Decision Making

I was inspired to write this short note by an online course by The Great Courses that provided a few interesting insights into the process of decision making. The course uses many case studies to provide tangible insights into the myriad issues involved in the decision making processes in complex organisations. A key aspect of the lessons was an understanding how catastrophic errors can arise in decisions, and the post-mortems of such failures provide quite powerful insights into the interplay of the many issues involved. 

Decisions by groups or individuals can be difficult to understand. Take for example, the countless failed investments in the airline business. The world would be very different without cheap and convenient airline travel, yet as a commercial enterprise the investment in airlines has generally been a disaster. A couple of quotes reinforce the point:

It can be observed that the seismic service company business is not dissimilar to the airline business in a few ways: It costs a huge amount to run the business, competition is fierce, most people run around break-even most of the time thanks to the creativity of our accountants, and the customers demand the latest technology whilst simultaneously being overtly cost-driven.

It is impossible to summarise a 24 part course into a few text extracts, but I will try to extract a few items that appealed to me.

Decisions in a Pragmatic Context

Most decisions involve a series of events and interactions that unfold over time. Decisions involve processes that take place inside the minds of individuals, within groups, and across units of complex organizations. The following table separates a few myths and realities:

What This Means for Us as Individuals

In reality, decisions occur at three levels: individual, group, and organisational.

Of relevance, “cognitive biases” affect decision making at the individual level, as discussed below.

One challenge for all of us, despite our best intentions, is that we satisfice rather than optimize in the way that economic theory presumes. By satisficing, we search for alternatives only to the point where we find an acceptable solution. We do not keep looking for the perfectly optimal solution. In many situations, we take shortcuts. We employ heuristics and rules of thumb to make decisions.

Most of the time, our shortcuts serve us well. They save us a great deal of time, and we still arrive at a good decision. Sometimes, though, we make mistakes. Our cognitive limitations lead to errors in judgement, not because of a lack of intelligence, but simply because we are human. Psychologists describe these systematic mistakes as “cognitive biases”.

Systematic biases impair the judgments and choices that individuals make. How many of the following can you recognize?

• Sunk-cost effect: refers to the tendency for people to escalate commitment to a course of action in which they have made substantial prior investments of time, money, or other resources.
• Confirmation bias: refers to our tendency to gather and rely on information that confirms our existing views and to avoid or downplay information that disconfirms our preexisting hypotheses.
• Anchoring bias: refers to the notion that we sometimes allow an initial reference point to distort our estimates. We begin at the reference point and then adjust from there, even if the initial reference point is completely arbitrary.
• Overconfidence bias: human beings are systematically overconfident in our judgements.
• Availability bias (recency effect): too much emphasis is placed on the information and evidence that is most readily available to us when we are making a decision. Also when we place too much emphasis on recent events.
• Illusory correlation: refers to the fact that we sometimes jump to conclusions about the relationship between two variables when no relationship exists.
• Hindsight bias: refers to the fact that we look back at past events and judge them as easily predictable when they clearly were not as easily foreseen.
• Egocentrism: when we attribute more credit to ourselves for a particular group or collective outcome than an outside party would attribute.

A case study was given of a famous incident on Mount Everest where two experienced climbers and their teams became stuck near the summit in a storm, with five fatalities including the two leaders being the outcome.

Despite their experience with many expeditions in the past, the two leaders were overconfident in their abilities to always succeed (overconfidence bias) and the participants were reluctant to pull back from their assault on the summit, having spent several months in preparation and invested up to $70,000 each for their one shot at success (sunk cost effect).

Indeed, the deviation from established guidelines or principles is a common theme in catastrophic decisions, sometimes at several levels within an organisation, and not just at the individual level.

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