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Making decisions under uncertainty is a major task, yet we face it in our everyday lives. Whether a decision is buying an umbrella in a cloudy day or funding a Mega-project, individuals make choices assisted by assumptions to address incomplete information based on values and experiences, moving through a strategy to reach a desired scenario.
In a corporate setting, decisions are constrained by a dominant logic enacted by senior management that package them in the organizational culture, normally following a “window of opportunity” that is circumscribed by preconceptions about how future events could materialize. Furthermore, two key variables, information and time, are crucial in decision-making: Increasing or decreasing any of them implies costs and returns. Therefore, the capability to decide will then depend on variables that are intrinsic to the individuals in an organization.
The Nobel Laureate Herbert Simon postulated that rationality is bounded primarily by the limitations of the human mind and the amount of information available, considering a specific objective and the expected cost of making a particular choice. In other words, these constraints, besides shaping the awareness of future scenarios, influences the perceptions of the external environment such as threats and opportunities to the organization.
To navigate uncertainty and simplify decision-making processes, individuals tend to take mental shortcuts, commonly known as heuristics. In other words, the “rules of thumb” individuals use based on “common sense” when attempting to solve a problem. Since heuristics derive from values and perceptions, trying to design a “standard way to decide" a utopia: decision-making processes and frameworks differ across individuals and organization, creating remarkable differences in the quality of choices that construct a strategy that reflect in the outcomes.
It is possible to increase the quality of our choices (hence our strategy) by understanding the elements that incline the "mental shortcuts" to a particular direction: In one of the most significant advances psychology and behavioural economics, Amos Tversky and Daniel Kahneman defined three heuristics and identified a set of biases that commonly affect decision-making. The following paragraphs briefly explains how these heuristics can be distorted by individual perspectives:
Heuristic 1: Representativeness: The judgment of the probability of an event based on the degree an event is representative of another. Biases to representativeness are:
Heuristic 2: Availability: The judgment of frequencies of a class based on personal knowledge and experience. Biases to availability are:
Heuristic 3: Adjustment and Anchoring: When a relevant prediction is available, subsequent refinements are conducted to arrive to a final solution based on the initial value. Common biases are:
Understanding how individuals bias criteria under uncertainty is essential for the integrity of the decision-making processes. However, it is unrealistic to pretend perfect heuristics: trying to cover all biases could lead to situations of “analysis paralysis” or loss of competitiveness, eroding the value generation potential of a strategy. Instead, it is necessary to generate a high level of awareness by clearly identifying them as risks to the decision-making process, setting clear paths to remove, mitigate or accept them.
Since biases are intrinsic to organizations, the combined effort of internal resources and external consultants is crucial to reach a level of awareness that increases robustness in the decision-making processes. For that reason, organizations have progressively realized the importance of incorporating specialized and independent perspectives when setting the long-term strategy.
Strategic consultants like Septentrion engineer and implement customized frameworks that guide decisions, analyzing scenarios and ensuring all assumptions are adequately evaluated. This allows extracting the maximum possible value while progressing towards the strategic goals, embracing adaptation when required and ensuring right decisions are taken right.
Simon, H. (1991) 'Bounded Rationality and Organizational Learning', Organization Science, 1 (1), pp. 125-134
Tversky, A. & Kahneman, D. (1974) ‘Judgement Under uncertainty: Heuristics and Biases’, Science, 185 (4157), pp. 1134-1131
Are You Making Your Right Decisions Right?
Cognitive Limitations in Decision-Making Processes
David Tain, MSc., P.Eng., PMP
David received a MSc. in International Management (Oil and Gas concentration) from the University of Liverpool and completed the Strategic Decision and Risk Management Program at Stanford University. He obtained his Civil Engineering degree in 2001 from Santa Maria University in Venezuela and progressively advanced his education in Project Management, Project Development and Organizational Strategy at several institutions across the globe, remarkably Villanova University in USA and the Institut Français du Pétrole (IFP) in Paris. David is a Professional Engineer (P.Eng.) in the province of Alberta, Canada. He can be contacted at email@example.com
“We think, each of us, that we are much more rational than we are. And we think that we make our decisions because we have a good reason to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision".
About the Author:
David Tain, MSc., P.Eng., PMP is the Principal Consultant - Project Management & Strategy Execution at Septentrion Strategic Solutions. David has worked extensively in the development of industrial facilities primarily for the oil and gas sector, holding diverse project leadership positions in several international oil operators and multinational engineering and construction corporations in North and South America. His professional and academic expertise focuses on projects execution, strategic organization, decision analysis, leadership, negotiation and the analysis of human behaviour in project environments.