34. Decision-Making

Introduction

Advancements in markets, organisations, technology, and the economic means of production are transferring business decision-making responsibility to lower levels of the organisation, ie closer to the customer.
This is also increasing the complexity in decision-making.

Adding to this scenario are these factors: increasingly sophisticated, technology-savvy stakeholders and competitors, growth and internationalisation of markets, increasing velocity of transactional flows, diminishing timeframes in which decisions need to be made, and the increasing importance of intellectual capital rather than labour as an dominant input.

Emotions in decision-making

. Don't under-estimate the role of emotions and circumstances in decision-making, especially in judgments of probabilities and possibilities. Remember that people overestimate and overweight, ie overestimate the probabilities of unlikely events and overweight unlikely events/outcomes in their decisions. This involves the following psychological mechanisms, ie focused attention, confirmation bias and cognitive ease. Entrepreneurs and investors are optimists who, when evaluating their prospects, are prone both to overestimate their chances and overweight their estimates of performance, ie planning fallacy.

. Need to go beyond decision weights that depend on probability and look at outcomes that include emotional reactions to actual and potential gains and losses. Furthermore, adding irrelevant but vivid details plus ease of imagining can confuse the decisions

. Different ways of communicating risk can impact upon decision-making. An actual number has a greater impact than a percentage. For example, if a children's vaccine has a chance of permanent disability risk of 0.001% is expressed as 1 In 100,000; the latter has a greater impact as it is called up an image of an individual child suffering.

. People tend to be risk averse in the domain of risk seeking re domain of losses. This can be costly as this attitude can make you pay a premium to obtain a short gain rather than face a gamble, and also make you willing to pay a premium to avoid a sure loss.

. Our preferences are not said to be coherent, because we tend to make decisions as problems arise, as our brains are averse to mental effort.

. Denominator neglect = low probability events are much more heavily weighted when described in terms of relative frequencies (how many) than when stated in more abstract terms of "chances", "risk", "probability" or "categories" (how likely)