A Framework for Quality Managerial Decision-Making

With the debate having raged for over 50 years, enabling better decision-making for more positive organisational outcomes is clearly not a new field of research. In working towards some resolution, through years of research and published academic works, I believe a clear framework that allows for better organisational decision-making is needed.

Understanding decision-making

Decision-making is not a simple process. When studying decision-making in business, we need to recognise both its psychological motivations as well as its economic drivers and inhibitors.

Neo-classical or mainstream economists argue that decision-makers are rational in their decision-making. This means that a decision-maker is making choices that result in the optimal level of benefit or utility for the parties involved. On the other hand, psychologists and behavioural economists argue that the decision-making process is far from rational and is based on emotions, biases and social influences.

I would argue that there are elements of both rationality and emotion in any decision-making process. As such, we need a new perspective if we are to fully understand how leaders make decisions.

Enter behavioural decision-making

Behavioural decision-making serves as a meeting point where the nuances of psychology intersect with the pragmatism of economics. In behavioural decision-making, scholars argue that our choices are impacted by three key factors: time, information, and our cognitive processing capacity. As such, leaders need to aim to make “good enough” decisions rather than perfect or optimal decisions.

In addition, decision-makers are not purely rational beings. So we also need to turn our attention to pillars of behavioural decision-making, namely, heuristics and bias:

• Heuristics is the process of using mental shortcuts that allow people to solve problems and make judgements quickly and efficiently. These shortcuts are learned over time and can include trial and error, past experiences and the need for speed and efficacy.
• Bias is where the decision-maker is limited through the processing of information, such as anchoring on the first information received or favouring familiar information. It differs from social bias or the prejudice against something or someone based on their background, past experiences, societal stereotypes, and/or cultural context.

Both heuristics and bias will result in deviations from the rational decision-making process. Where bias may result in the decision-maker overestimating their judgements, overvaluing losses or gains, poorly estimating probabilities and risks, and misjudging the influence of time and value, heuristics means that decision-makers are not meticulously evaluating every option. Rather, the heuristic decision-making process is streamlined by selecting the option that best aligns with their most important criteria or decision cues. While heuristics is about using shortcuts in decision-making, we must not mistake it for intuition – which is often confused as an inferior form of decision-making. Heuristics is not about making assumptions or guessing. Rather it employs a set of simple “rules” to decide between options.

Research has shown that decisions employing heuristics are often also superior to analytical approaches, leading to better decision-making outcomes, especially when used by experts in a field. In an uncertain world, intuitive and heuristic approaches result in better decision-making than using formal rules and analysis. As heuristic decision-making is quicker and requires less effort, it is particularly effective for simple decisions where speed is required and where information is limited.

Shifting the debate on decision-making 

We need to evolve from viewing decision-makers as flawed to embracing their inherent potential to make good decisions. To do so, we need to begin by defining a “good” decision. Many scholars consider organisational outcomes, such as efficiency and effectiveness, as a way of assessing the quality of a decision. However, a better measure of decision quality is how well we reason during decision-making. 

Consider the following three components of good decision-making:

• Flexibility in generating decision options: The ability to process and integrate cognitive complexity and navigate and surpass cognitive processing limitations.
• Moral reasoning: Understanding ethical dilemmas, assessing right and wrong, and making decisions based on moral principles, values, and beliefs.
• Effective interpersonal decisions: Group decisions that ensure decisions lead to positive outcomes, mutual understanding, and healthy relationships.

Using these focus areas, quality decision-making can be synthesised into a comprehensive framework that can guide individuals and organisations to better outcomes. 

Delving deeper into behavioural decision-making 

My argument as a researcher is that behavioural decision-making lacks adequate explanation – both theoretically and practically – of what it means to make good decisions. I aim to synthesise the insights on quality decision-making into a comprehensive framework, which can guide individuals and organisations towards better decision-making outcomes.

A lot of time has been spent on studying decision-making flaws and fallacies, but we appear to have forgotten that decision-makers have immense cognitive capacity to create, solve, and transcend through the decisions they make. As such, we require a framework that embraces both the positive and negative aspects of behavioural decision-making, and to view decision-making as reasonable rather than irrational. This means we need to include our creativity, capability, and other higher-level cognitive processes to enable decision-making.

Using this lens, I have worked extensively on my own research and that of my master’s and doctoral students to understand decision-making beyond the limitations of “bounded rationality”, which argues that human beings are rational but limited, by expanding into the realm of boundless possibilities.

A selection of insights have emerged from this research:

1. Decision-makers are biased
   When looking at different biases, including underdog bias, overconfidence, and risk propensity, research found that investors, for example, as a special class of decision-makers, have healthy risk-taking profiles but tend to overrate their performance compared to their peers.
2. Even executives are indecisive
   This indecisiveness often stems from executives’ desire to avoid retaliation, or from the complexity of reporting structures leading to decision paralysis. Indecisive leadership can be harmful to an organisation’s performance and can harm individuals and teams who become demotivated.
3. Interpersonal and environmental factors influence decisions
   Factors such as environmental risk, economic inequality, uncertainty, and competition can influence decision-making. But decision-making can be enhanced by characteristics such as astuteness and risk assessment, negotiation skills, and networking abilities.
4. Organisational reasoning improves decision-making
   Collective decision-making can be improved through practical tools that help managers prepare for uncertain times. This can be enabled through dedicating time to decision-making, increasing decision-making competence, offering a dedicated space for scenarios thinking, creating a consultative culture, and fostering openness and curiosity.
5. Organisation risk culture supports decision-making
   It is important that an organisation has a common set of values among employees to drive risk behaviour in collective strategic decision-making.
6. There are key values that enable effective decision-making
   Quality decisions occur when people value openness to change rather than traditions and norms. To achieve this, leaders need to understand the contextual values of the situation as well as the personal values of all decision-makers, and analyse competing preferences to ensure the best outcome of collective decision-making.
7. Mindfulness supports ethical decision making
   Mindful leaders have a greater sense of obligation to and care of others. They are better able to distinguish right from wrong and so, reasoning that can lead to better moral decisions can be developed.
8. Heuristics enable entrepreneurial decision-making
   When applied to entrepreneurs, the belief in their abilities (or self-efficacy) enables the use of the affordable loss heuristic – assessing what they can afford to lose, rather than what they stand to gain. This heuristic in turn leads to resourcefulness, allowing entrepreneurs to solve existing challenges using past resources.

The implications of this research for business leaders

The outcomes from the continuation of the research mentioned suggest that there is validity in taking a dualistic perspective on decision-making. Decision-makers are not perfect; they are biased, indecisive, and react to constraints and risks. However, our human nature, including personal values, can help leaders deal with decision dilemmas, and organisational decision-making can be supported through collective reasoning, culture, and values. The research also suggests that heuristics and intuition are good decision-making approaches when married with experience.

Through this research, I have started to create a framework to help develop thinking competencies for improved decision-making.

The good-decision framework

1. A good decision is an implicitly moral one and ethical considerations are therefore foundational criteria for evaluating decisions.
2. Good decisions require an adaptive decision strategy, which is a flexible approach that uses situation-specific approaches in response to circumstances.
3. Adaptive heuristics include flexible and contextually appropriate mental shortcuts or problem-solving strategies that can be adjusted based on changing situations. These heuristics offer the opportunity to improve our decision outcomes.
4. Good decisions draw on wider cognitive capabilities – both individually and collectively – through intuition, collective intuition, creativity, values, and similar constructs evident in positive psychology.
5. Businesses need to enhance interpersonal processes and dynamics supportive of cultures that improve corporate reasoning.
6. A self-actualisation mindset over a bounded mindset is a superior strategy to understand how to create contexts, decision architecture, and policies for better organisational decision-making.

KEY TAKEAWAYS

• Good decision-making has to be made through a lens that goes beyond decision bias considerations. This has to include the psychological potential to create, be intuitive, and solve moral problems.
• Decision-makers are not perfect. They are biased, indecisive, and react to constraints and risks.
• Instead of focusing on bias and fallacy, a proficiency perspective offers better pathways to improved organisational decision-making.
• Behavioural science is the foundation for studying improved decision-making. As we study what works in individual and group decision-making, we should improve our approaches rather than study our flaws.
• Good decision-making includes moral and ethical considerations, is analytical, heuristic, and intuitive in nature, and requires supportive organisational cultures based on collective corporate reasoning techniques.

Professor Charlene Lew is a full professor at the Gordon Institute of Business Science (GIBS). She holds a doctorate in psychology and teaches on behavioural science, change leadership, and strategic and ethical decision making. She serves as chair of the GIBS Ethical Business in Complex Contexts research community. Her consulting firm, PsyQuenza, focuses on behavioural change interventions and customised assessment and intervention development.