User:Malejandramoyar1995/Strategic decision making in business

For the business world, strategic decision making has become one of the most active areas of current management research. Deciding the course of action of a company, by decisions, can define the difference between success and failure of the enterprises.. In order to know more about the factors that can lead to a poor decision making, the cognitive biases will be explained during this article.

Decision making should be done strategically in order to get the best results.

Decision making according psychology

When talking about the psychology definition of decision making, it is regarded as a cognitive process which leads to the selection of a belief among several alternatives, choosing the best one. Every decision making process produces a final choice, which is shaped by the ambiance.

Poor decision making

In business, even the best designed strategies can fail if the managers do not use the information on the right way. The role of managers in the process of taking decisions, are of fundamental importance for the well being of the enterprise, and can collapse a company if decisions are not well taken. The rationality of decision-making is bound by one's cognitive capabilities. When we make decisions, we tend to fallback certain rules of thumb, or heuristics, that help us to make sense out of a complex and uncertain world. Based on extensive lab experiments, Tversky and Kahneman (1974) reports that biases may result from three major heuristics: representativeness, availability and adjustment, and anchoring. Representativeness talks about the tendency to imagine that what we see or will see is a typical of what can occur. On the other hand, Availability refers to the condition where, when imagining what could happen, we remember similar past situations.

However, according Harvard Business School, Daniel Kahneman, Amos Tversky, and others have clarified the specific ways in which decision makers are likely to be biased There are sometimes errors, which repeat over and over again. They are cognitive biases, and they are 6 types:

1. Prior Hypothesis Bias: occurs when decision makers who have strong prior beliefs tend to make decisions on the basis of the beliefs, even when presented with evidence that their beliefs are wrong.
2. Escalating commitment: occurs when decision makers, having already committed significant resources to a project, commit even more resources after receiving feedback that the projet is failing. A more logical answer would be leaving the projet and continue with other projects, rather than escalate commitment.
3. Reason by analogy: this case refers to the use of simple analogies to make sense out of complex problems. However, the analogy may not be valid.
4. Representativeness: tendency to generalize from a small sample or even a single vivid anecdote. Decision makers assume that if an enterprise has success, they will have too.
5. Illusion of control: overestimate one's ability to control events. This refers to having overconfidence about the charge of the decision maker. For example, general or top managers seem to be particularly keen on this bias, because having risen to the top of an organization, they tend to be overconfident about their ability to success.
6. Availability error: predisposition to estimate the probability of an outcome base on how easy the outcome is to imagine. Managers might allocate resources to a project with an outcome that is easier to outcome, than to one that might have the highest return.

Techniques for improving decision making

How can critical information affect the decision making mechanism so that a company's strategic decisions are realistic and based on thorough evaluation? Two techniques enhance strategic thinking and counteract cognitive biases.

1. Devil's advocacy: requires the generation of a plan and a critical analysis of that plan. One member of the decision making team identifies all the considerations that might make a proposal unacceptable.
2. Dialectic inquiry: requieres the generation of a plan and a counter plan that reflect plausible but conflicting courses of action. Strategic managers listen to a debate between advocates of the plan and counter plan and then decide which plan will lead to a higher performance.

Steps of decision making

In order to achieve great decision making, there are some steps to follow:

1. Identify the decision
2. Gather information
3. Identify alternatives
4. Weigh the evidence
5. Choose among alternatives
6. Take action

External links

1. Harvard Business School. Page 1.Retrieved from: http://www.hbs.edu/faculty/Publication%20Files/08-102.pdf Page

2. Page 760. Retrieved from: http://faculty.baruch.cuny.edu/tkdas/publications/das-teng_jms99_cognitivebias_757-778.pdf

3. Strategic management journal. Retrieved from: http://www.sscnet.ucla.edu/comm/haselton/unify_uploads/files/Johnson_etal_2013_TREE.pdf

4. Journal of Management studies. Retrieved from: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6486.1988.tb00021.x/full

5. Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making. Retrieved from: http://www.sciencedirect.com/science/article/pii/S0883902696000031