Decision Making: Herbert Simon
Decision making is a key element in strategic management. Good decision making is as much about collecting hard data and doing painstaking analysis as much about behavioral issues. According to Herbert Simon, the Nobel prize winner, decision making takes place in four stages. “Intelligence” involves discovering, identifying and understanding the problem. “Design” includes identifying and exploring solutions to the problem. “Choice” means choosing one of the alternatives. “Implementation” means making the chosen alternative work.

These stages explain how decision making should take place logically. In practice, the influence of various behavioral issues cannot be overlooked. Moreover, the four steps, instead of occurring sequentially, may overlap. And in many cases, decision making takes place in iterative fashion, accepting things that work and rejecting those that do not. Three key factors that are an impediment to good decisions are information quality, human filters and resistance to change. Information may not be accurate, complete, consistent or available on a timely basis. Managers have selective attention, various biases and focus on some dimensions of the problem while ignoring others. Last, but not the least, people are resistant to change. So, decisions often tend to be a balancing of the firm’s various interest groups rather than the most optimal solution.

The way people think, both as individuals and in groups, affects the decisions that they make. Bad decisions take place when the alternatives are not clearly defined; the right information is not collected and the costs and benefits are not accurately weighed. Some¬times the fault lies not in the decision-making process, but in the mind of the decision-maker. Managers often do not realize the various traps that exist while taking decisions. Some common traps include:

The anchoring trap. Managers tend to give disproportionate weight to the first piece of information they receive.

The status quo trap. People like to maintain the status quo, even when better alternatives exist.

The sunk-cost trap. Companies often perpetuate the mistakes of the past because they have invested so much in an approach or decision that they find it difficult to alter course.

The confirming-evidence trap. Managers tend to seek information to support an existing tendency and discount opposing information.

The overconfidence trap. Most people have an exaggerated belief in their ability to understand situations and predict the future.

The framing trap. People's roles in an organization influence the way problems are framed. So often a problem or situation is incorrectly stated.

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