How Decisions Get Made: The Managerial Decision Process

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How Decisions Get Made: The Managerial Decision Process

Principles of Management · Chapter 14: Strategic Management and Decision-MakingSection 14.3 · lesson 97 of 11711 min · free with a free account

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In this lesson

The managerial decision process.

  • Describe the 8-step decision process and its sequencing rule
  • Distinguish programmed from non-programmed decisions
  • Explain bounded rationality, satisficing, and when intuition works
  • Identify the cognitive biases and a countermeasure for each

Transcript

Everything said in the video, section by section (1,458 words). Read along, or search it.

Strategic Management and Decision-Making

How Decisions Get Made

Every managerial choice runs through some process, whether or not anyone designed it. This section looks at the decision process itself. We'll set out an eight-step process, and the one sequencing rule that protects it. We'll separate programmed decisions from the ones that need real judgment. We'll see where the rational model breaks down, and why satisficing is often sensible. We'll pin down when intuition can be trusted, and when it can't. We'll work through eight cognitive biases, each with a countermeasure, and look closely at the costliest one. And we'll see a project kept alive mainly by the money already spent on it.

Figure 14.3.1

Criteria Before Alternatives

A structured decision process runs through eight steps. Define the decision. Establish criteria. Weight the criteria. Generate alternatives. Then evaluate the alternatives against the criteria, choose, implement, and review. One sequencing requirement governs the first four steps. The criteria must be set before the alternatives are evaluated, and ideally before they're even generated. Why does the order matter so much? Because setting criteria afterward lets the preferred option define them. A decision-maker who already favors one alternative can, consciously or not, pick criteria that happen to favor it. The evaluation then only appears objective. Figure fourteen point three point one marks two points in gold, where criteria can be corrupted this way. Both sit after alternatives have been generated or evaluated. Once a favored option is visible, revisiting the criteria or their weighting risks reshaping them around that option.

2 Kinds of Decision

Programmed and Non-Programmed

Decisions come in two kinds. Programmed decisions are handled by an existing rule or procedure. They need little fresh judgment, once the situation is correctly recognized as matching the rule. Non-programmed decisions require genuine judgment, because no existing rule adequately covers the situation. The management implication follows directly. Programmed decisions should be pushed down, and proceduralized. That connects to the treatment of centralization in Subchapter seven point two. The point is to preserve a manager's attention for the non-programmed decisions that genuinely require it. Spend limited judgment on decisions a clear rule could handle, and less is left for the decisions that need it.

The Rational Model

3 Assumptions, 3 Failures

The rational model of decision-making rests on three assumptions. First, complete information about every alternative. Second, preferences that are known, stable, and fully understood by the decision-maker. Third, unlimited processing capacity, to evaluate every alternative against every criterion. Each assumption fails in practice. Information is always incomplete to some degree. Preferences are often genuinely unclear, even to the person holding them. And processing capacity is bounded by time, attention, and cognitive limits that no real decision-maker escapes. So the model describes an ideal. The question is what real decision-makers do instead.

Bounded Rationality

Satisficing Is a Rational Response

Bounded rationality is the recognition that real decision-making operates under the limits the rational model assumes away. Those limits produce satisficing. Decision-makers accept the first alternative that meets an acceptable threshold. They don't keep searching for the objectively optimal one. That can sound like a lapse, or a lazy shortcut. It isn't. It's a rational response to the genuine cost of continued search. Further searching consumes time and resources, and those have their own real value. So satisficing isn't a failure of effort. It's a judgment about when further searching stops paying.

Intuition

When Expert Intuition Can Be Trusted

What about intuition? The evidence, stated as it actually stands, is conditional. Expert intuition is reliable under specific conditions. The first is a regular environment, with genuine, learnable patterns. The second is sufficient opportunity to learn those patterns, through repeated exposure. The third is prompt feedback, which lets the decision-maker calibrate her judgment against outcomes. Outside these conditions, intuition is unreliable. Consider an experienced operations manager, in a domain she's worked for years, with fast, clear feedback on her calls. Her intuition there serves her well. The same manager's intuition may serve her poorly in a genuinely novel strategic domain, lacking all three conditions. So the question isn't whether to trust intuition. It's whether the conditions for trusting it are present.

Table 14.3.1

Cognitive Biases and Their Countermeasures

Eight cognitive biases recur in managerial decision-making. Table fourteen point three point one sets them out. Anchoring is over-reliance on the first piece of information encountered, even when it's arbitrary. An early figure dominates the discussion, and adjustment from it is insufficient. Generate independent estimates before sharing any figure. Availability overweights information that comes easily to mind, because it's recent or vivid, not representative. A memorable incident dominates the risk discussion. The fix is grounding it in actual base-rate data. Confirmation is seeking information that supports an existing belief, while discounting what contradicts it. The decision looks better supported than it is. Assign someone to argue the opposing case. Sunk cost is letting past, unrecoverable investment influence a forward-looking decision. Past spending gets cited as a reason to continue. Evaluate only future costs and benefits, from this point forward.

Table 14.3.1, Continued

Cognitive Biases and Their Countermeasures

Overconfidence is excessive certainty in one's own judgment, relative to its actual accuracy. Certainty is expressed with no range of error, and risk is underestimated. Require an explicit confidence interval. Framing effects occur when the same choice, presented as a gain or as a loss, produces a different decision. The decision shifts on wording alone. Restate the choice in both gain and loss terms before deciding. Hindsight bias is believing, once an outcome is known, that it was more predictable than it really was. It distorts learning. Review the reasoning documented at the time, not the outcome. Escalation of commitment is continuing to invest in a failing course, because of what's already been invested. It's closely related to sunk cost, but more consequential. A failing course gets prolonged. The countermeasure is a decision-maker with no prior stake in the original choice.

Escalation of Commitment

The Most Costly Bias in Organizations

Escalation of commitment deserves a closer look, because it's the most costly bias in organizational settings. It can drive an organization to pour steadily increasing resources into a visibly failing initiative. Three conditions produce it. First, the decision-maker was personally responsible for the original choice, and feels her judgment is now on the line. Second, there's a desire to avoid publicly admitting the earlier decision was wrong. Third, organizational norms treat abandoning a project as a personal failure. They don't treat it as a reasonable response to new information. Notice that all three concern the decision-maker's own position, not the evidence. That's why the countermeasure is a decision-maker with no stake in the original choice.

Groups and the Pre-Mortem

A Genuine Trade-Off, and a Countermeasure

Group decision making carries a genuine trade-off. The gain is information. Combining multiple perspectives can improve decision quality on complex problems. That echoes the participation benefits from Subchapter nine point five. The cost is speed and accountability. Group decisions take longer, and responsibility for the outcome can become diffuse across the group. Groups also carry the pathologies covered in Subchapter eight point three, particularly groupthink. One countermeasure from that subchapter works especially well here: the pre-mortem. The group imagines the decision has already failed, and works backward to explain why. That directly counters overconfidence, and the escalation risk that early enthusiasm can hide. Failure becomes the starting assumption to explain, rather than a possibility to dismiss.

Decision Quality and Outcome Quality

A Good Decision Can Still Turn Out Badly

One more discipline is essential: separating decision quality from outcome quality. Subchapter ten point seven raised it, in its treatment of attribution. A well-reasoned decision can still produce a poor outcome, through ordinary variation. And a poorly reasoned decision can still produce a good outcome, through luck. Judging only by outcomes rewards the lucky, and punishes the unlucky, whatever their reasoning. The remedy is documentation at the time the decision is made. Record the criteria used, the alternatives considered, and the information available. That record is what allows a decision to be reviewed on its process afterward. Without it, the decision is judged, unfairly, purely by however the outcome happened to turn out.

Case Vignette

Funding a Project Because of What Was Already Spent

Here's a composite case, constructed for instruction. Harborline Manufacturing's executive team had invested substantially in a new internal software platform, over eighteen months. Devraj, the project's executive sponsor, had originally championed it. Delivery deadlines slipped repeatedly, and early user testing returned consistently poor results. Yet the team's recurring justification for more funding centered on how much had already been invested. At a budget review, a newly arrived finance director, with no prior stake in the decision, changed the question. The director asked the team to evaluate the project using only future costs and expected future benefits. Everything already spent was set aside as irrecoverable. Viewed that way, the remaining investment no longer looked justified against its likely return. The original reasoning was a clear case of escalation of commitment. It was reinforced by Devraj's personal link to the decision, and a reluctance to call an eighteen-month effort a mistake. Bringing in a decision-maker with no prior stake, exactly the named countermeasure, is what broke the pattern. Next, Subchapter fourteen point four turns to the conditions decisions are made under: certainty, risk, and uncertainty.

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FAQ

Questions students ask us

About How Decisions Get Made: The Managerial Decision Process

What are the steps of the managerial decision-making process?
A structured decision process has eight steps: define the decision, establish criteria, weight the criteria, generate alternatives, evaluate the alternatives against the criteria, choose, implement, and review. The key sequencing rule is that criteria should be set before alternatives are evaluated, and ideally before they are generated. Setting criteria afterward lets a favored option shape them, so the evaluation only appears objective.
What is the difference between programmed and non-programmed decisions?
Programmed decisions are handled by an existing rule or procedure and need little fresh judgment once the situation is recognized, such as a routine reorder. Non-programmed decisions require genuine judgment because no existing rule adequately covers the situation. Managers should push programmed decisions down and turn them into procedures, saving their limited attention for the non-programmed decisions that actually need it.
What is bounded rationality and satisficing in decision making?
Bounded rationality, a concept associated with Herbert Simon, recognizes that real decision-makers lack complete information, fully stable preferences, and unlimited processing capacity. Those limits lead to satisficing, which means accepting the first alternative that meets an acceptable threshold rather than searching for the optimal one. Satisficing is not laziness; it is a reasonable response to the real time and resource costs of continued searching.
What is escalation of commitment and how is it different from the sunk cost fallacy?
Escalation of commitment is continuing to invest in a failing course of action because of what has already been invested. It is closely related to the sunk cost bias, which lets unrecoverable past spending influence a forward-looking choice, but escalation is more costly because the failing course keeps getting prolonged. It is driven by personal responsibility, fear of admitting error, and norms that treat quitting as failure; a decision-maker with no prior stake counters it.

About the Principles of Management course

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Principles of Management (Business 101) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
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