Effective decision-making can lead to effective leadership. It is a matter of applying critical evaluation methods and to gain advantages through group decision making. This article will introduce into essence of decision making. Therefore, a typical and generic decision making process model will show up the steps of finding a decision. Next, the article will explain the differences in individual vs. group decisions and comment on the role of luck and intuition in the decision making process. In order to systematize decision making the article provides an overview over well-known decision making approaches and describes some common and elementary decision making methods. Due to the fact that decision making strongly depends on the amount of available information contributing to the result, decision making under stress, with missing information or in a risky environment is discussed separately.
As already mentioned, successful leadership is strongly dependable on good decision making. In this context aspects of group decision making, bureaucracy, pluralism, participation of non-leaders and the cultural context are examined. In order to make a step into decision making practice typical decision making traps are illustrated with the help of two case studies providing a good and a bad leadership decision making example with in the organisational structure of HSBC Trinkaus & Burkardt.
What is Decision Making?
In general, decision making is a process of selecting a logical choice from a couple of available options. While determining a good alternative a decision maker must weight positives and negatives of each alternative. Decision making is an integral part of modern operational and strategic management. In this chapter the essence, the process and the role of intuition and luck with in the process of decision making are discussed.
The Process of Choice
A choice is generally the result of a process that includes problem assessment and a judgement over different options and alternatives. In order for the processes to take place there have to be at least two alternatives from which to choose. It is essential, that the alternatives of choice have a positive value in sense of the choice's usability. Otherwise, a choice with no positive value wouldn't be a real choice. [2]
Essence of Decision Making
Decisions are in general discrete activities that involve individuals over a period of time. Additionally they involve selection and implementation processes and they have an end point. [3] A manager usually selects the best way to solve a certain problem. Hence, there exist various alternatives Furthermore decision making is based on rational thinking. This is the essence of decision making, because every decision depends on rational thinking and objective study. A decision is therefore always related to a problem or discrepancy. The result of a decision is typically aimed at archiving organisational goals. A decision involves basically human activity. Despite certain ways to support the decision making process by information systems, a decision is usually made by and dedicated directly or indirectly to human beings. Within an organisation decision making is always part of strategic planning. This includes the determination of objectives, policies, procedures or rules. In this context, decisions also contribute to the start or resume of action. Future activity only starts after a decision is made. Although a decision is the potentially best alternative, the results of the decision remain uncertain because a decision is an imaginative action with a reference to the future. [4]
Process of Decision Making
Phases of Decision Making
For even minimal decisions the decision maker has to run through several tasks. Typically these tasks or stages are processed in determined order. This implies that each stage is a precondition for the follow-up stage. But this must not be strictly the case. Dependant on the type of decision task may or may not be applied during the whole process of decision making. The stages are (Figure : Phases of Decision Making) [5] :
Figure : Phases of Decision Making
Setting Goals
Typically a decision is based on goals of the decision maker for his or her plans for the future. This is the ultimate precondition for the actual decision making process. Only if goals are determined, one can evaluate the degree of goal achievement in the last phase of decision making.
Gathering Information
In this phase the decision maker has to gather more information about his or her selected alternatives. This can be information about options or about possible criteria to use in making a custom choice.
Decision Structuring
Decision structuring should happen when the decision maker is confronted with a large number of decisions or if the decision has to be subdivided into several subdivided decisions.
Making a final Choice
After gathering and structuring the collected information and defining the goal of the decision a final choice has to be made. Sometimes this choice is trivial to find and sometimes it is a more complex process of involving other decisions. This might eventually result in a hierarchy of decisions.
Evaluation
A very important and often omitted stage in the decision process is the evaluation of the final choice. The evaluation of the chosen decision includes the determination of the gap between the theoretical goal and the practical result or consequence of the decision. Here, the degree of goal achievement and the quality of the decider's decision abilities can be determined.
Individual vs. Group Decisions
Most important decisions in the society are made by groups like e.g. teams, families, committees or business partners. But they tend to differ from those decisions made by individuals in isolation. [6] Regarding individual decisions it can be stated that the results in evaluating alternatives a group judgement is more preferable than an individual judgement. Nonetheless, in implementing a choice individual responsibility is superior to group responsibility. [7] It is to expect that group decisions differ systematically from the distribution of individual decisions when group members can interact with each other since group members can communicate information in order to rationally change the intended action of the others. Group decision making involves social interaction, which makes the process of decision making slow and complex. In contrast to isolated individual decisions, people in groups act and decide more selfishly. Additionally, in most decisions groups tend to take more risky decisions and individuals make more cautions decisions. [8] However, the decision commitment in a group requires each individual in a decision making group to understand the hows, whys and wherefores of the group decisions. But decision understanding only comes through constructive controversy which may lead to relationship conflicts. Anyway, effective group decisions are only found at moderate and not high levels of relationship conflicts. [9]
Intuition and Luck
In strategic organisational planning tendencies arise saying that strategic planning is an oxymoron. Strategy cannot be planned because planning is about analysis and strategy is about synthesis. Intuitive processes in contrast to rational processes are often seen as irrational or paranormal. But studies in cognitive science say that intuitive processes are not paranormal or irrational. Moreover, they arise from long experience and learning and consist of patterns, concepts and techniques and what is called formal knowledge. [10] Intuition is no magical sixth sense and not the opposite of rationality. Intuition occurs subconsciously. It is complex and happens quickly. It is not emotion, it is not biased and it is part of all types of decisions, even rational ones. [11] Managers often use intuitive synthesis and it is an important strategy process factor which is often practiced in strategic decision making. As a result it can be stated that fast intuitive decisions and synthesis have a positive effect on performance and managers react quickly and accurately to changing stimuli in the company. [12] It is often said that some managers were lucky in having the right idea at the right time. Luck is the impact of events and occurrences beyond our capacity for rational prediction. It is uncontrollable chance and we cannot act or plan on the basis of lucky events. Luck can result in good effects of actions but it does not necessarily bear on the rationality of those actions. [13]
Decision Theories and Business Decision Making
There exist many ways to theorize and categorize different decision making approaches. It is an interdisciplinary area in which researchers with different backgrounds have developed methods that can be applied to the same or similar problems. In this chapter the major approaches are mentioned and explained. [14]
Normative Model
Within the normative model decision theories are contained about how decisions should be made. It refers to the preconditions of rational decision making and it is a model about how decisions should be made in order to be rational. [15] Normative models are targeted at developing methods for making optimal choices and are based on evaluating each possible alternative according to the variables subjective utility and the estimated probability. The subjective utility is the value or benefit of the outcomes associated with each of the alternatives whereas the estimated probability describes the probability that a specific chosen alternative leads to a certain outcome. All normative models have one thing in common. They all are based on the assumption that human beings are ideal rational decision makers with the aim to select the most beneficial alternative. Within this type of models decision makers have the ultimate information necessary for a decision and they are able to consider all possible outcomes of a certain decision. This approach has a major drawback. When the number of potential alternatives is large, theories of this type are dependable on collection extensive amounts of information that usually have to be calculated with computers. [16]
Descriptive Model
In contrast to the normative model, the descriptive model contains decision theories about how decisions are actually made. Within this model theories investigate how people make decisions including the gaps between the normative and the actual decision making procedure that occurs in real life. According to Simon (1955) the maximisation of the benefit of a decision is usually not a decision criterion. People often settle for an alternative that meets or exceeds a personally defined threshold requirement within a few for them most important factors. As a result people often chose an alternative that is not the best but adequate to the personal requirements to the decision. This leads to the fact that the decision is strongly dependant to the order in which possible alternatives are examined. [17]
Prescriptive Model
A prescriptive model is a decision model which can and should be applied for real decisions and is focused on both the specific underlying decision situation as well as the needs of the decision maker. [18] Prescriptive models try to integrate advantages of normative models and descriptive models, while minimising their disadvantages. Within such models frameworks for a better decision making process are outlined while coping with human limitations and accepting the intuitive ways human beings make their decisions. Prescriptive models are evaluated by their pragmatic value and they give up the aim of an optimal rational decision. Their goal is to provide a framework for a systematic process for making a better decision instead of reaching completely rational decisions. [19] So, the prescriptive methodology generally contains recommendations for shaping actions rather than explanations. [20]
Decisions under Risk and Uncertainty
Business decision making is almost always combined with conditions of uncertainty. In a scenario of pure uncertainty a decision maker has no knowledge about the states of outcomes and it is cost intensive to obtain the needed information. [21] Within deterministic situations expecting full information a good decision is evaluated by the outcome whereas in probabilistic situations is concerned not only with the outcome value but also with the risk each decision brings along. In life, most decisions are made with a certain amount of uncertainty where probability enters into the decision model and gets a substitute for uncertainty. All decision making models fall between two extreme cases, that is complete knowledge and pure uncertainty (Figure : Uncertainty and Certainty Domain22).
Figure : Uncertainty and Certainty Domain [22]
Between these extremes are problems characterized by more or less risk. Within this area the degree of certainty varies according to the degree of existing knowledge of the problem domain. The main sources of errors in risky or uncertain decision problems are e.g. false assumptions, inaccurate probability estimation, expectations, forecast errors and difficulties in measuring the utility function. [23] Usually managers handle risk situations with collecting more information, checking different aspects of the problem or easily avoid them. Sometimes they try to manage or minimize risk by buying insurance and thus reducing the consequences of a risk, by carrying out a pilot-study before making decision, using checklists of points that should be considered or easily "sign-away" a certain risk. [24]
Decisions under Stress
The quality of decisions can be negatively affected by stress, which is perceived as time pressure. Stress can have several reasons and triggers. Stressful situations can be caused by e.g. the perception of high gain or loss in the decision, when the decision environment is complex or when the organisational pressure to archive success increases. [25] This stress, paired with low self-esteem and threats of punishment for poor performance result in more errors within cognitive tasks. Within group decisions the degree of decision quality declines while raising the stress level. [26] In summarization it can be said that stress has a deleterious effect on the decision quality. Within stress decision situations decision makers tend to ignore important information and they use simplified and therefore often inadequate strategies of decision making. They also get meticulous searching for information, get disorganized, rapidly shifting solutions and avoid to consider important alternatives. [27]
Decision Making Methods
In literature there exist plenty of decision making method approaches. These methods are rational procedures for applying critical thinking on information in order to get a balanced decision. These methods break a major problem down into smaller and more manageable subproblems in order to assess, evaluate and analyse the potential alternatives. [28] The following five methods give a very short overview over common decision making approaches:
Pros and Cons Analysis
Within the pros and cons analysis a qualitative comparison of pros and cons is practiced. As a result the alternative with the strongest pros and the weakest cons is preferred. This analysis is fitting in decision situations where just a few alternatives are available and the number of discriminating criteria is also relatively low. It can be applied quickly and easily and requires no mathematical skills. [29]
K-T Decision Analysis
K-T is also a quantitative comparison method in which criteria and alternatives are scored numerically based on individual assessments by a team of experts. First, the target criteria are scored relatively to the other target criteria and secondly the alternatives are assessed relative to each other against all target criteria, one at a time. [30] This analysis is applicable for moderately complex problems involving few criteria. Problems occur if total scores are close together and when determining how much better a score of 5 is than a score of 6, e.g. [31] An example is shown in .
Figure : Kepner-Tregoe Decision Example
Analytic Hierarchy Process
The AHP is a descriptive method with the basic idea of converting subjective assessments of relative importance to a set of overall scores or weights. It is a multi-attribute decision making method and it is based on pairwise comparison of the importance of criterion Ci relative to criterion Cj. It organises a basic rationality by breaking down a problem into its smaller and smaller pieces. Finally it guides the decision makers through a series of pairwise comparison judgements to express the relative strength of the elements in the hierarchy. A complete calculation example is shown by Baker, et al (2001). [32] This method is useful when there are multiple criteria that occasionally are qualitative or quantitative. Software can be relevant in order to reduce calculation efforts that are occurring if a large number of alternatives or criteria have to be considered.
Multi-Attribute Utility Theory
The foundation of this quantitative comparison method used to combine dissimilar measures of costs, risks and benefits, is the use of the utility function. The utility function transforms diverse criteria into on common, dimensionless scale (0-1). [33] When the utility functions are created the objective or subjective criteria can be converted into the utility scores. Criteria are weighted according to their importance and the preferred alternative is determined by multiplying each normalized alternative's utility score. [34]
Cost-Benefit Analysis
The cost-benefit analysis is a quantitative normative decision making method and evaluates costs and benefits of the alternatives on a monetary basis. [35] The standard criterion in this analysis is the net present value - the discounted monetized value of the expected benefits of a certain alternative. Risk and uncertainty of certain projects are usually handled using probability analysis. [36]
Organisational Decision Making and Leadership
Bureaucracy
Pluralism
Participative Decision Making
Transformational Leadership
Cultural Context
1-s2.0-S1048984397900229-main
1-s2.0-S1048984303000560-main
Emergency Operations Coordination
Case Studies
Bla blub - a Positive Example
Blub blub - a Negative Example
Critical Perspective of the Cases
The case of non-decisions
decidophobia, proclaimed by Walter Kaufmann at Princeton University in 1973
Denial of Conflict
Decision Making Traps
The Anchoring Traps
Status Quo Trap
Sunk Cost Trap
Confirming Evidence Trap
Framing Trap
Conclusion and Outlook
Every ..
ITM Checklist
Complex of topics
The sine qua non of success
Comments/Suggestions
General Economics
Which macroeconomic relevance is inherent in the topics?
Strategic Management
How is the topic's strategic relevance to be evaluated, especially concerning the aspects of securing existence, competitive advantages, tying up resources, sustainability, and risk?
Marketing
What advantages and disadvantages arise out of the suggestions for marketing measures, external impact, and the company's general productivity?
Which measures should be taken concerning internal and/or external marketing?
Financial Management
What criteria have to be considered when choosing appropriate terms of financing?
Which risks are there and what kind of coverage do you suggest?
How should the influence of external factors be evaluated?
Human Resource Management
Which personnel consequences (quantitative or qualitative) result from the suggestions?
Business Law
Which legal fields are affected by the suggestions?
What has to be arranged in order to create legal security from the company's point of view?
Research Methods / Management Decision Making
What sources of information should be practised in order to stay up to date in the field of topics?
Which decision criteria should be practised on the choice of alternatives?
Soft Skills / Leadership
Which demands does the realization of the suggestions require of the responsible managers? What leadership behaviour is expedient?
Table : ITM Checklist
