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Decision-Making in Business

Decision-Making in Business

Although we expect employees and their leaders to make hundreds and even thousands of decisions each week in the jobs they perform for the organization, we often provide very little guidance on how such decisions should be made. In other words, we regularly put decisiveness or speed of decision-making above quality of decision-making and in this brief article we therefore want to look at what constitutes a “high-quality” decision as opposed to a “low-quality” one.

Although this topic is a large and complex one, the recent work of Daniel Kahneman is his book “thinking fast and thinking slow” is very useful. The book’s central thesis is that all individuals use two modes of thought when making decisions, which he calls “System 1 thinking” which is fast, instinctive and often emotional and “System 2 thinking” which is slower, more deliberate and calculating, and more logical.

According to Kahneman our decision-making (in life and not just in business) is dominated by System 1 thinking. This fast, automatic, intuitive and largely unconscious mode is dominant because it is the brain’s quick process for assessing risk in general, possible problems or even danger in a situation or hostility in a voice, for example. But system 1 type thinking goes further than this by effortlessly spotting patterns – for example completing the phrase “bread and. . . . ” or “playing cat and…”

This is not to say that System 2 thinking, in Kahneman’s model, does not come into play substantially. It does so considerably but only when there is time and space for it to deploy effectively. System 2 thinking is therefore our slow, analytical and consciously effortful mode of reasoning about the world. It is System 2 thinking that swings into action when we have to fill out a tax form or even attempt to park our car in a narrow space. So in summary according Kahneman’s System 1 thinking proposes, System 2 thinking disposes. Hence we could say that System 2 thinking would be ultimately in charge, right? Well perhaps in principle, yes but the trouble is that System 2 thinking is not only often slow to fire but also lazy and even tires easily. In other words, on many occasions instead of looking for more time for analysis to occur, System 2 thinking is content to accept the intuitive guesswork offered to it by System 1 thinking. “Although System 2 believes itself to be where the action is,” Kahneman writes, “the automatic System 1 is the hero”  (and especially when we are feeling optimistic or happy in general it seems).

When people make decisions Kahneman suggests that most of the time we are simply estimating the odds of one alternative over one or more others using System 1 thinking. For example, we might reasonably assume that an individual would place twice as much value on a 20% chance of winning a prize as opposed to a 10% chance, but Kahneman’s experiments show otherwise. Adults are more likely to act to avoid loss than to achieve a gain.

Kahneman suggests that decision-making is limited in practice when individuals use a variety of “rules of thumb” in deploying their more intuitive or System 1 thinking. This involves associating new information with existing patterns, or thoughts, rather than creating new patterns for each new experience. For example, in a legal courtroom situation, a judge may only be able to think of similar historical cases when presented with a new case, rather than seeing the unique details that present themselves. The way to counter this bias is to deliberately invoke the slower System 2 thinking when a decision really matters-which it clearly would in the legal situation described above. This is actually why courtrooms are often so slow and procedural with lots of breaks to weigh or consider the evidence and to avoid letting intuitive judgments dominate.

A particular decision-making bias pointed out by Kahneman is what he calls the “planning fallacy”. This is the tendency to overestimate benefits and underestimate costs, and hence unwisely to take on risky projects. The planning fallacy is “only one of the manifestations of a pervasive optimistic bias,” Kahneman writes, which “may well be the most significant of the cognitive biases.” In one sense, a bias toward optimism is obviously bad, since it generates false beliefs – like the belief that we are in control, and not a hostage to luck. But without this “illusion of control,” would we even be able to get out of bed in the morning? Optimists are more psychologically resilient, have stronger immune systems, and live longer on average than their more reality-based counterparts. Moreover, as Kahneman notes, exaggerated optimism serves to protect both individuals and organizations from the paralyzing effects of another bias, “loss aversion”: our tendency to fear losses more than we value gains.

So what does all this mean to day-to-day decision-making in business at any level? Well, the main implication is that, at least initially, we need to be aware of the benefits of system 1 thinking (being a fast way to reach a draft decision each time we are required to do so) but learn to draw upon the slower System 2 thinking when the outcome is critical or is significant in any way. In practical terms this means that we may need to create more time for major decisions and allow individuals to discuss and debate the alternatives (and even look for an alternative when one does not seem to present itself), as well as check for System 1 thinking biases that may have caused poor choices. This will help to ensure that many more of our decisions of all kinds are high quality ones.

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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at OptimalJon@gmail.com

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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