby by influencing the consumer’s buying decision. This can have a negative impacts as well. In case a company fails to deliver the required quality of product, then the negative reviews posted by the customers can affect the sales. Recently, Tesla Motors loses $3 billion market value after its CEO’s smoking picture got viral.
There are many researchers who have given their views on the effects of social influences, such as social media, cultural norms, and mass media on people’s decision making. In 1967, George Gerbner in his research argued that people who are in prolonged influence of TV or radio absorb images, dominant symbols, and messages of mass media. If a person is persistently in the exposure of the mass media, then he/she may cultivate a common perception about the world. In addition to this, social influencers can teach and educate readers or listeners about the organisation or the world. Most importantly, the research argues how people can make a common understanding of the world just by observations alone. Furthermore, Maxwell McCombs in his work highlighted that if a news is presented to the audience consistently and frequently, then they will start believing that the news is true and significant (Bourgeoisand Brodwin, 2014). In one of the research work, it was highlighted that people actively and willingly come in the exposure of media by themselves and media cannot influence those who has nothing to do with the media. Hence, one can conclude that the social influences are dependent on perception, ethical values, culture, beliefs, interest, and selectivity of the people.
Mostly, the managers are required to make decisions in environments which are uncertain and with limited information available. In addition to this , there are time constraints due to pressures of competition. Each and every decision within an organisation is associated with a particular problem that an organisation faces and that affects the performance of the organisation. The ultimate motive behind every decision is to achieve the overall goals and objectives of the company. There are many factors that can affect the final decision-making process in an organisation. In this report three of such major factors were discussed in detail. The first and foremost was the “heuristics.” This can affect the speed of the decision-making process by reducing the overall efforts and substituting certain attributes.When there is a need to solve a problem or take a decision, then the individuals with the task in hand move to the mental shortcuts as they need quick solutions. The second factor was common biases that can skew the decision-making process. These included anchoring effect, conceptual biases, etc. The leaders in the organisation must remain aware of these challenges as these biases are impediment to the accurate decision making can therefore can lead to ineffective outcomes. The third and the last factor is social influence that consisted of social media, cultural norms, and mass media. These social influences are very huge in the field, such as political polls, stock markets, aid campaigns, cultural market, panic stampedes, etc. They can control the whole system and manoeuvre it in a positive direction like increase in the tax compliance rate.
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