Graduate School of Sunderland, MBA in Finance
Management Development Institute of Singapore in Tashkent
In today’s highly competitive business environment, managers of businesses face a number of decisions on a day-to–day basis. If some decisions are quite routine and do not require much elaboration from decision-makers, other decisions need proper evaluation and analysis of the case at hand. To arrive at a certain business decision managers can exploit several models that are characterized by different assumptions and nature of techniques used. Namely, they include the following: computational strategy, judgmental strategies, compromise strategy (political model) and inspirational strategy (garbage can model). This paper presents the comparison of the pros and cons of four decision-making models used by managers, and these will be followed by the description of biases that may influence decision-making models.
Advantages and disadvantages of decision-making models
Bartol et al (2008: 156) define managerial decision-making as ‘the process by which managers identify organizational problems and try to resolve them’. Decisions made within an organization are important factors that determine an organization’s overall performance (Boddy, 2011: 194). Depending on the nature of a problem and context where it arises, managers apply diverse decision-making models to deal with it. Below the benefits and drawbacks of such models are to be compared.
- Computational strategy
According to Turpin & Marais (2004), this model assumes that the decision-maker is a rational “economic man”. The decision-maker chooses the solution that serves best the economic interests of the organization (Simon, 1986: 209-24). The model also suggests that managers ‘use totally rational decision processes, make optimal decisions and have all needed information (including all possible alternatives, potential outcomes and ramifications)’ (Bartol et al, 2008: 159).
Given that there is high agreement on goals this model may provide a number of advantages (Boddy, 2011: 207). Lee et al (1999: 96) argue that computational strategy enhances the level of objectivity of the decision. They state ‘objective interactions or linkages between variables may emerge, making primary conclusions clear’. Rational model aims to consider decision making as an understandable process, not as difficult to explain like it is in the case of incrementalism (Lee et al, 1999: 144).
Disadvantages of the model consist in ‘the long turnaround time’ that may take decision-makers to gather information, analyze it and draw certain conclusions (Turpin & Marais, 2004). By that time conditions might have already changed. Another major issue is that this strategy does not produce decisions on its own. Figures that it generates for use by decision-maker can present ‘distorted picture’ (Lee et al, 1999: 97), and sometimes it could happen intentionally to serve someone’s interest (Turpin & Marais, 2004). The usage of this model is limited to quantitative issues, and when it comes to qualitative matters, it can only act as an input to a range of other methods (Boddy, 2011: 208).
1.2 Judgmental strategies
Judgmental strategies (e.g. bounded rationality, incrementalism) take into account the fact that human abilities are limited (Boddy, 2011: 210). The research by Turpin & Marais (2004) resulted in a view that supports bounded rationality by stating the following: managers in uncertain conditions should choose a certain ‘subset of the system’ and deal with that. This way they will have larger number of ‘manageable set of variables and interdependencies’.
As regards incrementalism, it is argued to reduce the risk of mistakes in decision-making and makes possible ‘to reverse the decision’ (Boddy, 2011: 209).
Disadvantage of judgmental strategy (bounded rationality) is pointed out by Bartol et al (2008: 159). They argue that decision-makers hold different values and views concerning the essence of the information gathered. Decision-makers’ attention is drawn to something which they think is important. They suggest that by doing so managers may accidentally or deliberately leave critical information without proper attention.
1.3 Compromise strategy – political model
Turpin & Marais (2004) describe this model as a ‘bargaining process’. They further state that different individuals in organizations have different objectives and beliefs. What one manager considers as relevant can totally be irrelevant for the other. Organizations consist of so-called coalitions of people with similar views and goals (Cyert and March, 1963). Coalitions follow goals designed to serve their own interest instead of pursuing organization-wide objectives (Turpin & Marais, 2004). Therefore, the disadvantage of this model consists in the possibility that groups of individuals may strongly wish to win the battle rather than endeavoring to take wise decisions (Turpin & Marais, 2004).
According to Boddy (2011: 210), the model allows for better implementation of the decision made since coalition members have a chance to make a contribution by expressing their ideas and taking greater responsibility.
1.4 Inspirational strategy – garbage can model
This model is designed for the use in organizations functioning within conditions of high uncertainty (Cohen et al 1972, cited in Mitchell 1985:13) and which lack ‘hierarchical authority structure and established bureaucratic rules (Cohen and March, 1974). Garbage can is a choice opportunity (meetings, etc) where flow of participants, problems and solutions confront each other (Turpin & Marais, 2004). This approach may generate new opportunities that were not even expected by managers (Bartol et al, 2008: 160).
According to Daft (1983 cited in Mitchell, 1985), drawbacks of the model include the following:
- Solutions to non-existing problems are suggested;
- Problems are left without being dealt with;
- Solutions to only a small number of problems are found.
Apart from the assumptions present in the decision-making models there are several other factors that manifest themselves in the decision-making process. These are so-called biases that managers adopt when dealing with the decision and they arise due to heuristics that is inherent in human nature. More on this is in the following section dedicated to the influences of biases on managers’ decision-making.
The impact of biases on decision-making models
In order to simplify the complexity of a problem and highly uncertain conditions within which it arises decision-makers apply their ‘unconscious routines’ called heuristics (Hammond et al, 2003). Tversky and Kahneman argue that ‘generally these heuristics are quite useful but sometimes they lead to severe and systematic errors’ (1974 cited in Schwenk, 1984, p. 112).
2.1 Escalating commitment
It is defined as continuing to contribute to the decision made even if there is evidence that it could be erroneous. Schwenk (1984) illustrates this bias by giving an example of a decision-maker who devotes enormous resources to some project. It is proved through researches that decision-maker will commit greater amount of resources when he discovers failure compared to what he will commit in case of positive results. One of the reasons could be fear of losing current position in the organization (Fox and Staw, 1979, cited in Schwenk, 1984).
This bias is described as the tendency to draw conclusions about people or events relying only on a small sample of people or events and ignoring other, possibly critical, information (Busenitz, 1997). As it is put forward by Payne et al 1992, ‘decision-makers consistently underestimate the error and unreliability inherent in small samples of data’ (cited in Busenitz, 1997).
2.3 Prior hypothesis
Researchers confirm that people who have developed wrong ideas or ‘hypotheses’ concerning the link between ‘variables’ are prone to heavily rely on these erroneous views while undertaking decisions, although they ascertained a number of times that these are not right (Levine, 1971, Pruitt, 1961 and Wason, 1960, cited in Schwenk, 1984). This bias is reinforced by the readiness of managers to consider only that information which supports their beliefs. The rest is disregarded (Boddy, 2011: 212).
2.4 Illusion of control
According to Das and Teng, this bias stems from overestimation of one’s success and excessive optimism in measuring one’s capability to control events (1999 cited in Korte, 2003). They state further that it results in the following mistakes:
- Courses of action are chosen relying on ‘unrealistic’ evaluations of success;
- Risk is unreasonably reduced.
It is essential to acknowledge that each organization is unique and it differs from others by the fact that people working are different, internal principles of running organizations is diverse and products or services provided vary. This difference implies that managers may encounter problems and business decisions within unpredictable and unexpected contexts not often dealt with by others before. This diversity and uncertainty should, in fact, permit and strongly encourage managers to use a mixture of decision-making models when there is a necessity to do so by picking up the needed elements of all models and using them where they are most relevant. In other words, the 4 models should not be perceived as a strict rule telling which model to use in a certain case, but rather they should be accepted as a general outline of managers’ behavior in particular business situations.
Furthermore, it is critically important for managers to be aware of the biases that may influence their decisions. Negative consequences of biases such as escalating commitment, representativeness, prior hypothesis and illusion of control can be better distinguished by taking a look at a decision from the third side. For a manager who is aware of existence of biases it is easier to detect them in their own behavior, and hence control and reduce their effect on decision-making process.
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