When managers make decisions, they use their own particular style, and may use “rules of thumb,” or heuristics, to simplify their decision making.9 Rules of thumb can be useful because they help make sense of complex, uncertain, and ambiguous information. However, even though managers may use rules of thumb, that doesn’t mean those rules are reliable. Why? Because they may lead to errors and biases in processing and evaluating information. Exhibit 4–5 identifies 13 common decision errors and biases that managers make. Let’s look briefly at each.10

Exhibit 4–5

Common Decision-Making Errors and Biases

• Overconfidence bias is when decision makers tend to think they know more than they do or hold unrealistically positive views of themselves and their performance.

• Immediate gratification bias describes decision makers who tend to want immediate rewards and to avoid immediate costs. For these individuals, decision choices that provide quick payoffs are more appealing than those in the future. The

• Anchoring effect describes when decision makers fixate on initial information as a starting point and then, once set, fail to adequately adjust for subsequent information. First impressions, ideas, prices, and estimates carry unwarranted weight relative to information received later.

• Selective perception bias is when decision makers selectively organize and interpret events based on their biased perceptions. This influences the information they pay attention to, the problems they identify, and the alternatives they develop.

• Confirmation bias is exhibited when decision makers seek out information that reaffirms their past choices and discount information that contradicts past judgments. These people tend to accept at face value information that confirms their preconceived views and are critical and skeptical of information that challenges these views.

• Framing bias happens when decision makers select and highlight certain aspects of a situation while excluding others. By drawing attention to specific aspects of a situation and highlighting them, while at the same time downplaying or omitting other aspects, they distort what they see and create incorrect reference points.

• Availability bias occurs when decision makers tend to remember events that are the most recent and vivid in their memory. The result? It distorts their ability to recall events in an objective manner and results in distorted judgments and probability estimates.

• Representation bias is when decision makers assess the likelihood of an event based on how closely it resembles other events or sets of events. Managers exhibiting this bias draw analogies and see identical situations where they don’t exist.

• Randomness bias describes when decision makers try to create meaning out of random events. They do this because most decision makers have difficulty dealing with chance even though random events happen to everyone and there’s nothing that can be done to predict them.

• Sunk costs error takes place when decision makers forget that current choices can’t correct the past. They incorrectly fixate on past expenditures of time, money, or effort in assessing choices rather than on future consequences. Instead of ignoring sunk costs, they can’t forget them.

• Self-serving bias describes decision makers who are quick to take credit for their successes and to blame failure on outside factors.

• Hindsight bias is the tendency for decision makers to falsely believe that they would have accurately predicted the outcome of an event once that outcome is actually known.

• Revision bias is the tendency of decision makers to assume that when an object or idea has been changed (revised) in some way, it’s actually been improved and is better than the original, regardless of whether it truly is better.

How can managers avoid the negative effects of these decision errors and biases? 1 Be aware of them and then don’t use them! 2 Pay attention to “how” decisions are made, try to identify heuristics being used, and critically evaluate how appropriate those are. 3 Ask colleagues to help identify weaknesses in decision-making style and then work on improving those weaknesses.

What Are the 3 Approaches Managers Can Use to Make Decisions?

1. 4-2 Explain the three approaches managers can use to make decisions.

• Everyone in an organization makes decisions, but it’s particularly important to managers.

• Managers make decisions—mostly routine ones like which employee will work what shift, what information to include in a report, how to resolve a customer’s complaint, etc.—as they plan, organize, lead, and control. See Exhibit 4–6.

  Exhibit 4–6

  Decisions Managers May Make

  

  Figure 4–6 Full Alternative Text

  

• Managers want to be good decision makers and exhibit good decision-making behaviors so they appear competent and intelligent to their boss, employees, and coworkers.

  

Here are the 3 approaches managers use to make decisions:

1 Rational Model

• This approach assumes: Decision makers ACT RATIONALLY.12 How? By using rational decision making; that is, by making logical and consistent choices to maximize value.13

(Check out the two decision-making tools described in the Managing Technology in Today’s Workplace box on pp. 102.)

“Rational” decision makers and decisions:

Should Be:	Can Ever Be?
Fully objective and logical	Can we ever be fully objective and logical?
Problem is clear and unambiguous	Can problems ever be totally clear and unambiguous?
Clear and specific goal regarding decision	Can a goal ever be made that clear and specific?
All possible alternatives and consequences known	Can all possible alternatives and consequences ever be known?
Alternative selected maximizes likelihood of achieving goal	Can any alternative ever really do that?
Organization’s best interests are considered	Managers should do this but may face factors beyond their control.

2 Bounded Rationality

• The bounded rationality approach assumes that managers make rational decisions but are limited (bounded) by their ability to process information.14

• Most decisions managers make don’t fit the assumption of perfect rationality.

• No one can possibly analyze all information on all alternatives so they . . . 

• satisfice—that is, accept solutions that are “good enough,” rather than spend time and other resources trying to maximize. (See Classic Concepts in Today’s Workplace box on p. 101.)

  

  Example: As a newly graduated finance major, you look for a job as a financial planner—minimum salary of $55k, and within 100 miles of your hometown. After searching several different options, you accept a job as a business credit analyst at a bank 50 miles away at a starting salary of $53k. HOORAY! If, however, you’d maximized—that is, continued to search all possible alternatives—you’d have eventually found this financial planning job at a trust company 25 miles away with a starting salary of $59k. However, the first job offer was satisfactory—“good enough”—and you took it! Your decision making was still rational . . . but within the bounds of your abilities to process information!

• Most decisions don’t fit the assumptions of perfect rationality, so managers satisfice. But decisions can also be influenced by (1) the organization’s culture, (2) internal politics, (3) power considerations, and (4) a phenomenon called:

• Why would anyone—especially managers—escalate commitment to a bad decision?

  • — Hate to admit that initial decision may have been flawed.

  • — Don’t want to search for new alternatives.

    Bottom line: Bounded rationality is a more realistic approach as managers are rational within their abilities to process information about alternatives.

3 Intuition and Managerial Decision Making

When deciding yay or nay on new shoe styles, Diego Della Valle, chairman of Tod’s luxury shoe empire, doesn’t use common decision-making tools like focus groups or poll testing. Nope . . . he wears the shoes for a few days. If they’re not to his liking, his verdict: No! His intuitive decision-making approach has helped make Tod’s a successful multinational company.17

• This approach assumes that managers make decisions on the basis of experience, feelings, and accumulated judgment.

  • — Described as subconscious reasoning.18

  • — Five different aspects of intuition: See Exhibit 4–7.19

  Exhibit 4–7

  What Is Intuition?

  

  Figure 4–7 Full Alternative Text

• Bottom line: Intuitive decision making can be useful to managers, especially when following these suggestions:

  • — Use it to complement, not replace, other decision-making approaches.21

  • — Look to act quickly with limited information because of past experience with a similar problem.

  • — Pay attention to the intense feelings and emotions experienced when making decisions. The payoff? Better decisions!22