Managerial Decision-Making - Coursework Example

Managerial Decision Making Name Institution Managerial Decision Making Part One Every day, business people are inundated with decisions, either big or small. Understanding the way people arrive at decisions is a section of cognitive psychology that over the years has received attention from scholars. Theories have been developed to explain how individuals make these decisions and what factors impact decision making. Decisions require a choice to be made among various alternatives and often, the choice selected is only based on judgement (Chugh and Bazerman, 2007). On the other hand, this judgement relies heavily on a cognitive evaluation on the basis of interpretations of aspects such as facts, evidence and opinions. For a number of reasons, interpretation always varies from one person to another. For this reason, different types of heuristics were developed to give people general guide in decision making in order to reduce the efforts needed in making decisions. Thus, heuristics and factors that impact decision making are fundamental aspect of critical thinking in decision-making. There are various concepts that influence decision making. This paper will highlight four discrete concept explained in Simon’s quote that discusses bias in decision-making. From the quote highlighted by Simon, four discrete concepts that explain bias that occurs during decision making are seen. “The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world—or even for a reasonable approximation to such objective rationality” (Simon, 1957,p.198). These concepts include bounded awareness, rationality and emotional biases, escalation of commitment and fairness and equality. Bounded awareness is a concept that was described by Bazerman and Chugh based on the observation that people sometimes overlook significant information when making decision (Chugh and Bazerman, 2007). One cause of bounded awareness is the tendency to become over focussed. It is noted that focus often limits awareness and may cause important information to be missed. The human mind is intrinsically unable to see certain things. An individual only detect patterns in what he or she sees, but since this individual is limited by the range of his imagination, he or she may face difficulties in imagining what is not present. Because of blind spots, one may miss things, then minds can replace what is not seen with what it wants to see or experience. Bounded awareness is regarded cognitive blinders that prevent an individual from seeing, pursuing, using or even sharing information in the course of decision making. Bounded awareness may be in terms of selective focus (Chugh and Bazerman, 2007). This is to mean that, if a decision involves many choices of considerations, the response that comes naturally involves simplification by focussing entirely on the subset of what matters. This simplification sometimes can be misleading. Oversimplification may be a bias to decision-making. Another factor of bounded awareness is intuition. Many business people make decisions by intuition. This is termed as letting the subconscious mind make the choice that it feels is right. Our intuition may cause us to accept what is offered and not going beyond it. This can result to simplified reasoning that may lead to bias in decision making. In addition, bounded awareness may occur at different points in decision making (Fairchild, 2014). First, managers may fail to see information required to make decision. Second, they may not use the information they see and finally, they may fail to share such information. People tend to overlook unexpected information. Also gradual changes may not be recognised easily causing bounded awareness. Adding to this, many people may discard information when making decision due to perpetual and cognitive processes. Also, bounded awareness can occur when members of a team fail to share information necessary for decision making with other members (Brotheridge and Lee, 2008). Team members often discuss the information they would use to make decision and naturally fail to share new and unique information because it tends to be easy to share common information since common information is positively rewarded since other members chime in with support. Cognitively, people do not realize the significance of sharing unique information and also fail to obtain unique information form others. This pattern negatively influences how organisation form diverse teams and consequently becomes bias to decision-making processes. Bounded awareness generally, as Simon highlighted makes the capacity of people to solve problems small compared to the existing problem, thus affects decision-making process (Brotheridge and Lee, 2008). Another discrete concept that impact decision outcomes is motivations and emotions. A common interpretation in behavioural pattern is that rationality result from cognitive process that is often behaviourally biased. The bias has negative consequences since it causes distortion in the perception of an outcome. Decision-making processes considered cognitively biased when it causes sub-optimal results errors (Brotheridge and Lee, 2008). An individual may make irrational decision due to faulty reasoning, lack of information, inability to seek information, memory errors, to name a few (Fairchild, 2014). Differently, when a decision is motivationally and emotionally biased, it is clear that the cognitive process has been influenced by factors like moods, affects and feelings. This may lead to an individual making irrational decisions. Therefore, cognitive and emotional processes are considered discrete and result from two systems; an emotional system and a cognitive system. While cognitive process bias is a concept that impact rationality from inside the cognitive system, an emotional bias are concepts that impact cognitive system from outside. Unfortunately, we can assume that, rationality is purely a cognitive process and not motivated. To add to this, there is no rationality without involvement of emotions (Fairchild, 2014). Emotions are so inclined in every individual life and thus is transferred in the decision-making process and without them human behaviour would be irrational. Emotions have significant effects in decision-making process (Fairchild, 2014). Often, they influence decisions indirectly; the affective response is incidental to available choice thus influencing indirectly the subjective value resulting from an option. However, emotions can influence decision making directly. Reactions caused by emotions need not to affect subjective value of available choice. It may be incorporated in the calculation as an opinion. This means that, in the indirect case, emotions affects subjective value of a choice while in the direct case, the emotion become one of the choices (Lempert and Phelps, 2014). Also, emotions can trigger other mental states such as new beliefs, forgotten memories, new preferences etc. that could be added as choices in arguments leading to decision outcomes. Also, specific emotions can result to different outcome. For instance, fear can cause risk aversion, sadness may motivate change, disgust may motivate sale and anger and happiness may increase confidence and sense of power and reduce risk sensitivity (Livet, 2010). Another discrete concept that makes the ability of an individual to make decision smaller compared to the existing problem is escalation of commitment. Sometimes committing to a decision is important, but at times it may be a bad idea that may result to poor decision-making (Lempert and Phelps, 2014). Escalation of commitment takes place when an individual continuously allocate resources such as capital and time to a declining course of action. One reason why people tend to escalate commitment is self-justification. Feelings of responsibility towards a failing course of action intensify the threat of failure and elevate an individual’s motivation to justify this action (Bazerman and Moore, 2009). Many decision makers tend to convince themselves that the failing action will turn for the best if they keep allocating more resources. Another reason for escalation of commitment is confirmation bias. After committing to a course of action, an individual is likely to overweigh evidence that support his decision and may fail to underweight evidence that do the opposite (Lempert and Phelps, 2014). Decision-makers may be less aware of the problems associated with their current venture, or when they are aware of the available problems, they tend to underestimate their severity. Other factors that may make a person to escalate commitment are loss aversion from the current venture, and impression management that is focussed on avoiding admitting an investment was a failure due to the decisions made (Martino, Cameree, and Adolphs, 2010). Escalation of commitment may result to irrational decisions as it reduces the capacity of an individual to make right choices. Irrational decisions may result also due to fairness and equity concept. Decision making can be bound between being fair and monetary gain. If the predestined outcome is dependent on monetary gain such as in the demand and supply business, then the decision-making process can be regarded as maximization process of increasing monitory gain to greater extend (Lempert and Phelps, 2014). On the other hand, if the predestined outcome is dependent on equity and fairness, then it is considered a process of increasing fairness and equity as much as possible. When the predestined outcome is dependent on both monetary gain and fairness and equality, then the decision process should maximize both concepts. However, if maximization of one concept conflict with maximization of the other, then a decision must be made to optimize one or the other. Decisions may also be influenced by bounded ethnicity that is described as unethical behaviour that takes place unconsciously that may be inform of over-claiming credit, implicit attitudes and in-group favouritism. All these may lead to irrational decisions (Lempert and Phelps, 2014). In conclusion, examination of concepts that explains bias in decision making; bounded awareness, equity and fairness, escalation of commitment and motivations and emotions, explains that in the midst of such biases, the capacity of an individual to solve a problem in business is small compared to the extent of the problem and often leads or irrational decisions. Part Two Decision Making Scenarios Introduction Decision making is an important concept in a business. Good decisions are made in an event of good information, experience, consultation and avoidance of biases. Decision-making process takes place at all levels of an organisational operation. Managers and senior executives may make decisions about investment and business growth, improvement of business practices to name a few (Kumar and Chakrabarti, 2012). This decision affects the business and should therefore be made in the right way. One major cause of irrational decisions in business organisation is the bias concept. This report will outline decision making scenarios in the real world, taking into consideration concepts such as bounded awareness, escalation of commitment, fairness and equity and motivations and emotions. Bounded Awareness scenario Bounded awareness may occur in a situation where the information for decision making is known but not used (Kumar and Chakrabarti, 2012). For instance, Merck, a drug company failed to withdraw a pain relief drug called Vioxx from the market not until 2004. By this time, it was approximated that the drug may have caused over 25,000 cases of heart attacks and strokes. The risks of the drug were reported as early as 2000 by England Journal Medicine but Merck failed to take action early and this caused them dearly since over $200 million was used in claim settlement. By the time the medicine was withdrawn from the market, over 100 million prescriptions were given in the United States. Over 1,000 claims have been forwarded against the firm. According to the information presented by the medical journal, people taking Vioxx complained to be experiencing myocardial infarctions. By 2001, the firm reported 14.6% of patients taking Vioxx experienced cardiovascular troubles, and 2.5% developed conditions like heart attack. Social science research acknowledged that without knowledge, decision makers tend to ignore some critical information (Kumar and Chakrabarti, 2012). Doctors, just like ordinary people, are not perfect in processing information. They face dramatic demands on their time and are expected to make life-and-death associated decisions under ambiguous circumstances and conditions. In the case of Vioxx, it has been reported that doctors, more often than not, acquired positive feedback from individual taking the drug (Bennis and O’Toole, 2005). Therefore, Merck took unethical chances to make Vioxx appear safer and healthy than it was. Despite having knowledge of the problems associated with Vioxx, the doctors were blinded by the extent of the problems. Also, Merck’s executives allowed the drug to stay in the market despite their knowledge of the risks associated with Vioxx. Focus is good in business. But in decision making, executives should establish whether important information exists out of focus due to bounded awareness. For example, when Merck decided to aggressively pursue sale of Vioxx, they lost sight of the risks attributed to the drug. Also, when something is at stake like the potentially dangerous product such as Vioxx, executives should gather all the information needed in making wise decision before it is too late. Merck would have not ignored the risks reported by use of Vioxx in their operational decisions. This would have prevented the extent of the problem (Bennis and O’Toole, 2005). Motivations and emotions Scenario Emotions may impact investments decisions. The risk of investment of an individual is impacted by inner factors (emotions) and to a less extent relate to outside factors. The process of decision-making involving the investors is highly affected by their emotions and motivations (Constantini, 2006). An individual behaviour in the stock market has biases that can be explained by behaviours and emotions. Every person has emotions bases that tend to shape the choices taken. Overcoming such biases will enable one avoid bad investment decisions. A large number of people make investment mistakes. For instance, a middle-aged banker places approximately half of his $500,000 portfolio in a number of bank stocks. Another individual sells her business to a large consumer-goods company that had almost all his money in the company’s stock. Investor’s mistakes often have a predictable pattern (Constantini, 2006). Emotions that lead to bad investment decisions include overconfidence, self-attribution, familiarity and anchoring and loss aversion. It is very easy for an individual to overestimate his ability in picking stocks and in turn underestimating the risks involved. Even professional money executives often struggle to deal with index fund. Overconfidence is a result of emotions and self-motivation that may lead to irrational decisions. On the other hand, self-attribution is a cognitive error that potentially leads to overconfidence. The person who bought Pet.com and Apple in the late 1999 dismissed Pet.com loss as it went bankrupt since the market tanked and yet he still believed he was an investment whiz since he owned Apple. Individuals tend to invest in what they know best but this can go astray (Constantini, 2006). Familiarity is an emotional state of wanting to involve oneself to something one knows best and this may lead to irrational decisions. In order to overcome emotional biases in investment, one should have a written plan that he can stick to even during times of stress or euphoria. In an event where someone cannot control their emotions and do not have enough time to control their investments, then it is advisable to hire financial adviser who can offer moral support and coaching (Pompian, 2006). Escalation of Commitment Escalation of commitment is very common in the professional and personal life (Wong and Kwong, 2007). British Columbia’s decision to hold the World’s fair Expo ’86 represents a public example of escalation of commitment. Expo’s ’86 was required to operate until a financial break-even point. However, as plans for fair continued, the losses burgeoned. Planner at this point tried every means to minimize losses by reporting heartening but biased approximation of revenue and costs. The director recommended cancelation of the firm but the planners went ahead with the plan. Fortunes of various businesses were tied to the Expo ’86 and the future of the premier were aligned with it. In the midst of this, the province developed a lottery to deal with the $300 million deficit before the fair was opened as scheduled (Pompian, 2006). The case of Expo ’86 shows an example where political forces may have taken part in sustaining the costly business project. The estimates of the costs of the fair were too high compared to the benefits of continuing with the project thus stating the likelihood of biasness. Knowing that one is committing to failing course of action is not enough. It is also necessary to follow some steps that would eliminate over-commitment. One way Expo ’86 would have taken care of escalation of commitment is using separate decision makers. Separation of initial from subsequent decision makers taking part in the fair would have been a good idea. This is to say, they could have separated funding from project decision makers. Also, reducing escalation of commitment may involve replacing individuals involved in the original project on our case the Expo ’86 fair. The removal of the originators tends to eliminate a number of sources of commitment (Beshears and Milkman, 2011). Equity and Fairness scenario Economics involves supply and demand. There is a third factor that should be taken into consideration. That is fairness. People are driven by how fair they perceive something is. Business may raise its prices in certain circumstances. However, customer may regard this as violation of sense of fairness. For instance the Coca-Cola Company has taken advantage of supply and demand laws by testing vending machines that raises prices of its drinks during hot conditions (Haig, 2003). This was attributed to the increase in demand of cold drinks during the hot season. While the idea may seem unfair, the company considers it fair as it utilises the laws of demand and supply. Vending machines are very popular and source of profits for the company. Industry reason to the Coca-Cola vending machine initiative ranged from sanctimonious to enthusiastic. The increase of prices by the vending machines during hot season led to increase in profits. However, the move was regarded unfair and unethical as it exploited individuals living in warm climates. The decision-making process based on equity and fairness can be evaluated using relativistic fairness-equity model (Pompian, 2006). Logical decisions can be made by considering fairness or monetary gain or both without being paradoxical. Profit gain or loss is as a result of the decision. If the desired result is to maximise the profits, then the decisions should be based on increasing monetary gain. If the desired outcome is to increase fairness, then the decisions should be based on maximization of fairness. Conclusion Business people often make irrational decisions due to factors like escalation of commitment, motivations and emotions, equity and fairness and bounded awareness. All these factors are considered biases in decision-making process (Pompian, 2006). Motivation and emotion biases may lead to poor investment decisions leading to losses; equity and fairness biases may lead to exploitation of consumers or losses in the demand and supply situation, escalation of commitment lead to exploitation of available resources to failing course of action and bonded awareness tend to limit the amount of information necessary for decision making. Biases should therefore be avoided in order for rational decision to be made. References Bazerman, M.H. & Moore, D.A. (2009). The escalation of commitment. Judgment in Managerial Decision Making, 7th edition (pp. 101-112). New York: Wiley. Bennis, W. G., & O’Toole, J. (2005). How business schools lost their way. Harvard Business Review, 83(5), 96-104. 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