Information for Decision-Making - Essay Example

Page Information for Decision-Making Table of Contents Page i Table of Contents ii Introduction Management of Organisations and Decision-making 1 Decision-making: A Few Basic Facts 3 Managing Information and Decision Making 5 When Decision-Making Breaks Down 8 Conclusions 9 Works Cited 11 Introduction This paper is on the role that information plays in organisational decision-making and has four parts. The first part explains what decision-making is, its importance in organisations, and common techniques of making decisions. The second part identifies the basic facts common to the decision-making process. The third part is a discussion of the connection between information and decision-making. The fourth part looks at the consequences when the connection between information and decision-making breaks down, citing two related examples based on actual, publicly-known experience. Management of Organisations and Decision-making Making decisions is an intelligent action that any normal human being performs several times each day, starting from the time one decides to get up out of bed and ending with what one decides to think about as one falls asleep at the end of the day. In between are thousands of decisions that are made following a few basic and simple rules, but these decisions may differ in their complexity. Some decisions are simple and have short-term consequences, such as deciding what to wear to school or at work, but some may be complex because they have long-term consequences, such as deciding what academic programme to take up in the university. The complexity of decision-making depends on several factors, of which the time frame – of making the decision and the consequences of the decisions made – is only one. Examples of other factors are the impact of the decisions on the person, the number of people involved in making the decision and who would be affected by the consequences of that decision, and the risks to which decision-makers are willing to expose themselves and their resources. Organisations, being made up of several people with a common set of objectives, are subject to these same factors that affect the way that decisions are made. However, unlike personal decisions that may affect only one person, i.e., the decision-maker, organisational decisions have an impact on everyone in the organisation, on the customers that the organisation exists to serve, the owners of the business, and on other parts of society in which the organisation operates. Thus, organisational decisions carry greater risks, which is the probability that the perceived effect of the decision would not be the same as or even close to what is originally intended. Decisions are made to achieve a specific outcome, and in the case of a business organisation, such an outcome is intended to be in line with the purpose and business of the organisation (Sitkin 260-262). However, not all decisions may turn out well, either because the factors that were considered when the decisions were made were wrong or have changed, or there was a fault in the decision-making process, which can happen for several reasons (Shiller 58-59). First, decisions are made according to the personal perceptions of those making them. Each person involved in making the decision has biases shaped by education, personal experience, and tolerance for risk. This affects how they perceive the issues that require decisions to be made, or the manner by which the decisions are made, or the effects of those decisions. Second, people may lack the skills needed to make complex decisions. Although making decisions at a personal level may seem simple, most organisational decisions feature complex features that managers must learn to control for decisions made to turn out to be right. Academics identify four decision strategies: (1) optimisation – choosing the best solution to a problem; (2) satisficing – choosing the first satisfactory alternative rather than the best one; (3) maximising the maximum – choosing the alternative with the best possible result; and (4) maximising the minimum – choosing the best or the least worse of several bad alternatives (Stokes et al. 535-537; Kahneman & Tversky). People who make decisions choose the strategy that best fits their values and perceptions. Optimists, for example, maximise the maximum whilst pessimists maximise the minimum when they make decisions. Decision-making: A Few Basic Facts A manager who wants to improve decision-making skills must know a few basic facts about the decision-making process: its objectives, the types of decisions, its components, and some approaches and strategies to making decisions (Kahneman & Tversky 341-343). Definitions: Making decisions can be defined in two ways. First, it can mean identifying and choosing alternatives based on the decision-maker’s values and preferences. Making a decision involves considering alternative choices, identifying as many alternatives as possible, and choosing the one that best fits the goals, desires, lifestyle, and values of the person. Second, making a decision is the process of reducing uncertainty and doubt about the many reasonable alternatives faced by a person. This second definition stresses the importance of information when making a decision, because information reduces uncertainty in decision-making but does not totally eliminate it. This uncertainty is what is commonly defined as risk, and there is no such thing as a decision that is absolutely certain. Decision Types: Decisions can be characterised as one of three types. The first is the “either/or” or “yes/no” type of decision. This first type of decision is the most basic and usually is the first step before choosing an alternative. It requires weighing reasons that are for or against future decisions. One example in the case of an organisation is deciding whether to hold an office party before the end of the year. It is very basic and does not require much information. The second type can be characterised as the “choose from alternatives” type of decision, where a decision has to be made to choose from more than one alternative. The choice depends on which alternative measures up to a pre-defined set of criteria for making the decision. An example is that once the organisation has taken the first type of decision – hold an office party – it can now choose from alternative dates and venues or when and where to hold the party. The third type can be described as the contingent decision, which requires that some additional conditions are met before a final decision is made. The organisation may have decided to hold the office party in a 4-star hotel on the third Friday of the coming month, but on the condition that sales targets are met. Although a set of earlier decisions have been made, carrying out the decision would still depend on a set of conditions that have been established. Most decisions made in and by organisations are contingent decisions. Profits targets, incentives, expansion plans, new products or services, hiring and firing decisions are mostly contingent on meeting several sets of conditions that are the result of other decisions. These conditions are also known as objectives or goals. It is the job of management to coordinate all these objectives without causing too much confusion so as to ensure that everyone can work together towards achieving these objectives that serve to enable the business to achieve its purpose for existence (Stokes et al. 534). Much of decision-making is therefore iterative and is not a linear process where one decision always automatically leads to the next logical one. As each decision is made, the decision-maker makes adjustments depending on whether the conditions continue to hold. Thus, in the example, the firm that has decided to hold an office party may change its decision after it gets new information on how the conditions were met. It may decide to party in a Mediterranean resort instead of a hotel because the objectives were achieved ahead of time and way above target. Most decisions move back and forth between the choice of criteria (characteristics of the choice) and the identification of alternatives (possibilities from which one can choose). Criteria and alternatives influence each other and can lead to a change in the set of decisions made, contributing to its complexity (Norman 9-13). Decision Environment: As can be seen, decisions are made within what is called a decision environment, which has several components such as the collection of information, alternatives, values, and preferences available at the time of the decision. Information is the knowledge about the decision, the effects of its alternatives, and the probability of each alternative becoming real. Whilst having more information is ideal, too much information can also reduce the quality of a decision. Alternatives are the possibilities one has to choose from and can be identified or developed. Like having too much information, having too many alternatives also affect the quality of decisions. Values consist of criteria and goals and affect the desirability of a particular outcome from the decision. The criteria are characteristics or requirements that each alternative must possess, whilst goals are what the decision-maker wants to accomplish. Having clear goals and criteria would help a decision-maker evaluate what information to gather and the alternatives that would be considered. Preferences are the reflection of the decision-maker’s philosophy and moral priorities that affect what one considers to be good and true. Since people act for their own good and in search of truth, then knowing clearly these personal preferences would affect the quality of all decisions made. If some of these preferences do not conform to the preferences of others, there would be conflict. An important task of managers is to minimise these conflicts amongst those who work in the organisation so that their decisions conform to the preferences and values of the business. This, of course, is easier said than done, which makes management a challenging occupation. Decision Quality: A good decision is one that is logical, based on the available information, and reflects the preferences of the decision-maker. Managing Information and Decision Making Ideally, the decision environment would include having all the possible information and alternatives before a decision is made, but in reality, this is almost impossible. The reason is that both the information and alternatives may be constantly changing because the time and effort needed to gather information or identify alternatives are limited. Time constraints require that a decision has to be made at a certain time, whilst effort constraints reflect the limited resources such as money, sense of priorities, and personnel that are always present. Every person and firm, no matter how rich or successful, have these two constraints of time and effort because humans are limited (Sitkin 235-238). For example, no one can be in two places or be two realities at the same time. The decision environment is full of uncertainty, which therefore means that anyone who makes a decision has to do the best that could be done given all of these limitations. In the end, what would be most important is limiting the level of risk associated with the decision to a degree that could be controlled. Every organisation in whatever industry has managers whose task is to make the decision of how much risk the organisation could willingly take, so that if the worst happens, the firm would still be able to survive and recover. Otherwise, the firm is totally destroyed and ceases to exist. The greatest risk that management decision-making can lead to is, as in making personal decisions, that the organisation puts an end to its existence. Information affects each component of the decision environment, which continues to change shape, grow or diminish, with the passage of time. Facts and conditions change; values and preferences change too, though not in the same magnitude and frequency as the former. Information and alternatives may continue to grow, which is why many managers put off making a decision until close to the deadline. The main benefit of delaying decisions is due to the access to more information and for more thoughtful and extended analysis. The delay may also lead to the recognition or creation of new alternatives. Or, the decision-maker’s preferences may change. All these may result in the building up of tension within the organisation and in the minds of its decision-makers, but this is all part of the dynamics of managerial performance and is one of the reasons why managers are paid higher salaries. The stresses and tensions of decision-making are conditions that not too many people are capable of handling, especially when decisions are not popular like layoffs or closing down factories, or deciding which new product to launch (Stokes et al. 548-552). It is for the reason of diminishing the stresses and tensions of risky decision-making that many managers give in to the tendency to seek as much information as required before they make a decision. The problem is that when too much information is gathered, many things can happen. First, the decision is delayed, which could affect the effectiveness of the decision or the solution to a problem for which a decision is made. The opportunities that were open to the firm may also have disappeared, rendering the decision useless. Second, there may be information overload, making it almost impossible to make a decision. The amount of information is so great that the managers find it difficult to manage such a quantity of information. This leads to forgetfulness, inappropriate decision-making, and pushing out some information that may have been important in the first place. Third, managers would engage in selective use of information, resulting in decisions that are based on information that is easier to grasp or that support a preconceived notion of which solution would be acceptable or that meets a biased position. Fourth, there is mental fatigue that slows down work or diminishes its quality. This leads to decision fatigue, where the decision-maker tires of making decisions and ends up committing careless mistakes, or even decision paralysis, where no decisions are made at all (Ustinovichius 549-552). The human mind is limited and the amount of information it could process is also limited. Thus, if good quality decisions need to be made, the decision-maker has to develop the skills of finding the right information sets, processing the right quantity of information and turning away the rest, and making the decision at the right time so as to move the organisation in the right direction. The best managers are those who learn to manage information and make the timely decisions that best serve the organisation (Kahneman & Tversky 345-347). When Decision-Making Breaks Down Every decision follows from previous decisions, enables many future decisions, and prevents other future decisions. Some managers are indecisive because they are trapped by this limiting nature of decision-making. What they fail to realise is that while making a decision means a loss of freedom, it also creates new freedom, new choices, and new possibilities. Thus, making decisions can be an exciting activity depending on the attitude of the manager. Besides, not making a decision may result in greater risk that would require a more difficult decision later on (Hansen & Brooks 55-74). Decisions have far-reaching consequences, and the quality of a decision may not be related to its outcome, which may be good or bad. A good decision may lead to a bad outcome, but most bad decisions, those that are based on poor information or that do not reflect the decision-maker’s preferences, eventually lead to a bad outcome, unless luck is involved (Owens & Wilson 231-266). The reason a good decision may lead to a bad outcome is the change in information, which is not a justification for blaming the decision-maker, unless there was a defect in the manner by which the information was gathered. However, there is no excuse for bad decision-making, and in most cases those managers who make such a mistake deserve to be replaced or penalised (Hirshleifer & Teoh 25-35). Two concrete and related examples are what happened at Enron, a US firm that went bankrupt in 2001 because of bad decisions made by the senior management team to cover up the bad outcomes of good decisions, and in its workers, who made a good decision that resulted in a bad outcome for which they paid the ultimate price: bankruptcy and loss of financial security. The senior management made a series of decisions that were initially good ones but that resulted in a series of bad outcome in the form of financial losses. Their decision to make investments in trading of water resources, Internet broadband, and electricity were good, but when they met strong resistance from environment groups and equally strong opposition from its competitors, most of these investments failed to give acceptable returns, resulting in lower profits or losses in some of its subsidiaries (Jensen 379-406). However, since Enron’s executives were compensated based on the stock price, a good method according to Jensen & Murphy (1990), they had an incentive to keep the stock price artificially high by not declaring their losses. They did so by using accounting magic to hide these losses and to even declare profits. These actions reflect a bad decision-making process where accurate information (losses and proper accounting principles) were used to support the negative values and preferences (they wanted to earn more than what they deserved) of the management team. And to make matters worse, the Enron CEO encouraged the workers to put their retirement fund in the company’s stock, even when the stock price was collapsing (Bebchuk & Grinstein 287-289). The employees, who trusted what their CEO told them, did so and ended up losing everything when the stock eventually collapsed and the company closed down. They made a good decision based on the available information and according to good values and preferences as shown by their wanting to maximise their retirement benefits, but the initial information turned out to be false, so the outcome was bad. Conclusions The quality of a decision is affected by its logic, the use of information and the choice amongst alternatives. In addition, the decision must thoroughly and completely satisfy the objectives or goals for which a decision needs to be made in the first place. It must also meet the desired objectives efficiently, taking into account the cost of implementing the decision, the amount of effort needed, and the long-term effects that the decision would result from the decision. The decision-maker has to make sure that the consequent risks could be managed, including whatever indirect advantages the decisions may have. Having the right amount of information is important, but what is perhaps more important is learning to manage the information gathered to make the decision. Not being able to manage the information can also lead to bad decision-making or bad outcomes, both of which a manager must try to avoid at all cost. There are three important lessons a manager can learn from the decision-making process. First, the quality of decision-making depends on the ability to manage information about the decision that needs to be made, the alternatives to choose from, and the uncertainties that making a decision attempts to reduce. This ability can be learned as one grows in the job, and there is no better teacher than experience and making mistakes, manageable or not. Thus, even if a bad decision results in the loss of the manager’s job, it is still a good learning experience. Second, a manager must learn to intellectually and emotionally accept the decision that is made. Unless such acceptance is present, implementing the decision and managing its consequences would be difficult, if not impossible. Acceptance is critical because most decisions are made under conditions that are less than ideal and so full of uncertainty. Third, most decisions must be made taking into account that they have an effect on people. Some decisions, like Enron’s initial business strategies, may have been good, but they turned out to be difficult for people to implement, so they did not work out as intended. Every decision carries some degree of uncertainty and risk that create anxiety and stress. A manager who learns to gather the right amount of information can cope with the challenges that are part of decision-making. Should the manager learn how to consistently show grace under tremendous pressure and learn from every decision made, regardless of the outcome, such actions would inspire others to follow their example. Works Cited Bebchuk, L.A. & Y. Grinstein. ”The Growth of Executive Pay.” Oxford Review of Economic Policy 21 (2005): 283-303. Hansen, C.D. & A.K. Brooks. “A Review of Cross-cultural Research on Human Resource Development.” Human Resource Development Quarterly 5.1(2006): 55-74. Hirshleifer, D. & S.H. Teoh. “Herd Behaviour and Cascading in Capital Markets: A Review and Synthesis.” European Financial Management 9.1 (2003): 25-66. Jensen, M.C. “Paying People to Lie: The Truth about the Budgeting Process.” European Financial Management Journal 9.3(2003): 379-406. Jensen, M.C. & K.J. 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Ustinovichius, L. “Methods of Determining Objective, Subjective, and Integrated Weights of Attributes.” International Journal of Management and Decision Making 8.5/6 (2007): 540-554. Read More