Three Common Managerial Decision making Mistakes

Our mind works faster than any computer on earth, especially when it comes to cognitive functions. We can see a new face and instantly compare it to all the previous faces that we have ever glanced at and within a fraction of a second determine whether it is indeed a new face or not. Our mind does not stop there, it goes further by instantly recalling all other faces that have commonalities to this new face and brings back any associated memories that go with those faces. This extremely complicated function can never be matched by any computer. And yet, we make simple, common mistakes that would make a computer laugh at our primitiveness.

As managers we perform complex tasks everyday, often juggling multiple tasks as part of our daily managerial duties. However, most managers are not aware of how their minds accomplish these complex activities. Sadly, experience offers little guidance in this respect. To most managers it might not seem important to know how they make decisions, but this lack of understanding the decision making process has profound consequences. It could lead us into making minor mistakes such as assigning a task to a wrong team member or major mistakes such as choosing Madoff to manage our life savings.

Rational Decision Making Process

The rational way to go about making an optimal decision would follow these steps:

Define the problem – understand and state the problem clearly. This would avoid in solving the wrong problem or confusing the symptoms for the problem.

Identify the evaluation criteria – when selecting one project over another, define what criteria will used since in some cases the project that might be chosen based on cost savings versus another that might be based on generating new business.

Generate alternatives – in this stage we generate as many possible solutions as possible

Rate each alternative – the rating should be based objectively on the evaluation criteria

Finally, choose the alternative that has the best rating as the optimal decision.



Satisficing

However in reality, most of us do not have the time or energy or the information to deliberate on each step. Instead, we operate on an instinctual level. Preferring to choose the best alternative based on our experience and instinct. In order to deal with complex situations and not be bogged down due to constraints of time and costs, we devise ‘thumb-rules’ or heuristics to quickly make decisions. Therefore, we forgo the optimal solution to choose the solution that seems reasonable, thus we seek to satisfice.



Three Common Mistakes

Anchoring-

Anchoring is a powerful concept that makes our mind cling to any initial number that is thrown at us. It prevents us from adjusting this number as new information becomes available. It is so powerful that we are unaware that we are not adjusting far enough away from this initial anchor and end up in its neighborhood. For example, when buying a used car, if the dealer first states the asking price as $ 5000, then after the usual negotiations between the buyer and seller, if a deal is struck, research has shown that invariably the deal price tends to be closer to the initial asking price of $ 5000. Whereas, in this same transaction, if the dealer had initially asked for say $ 6000 as the starting price, then the deal price would end up higher than in the first instance. That is because in the buyer’s mind, the initial anchor has been set, and this anchor makes it harder for the buyer to move away from that initial value, so the final value ends up closer to the anchor value than the buyer would want to believe. As a manager, we need to be aware of this anchoring effect, so as not to unconsciously err in everyday decision making: whether we are determining the return on an investment or assessing the capabilities of a new team member or deciding on the time it takes to complete a task.

Over confidence-

Overconfidence has been identified as a common judgmental pattern and demonstrated in a wide variety of settings. Most of us are overconfident in the precision of our beliefs and do not acknowledge our true uncertainty. If we are asked to estimate the number of fatalities due to road accidents in a given year or estimate the revenues of Microsoft, most of us will come up with a number and are fairly confident that our guess is very close to the actual number. While confidence in our abilities is necessary for achievement in life, overconfidence can be a barrier to effective professional decision making. With overconfidence one becomes impervious to new evidence or alternative perspectives. For example, you developed a new marketing plan for a new product and you are so confident in your plan that you have not developed any contingencies. When the plan starts to falter during implementation, will you make changes to this plan or will your overconfidence blind you to its flaws and make you continue with the plan as is. As a manager we need to be aware of overconfidence and think about why we might be wrong before making important decisions.

Representative heuristic-

When making decisions we tend to look for patterns that correspond to our previous experiences. Unfortunately this leads to stereotyping and bad judgments. When a manager thinks that the best sales people are likely to be extroverts or white people then the manager will unconsciously focus only on those sorts of people when hiring new salespeople. This could lead to discrimination and bad judgment calls. So as a manager we need to question our assumptions before making a decision.