UNDERSTANDING DECISION MAKING PROCESS
Dr Rajendra K Gupta, Delhi India.
First Published online 2006
[email protected]Introduction
Decision making is a daily task in personal life and profession. To lead, ability of
decision making is most important quality and one has to be right in most of the
decisions taken as a leader. Some decisions taken by the political or business leaders
in the public domain have significant impact on life and well being of millions of
citizens, for example, demonetization of high value currency notes by Indian
Government.
Ability and quality of decision is also affected by the comfort zone and training of
decision maker. Some decisions are disruptive and thus fraught with high risks while
majority are routine decisions, the procedural decisions or the investment decisions
which have long term impact. The costs involved in major decisions are huge and
many of these can’t be reversed or stalled. The decision of Adolf Hitler to invade
Russia at a wrong time of the season led to collapse of his rule.
It is very easy to analyze and criticize the decisions taken by others in past, but
everyone is always wise in the hind sight. It is difficult and risky to look into future and
take major decisions under pressure, situation and uncertainty. When crisis happens,
reactive decisions are needed to either solve the crisis or postpone its effects until it is
effectively handled. This is called Damage Control decisions. It needs procedures,
patience, preparations and courage. Visionary leaders take bold but well deliberated
decisions that alter life of people or the long term performance of organizations.
Impulsive, off the cuff and hurried decisions based on personal biases and beliefs
should be avoided.
Decision making is based on value system, nature of current problem, long term goals,
available resources, past experience and skill, psychology, group behavior and
science.
Confidence is another asset of leader or decision maker. This is based on personality
traits, experience and the skills of the person and their past successes. But over
confidence may result into diagnosis and treatment error as it happens. In most
personal and business situations the mental heuristics are more useful to arrive at
quicker decisions at low cost and effort. In many situations like medical treatment, a
hierarchy of alternatives is already available by research and past experience of
several experts. So a medical expert starts with first line of treatment including regular
medicines or procedures. If it does not work, then the second line of treatment is
administered, and if that does not work too, then surgery or transplant and other
methods is the final line of treatment. Here the decisions have already been taken as to
alternative course of actions and the expert has to diagnose which stage of treatment
is needed. More accurate is the diagnosis better and less costly treatment of disease
will happen with minimum side effects. It therefore means that diagnosis of problem
and available alternative responses/Actions is main part of decision making process,
whatever it is. The word Problem is generic word used for actual problems of any type
or for laying down goals including the investment decisions. The decisions have to be
integrated with future scenario at least looking One year ahead. Many of decisions are
not just isolated one time decisions to meet current situation or demand. These have
long term impact and are interconnected to other parts or functions of the organization.
Hence business leaders need holistic thinking. The well known example of statement
made about governance and financial system of China by Alibaba promoter Jack Ma
created threat to his businesses, he disappeared for pretty long time and he has finally
shifted to Japan to avid rise in controversy and back lash form Chinese dictatorship.
Decisions are of various types-
1. Casual or urgent one-time decisions
2. Decisions of personal life
3. Decisions about professional work or Business decision
4. Decisions of Public interest
5. Emergency Response decisions
6. Decisions that are significant or of high value & risk, especially when lives are
involved
7. Group Decisions where more than one person jointly or sequentially takes decision
8. Decision, not to take any decision, immediately or Procrastination
Decision making needs certain inputs which may not be available so well in emergency
situations and past experience; guidelines framed and personal expertise forms the
main basis of decision like a captain leading the troupe in a war zone.
It is also possible the person taking the decision may not have previous experience in
first time situation that has now occurred. Hence there is no precedent.
Lack of past experience and lack of adequate information is the worst scenario in
decision making.
The person should be in right frame of Mind to start process of decision making and
not in any emotional state. Emotional decisions often tend to end up being wrong.
Decisions taken logically based on certain information and help of algorithm or expert
opinions are better and objective decisions with low risk of failure or negative outcome.
One of the most important assets of a good decision maker is skill set, experience and
ability to forecast the impact and events, at least in short term. Such people are
visionary and are governed by their strong value system and beliefs. A need for
decision arises when a person or group of persons needs to solve a problem that
already exists or suddenly occurred and an action or response has to be chosen from
among the alternatives available. As a rule, too many decisions are never taken at a
time, by successful executives and their focus is holistic meaning thereby that looking
at what are the ground realities and what overall impact it would make.
The technique or algorithm used is not as important as the effective outcome.
The availability of all logical and related alternative actions related to goal is the main
problem in taking better decisions. Either because there is emergency, or sufficient
information is not available or time is not available to wait longer.
One should try to find at least 4 alternative solutions to the problem and their relative
ranks. It may take time but it is worth the trouble and cost. It is not easy to think all
possible solutions and collect information about the options regarding costs,
technology, process and its credibility.
The frame of mind of decision maker is another important obstacle whether person is in
emotional state or has some strong belief systems or knows how to take logical
decisions which we may call for professional decision making.
Compulsive quick decisions are required in politics and war situations where decision
must be taken and fast without delay like a colonel is faced with situation to adopt next
tactical move in war field or to save life of soldiers or an expensive installation. The
cost of such decisions may be very heavy like loss of many lives. Another problem on
decision making is unforeseen failures at any stage of the process of implementation of
decision taken, which leads to taking another consequential decision during the
implementation phase. A new set of alterative actions emerges and decision has to be
taken so as to bring back the event on the planned track. This is like a cricket team
captain changing a new unscheduled bowler to regain control on losing test match
while looking for a couple of quick wickets during the course of game, departing from
the already made plan in the beginning.
Managers are often faced with similar situations when there are failures during the
process going on and these too have to be identified in advance and planned for or a
quick decision is needed on the spot. All decisions are not one time responses to a
problem. Most decisions are part of a group of decisions or an overall work
environment and may have intricate relationships with other conditions in the
organization and therefore have short or long term implications in future and operation
of other parts of organizations. For example, an emotional wrong decision taken by a
manager to fire an important employee may well result into employee union’s protest
and loss of production.
Hence, following factors are important in decision making:
1. What is the need to take a decision? Who is going to benefit and adversely effected,
if any.
2. What is the priority of taking the decision or can it be postponed for a later date?
3. What are immediate or long term goals of decision and its probabilistic or stochastic
implication and outcome vis-à-vis other functions in organization and future goals?
4. The extent to which relevant information and data are available for decision making
5. Competence of person to take decision
6. Whether decision is with or without legal and financial involvement.
It is easier to take decisions that don’t have financial involvement. In complex and high
value decisions, finally, these are taken by Intuition of decision makers who are highly
experienced persons and track record of successful decisions in past. The logical
analysis and help of mathematical or statistical models and brain storming is carried
out to identify the options available objectively, and assess the extent of risks involved.
Many times we have seen final decision taken totally different than from those
alternatives which were initially identified or no decision taken at all. This deferment of
decision is also a decision.
For example there is always a high risk in launching a new product.
There are several probability based models available and the decision maker has to
choose a suitable level of uncertainly acceptable for taking such decision. The product
recall may seriously damage the brand image or the company may land into legal
consequences.
In many situations the cost of all the alternatives and their likely outcome is similar and
therefore, it may become difficult to decide among these alternatives, and lingering the
matter may solve the problem as time itself is a great problem solver. Let us take an
example, there is an allegation made by a female employee against a senior manager
for sexual bias or harassment. The two obvious decision alternatives are to fire the
senior manger or face legal prosecution by the employee; although there are many
secondary actions and outcomes possible in this case. But the main two extreme
alternatives have high costs involved. The allegations itself may be motivated or partly
true or totally false or totally true. That is why a committee is always formed in
organization to deal with such cases.
The relative strength of parties involved in dispute related decisions is also important
input. In our case removing misunderstanding between the employee and the
manager, apology or some compensation in some form may be cheaper option; For
example, transfer of any of the two.
There are not many decision situations where one has to choose just one out of two,
like yes/no, true/false, do/not to do. Very few situations have such decision making
environment. For example, I should attend the marriage ceremony of a client or I don’t
attend. Most decisions are about invoking resources and the best procedure that
should be adopted; for example, a blast in the manufacturing plant or a fire in the
building.
Peter F. Drucker observed, according an article in HBR (https://hbr.org/1967/01/the-
effective-decision) that following sequential steps are needed for decision making -
1 Classifying the problem
2 Defining the problem
3 Specifying the answer to the problem as to what are the boundary conditions.
4 Deciding what is “right “rather than what is acceptable in order to meet the boundary
conditions
5 Building into the decision the action to carry it out
6 Testing the validity and effectiveness of the decision against the actual course of
events
So decisions may be taken on merits or by help of existing administrative rules and
framework. In government for example, in exceptional situations the rules are
bypassed by approval of highest authority, otherwise administrative policies and rules
are to be followed, strictly.
It becomes easier if policy guidelines are already available for different situations.
Presently there are mathematical models available integrated with AI which takes
decisions much faster than human by considering several inputs and outcomes and
scanning the registry of previous successful decisions taken in same or similar
situations. Here Fuzzy logic technique too is used .
To summarize it, the aim of decision is to minimize delay and probability of error by
gathering better information and processing it either with models and programs or just
by experience based judgment. For example, for the Capital investment decisions, the
discounted cash flow model is available for better decision by the experts to evaluate
various opportunities for investment. But most financial decisions often have non –
financial variables too like fitting into current product line of a new business plan.
Group decisions are basically of three types:
By majority (51% supporters), by consensus where a large majority agrees but the
dissenting minority too is willing to go along the majority decision, and by unanimity
(100% agree). Another way is forming the sub-committees. However, too large a group
may spoil the decision making process, distract from the goals and delay the process
or even stall it. Smaller the group better is decision making in view of the author. In
most of such group decisions, there is always seen a dominant person who may be
dictatorial in nature or having capital “I” complex. It is like the boss who may say
without deliberations, “So gentlemen we all agree that action A will be the best suited”.
The purpose of such style of decision making is to involve the persons who will execute
the task or just to go through formality of creating sense of involvement of executives.
This is superficial group decision making and one should avoid this.
In Multi Perspective Decision making, “Six Hats Approach” is quite fruitful to avoid
unidirectional and biased thinking of decision maker and look at the problem and
alternatives from all angles. These are 1 White Hat, 2 Red Hat, 3 Black Hat 4 Yellow
Hat 5 Green Hat and 6 Blue Hat. The Blue Hat is process control view point and
generally worn by person chairing the meeting. Idea is one view the problem and
solutions available from pros and cons, negative and positive angles and perspective
of affected parties by decision. More can be studied from literature on this topic.
Use of Heuristics in Decision making:
Heuristic is the mental shortcut to take the decisions. It is most popular. It is faster and
based on experience of decision maker. But it has risk of cognitive and personal biases
of the decision maker. In many real life situations rational models are not feasible.
Besides, heuristics may give better results instead adding too much of fragmented
information. Representation Heuristics (RH) is one common and simple method used
by people. When person recognizes one of two things the decision will be in favor of
recognized thing. But it is seen that in RH too additional information is used to arrive at
decision. More research is needed to make building blocks of heuristic decision making
process.
The decision making is difficult because most of information we have in real life is not
complete and 100% accurate. It may be difficult to obtain all the information about
possible alternative actions in reasonable length of time and cost. Why we do sample
surveys invariably? Since population survey is not feasible and is costly. But then
sampling error, sampling method and sample size and limitations of statistical error are
in built.
If there were 100 % certainty in outcome forecast and accuracy in the information
available, then decision making would have been simple action of Yes/No or Go
ahead, taking hardly any time. But that is not so in real life situations. Most of decisions
have to be taken in a limited time and with partly and not fully reliable information
available. Hence decision making problems are mostly probabilistic with inbuilt
uncertainly. Hence, decision maker should also process about what happens if the
decision goes wrong or just does not work.
The comparative evaluation table (grid) of inputs and output of various options
available
This is most popular and easy form of decision making process in which salient criteria
important to decision maker are listed in a table/grid form for various options available.
Most common is comparison of quotations for equipment to be purchased. This
process is also further refined by breaking up the process in three parts.
1. Pre qualifying the bidders so that only creditable and competent vendors are
included who have the track record and proven capability?
2. Technical bid is processed first to evaluate capability and suitability of scope of
supply to meet the customer’s criteria which includes the scope of supply of vendor
and of the customer sometimes called the “battery limits”, time of completion of supply
and installation, if applicable.
3. Finally the Commercial bid which is opened only when the first two are passed. Then
there are comparative and absolute evaluation of Price, other costs involved and
various facilities available like project financing facility, terms of payment and
guarantees etc.
It is obvious this step by step procedure and comparative evaluation leads to better
decisions at minimum costs and risks to the defined goals. Such decisions are not just
yes/ no, but a lengthy and objective process running over many days or months and
involvement of experts and hence is a group decision. But still it is finally to be
approved by the head of organization or department based on personal experience
and intuition
A variant of this is Paired Comparison method of taking two important options at a time,
and study the criteria in details
Many online commerce websites have such options available to prospective buyers
where one can tick two or more items available or the vendors available and a
comparative table is automatically created. For example, while purchasing decision of
a room air conditioner of various brands once the cooling capacity is chosen.
The Decision Tree Method
This is very popular method used when more than one option is available at each
stage and the alternatives are known if one event does not occur or is not possible.
Simply putting, it is making a decision tree and one starts form the beginning point and
keeps drawing horizontal bars downwards with next options available when either of 2
or more options fails. It is also used to lay down next steps once a decision has been
taken as to path of actions at each consequent stage. It is also a more structured
written analysis than the pure mental heuristics.
Some of the Decision Tree formal models are PERT (Program Evaluation and Review
Technique) and CPM (Critical Path Method). These are often used in project
management, whatever may be its nature. Idea is to pick such group of activities so as
to minimize cost or time by controlling and managing the connected and sequential
activities. For example, more than one activity are going on in construction of a
building, but at many points completion of one stage is necessary to enable progress of
further stages of work in different directions. Unless floor slab is cast many
simultaneous activities can’t be started further. Hence time taken for all such critical
activities has to be better controlled and minimized. The longest or costliest path is
chosen and controlled and minimized.
Problem of Uncertainty in Decision Making
But in most life situations or business situations, the options are too many with little
known outcome possibilities, for example a person graduating from a university. What
to do further? The options are too many and fragmented and diverse and the
influencing factors are too many. One has to start like: To go for job or to enroll in post
graduation program or to join a skill development course; or one can start a small
business or try to take competitive examination for recruitment by army or a state
department. Such decisions can materially affect the future and career of the person
and financial success. The outcomes of efforts are highly uncertain. Wrong decision
may get a person stuck up in career. It is very expensive to return to right track later
with huge delay, effort and cost. The uncertainty is very high. Besides this the
personality traits matter a lot and the personal circumstances, financial position and
family background of person.
So what one can do? Take aptitude test and seek advice and tips from professional
career counselor and Placement consultants. This may help in narrowing down
available opportunities and matching one’s set of skills and degrees with available
opportunities.
In uncertainty common tools are taking risk one at a time instead too many at the same
time (For example, marriage and job change together) and to create a worst case
scenario. Adaptive decision making is also used by changing or taking decisions as
more information unfolds with time and progress. Risk and uncertainty are two different
things it should be clear. To take decision attempt can be made to reduce the risks by
searching for information or reducing the canvass for decision making and outlining the
coping strategies. It always pays to use the time tested strategies and practices. A pilot
project for example is tool to reduce risks and refine commercial launch of any product
before major investment.
Random decision making is done when one does not have access to full information;
all alternatives have similar or unforeseeable outcomes or one has no control on taking
decisions. It fits in case of the young passing out graduate mentioned above. One can
take random decision by accepting first job offer or picking any of three education
programs one happens to look at. A major problem before such young pass outs is that
there are different rewards in different fields and scope for compensation and
promotions. By the time people realize that the particular sector is most growing and
rewarding; the same becomes stagnant and saturated by the time the candidate
passes out with necessary degree.
Hence forecasting and use of secondary data published by government or other
professional agencies is quite helpful in taking right decisions by choosing more
lucrative or assured alternative.
Hence we can see before taking decisions in many life or business situations, proactive
actions are required and gathering of information and expert opinions from primary or
secondary sources
Operations Research
Is a field which offers various mathematical models or tools to decision makers to
understand the problem by analysis of data related to the problem and offer solutions
or alternative solutions so as to maximize gains or minimize costs like in Linear
programming, which handles goal optimization by allocating limited supply of resources
and to pick one or more of many outputs available. This is advanced subject and offers
many models like linear programming, Dynamic Programming, Queuing theory,
Transportations model, Game theory and so on. The condition is that your problem
should be fit for converting it into a mathematical Model with available “variables”. The
computerized software programs are available where just problem converted to model
form is fed in form of data and instant results are available to choose from.
Stochastic modeling is a form of financial model that is used to help make
investment decisions. This type of modeling forecasts the probability of various
outcomes under different conditions, using random variables. Stochastic
modeling deals with mathematical or financial model to derive all possible outcomes
of a given problem or scenarios using random input variables. It focuses on the
probability distribution of possible outcomes. Some of the examples of stochastic
models are Monte Carlo Simulation, Regression Models, and Markov-Chain Models.
Some other commonly used tools are Min Max criteria, Pareto Analysis, Force Field
Analysis, and The Analytical Hierarchy Process (AHP).
The results of running such models equip the decision maker to focus narrowly towards
goals and solutions and know possibilities and probabilities of outcomes from interplay
of random variables involved .
Control of Emotions and Fears
The control on emotions of decision makers, hurrying and getting impulsive is
necessary for successful and effective decision making. When stakes are high, taking
decisions of the type- Leave it or Take it are very difficult and the situation needs cool
mind and assessment of alternatives as available. Objectivity should never be lost and
efforts should be made to collect relevant data and information and think about all
possible alternatives, weigh and prioritize them in hierarchy like best option, next option
and so on. If there is no choice or action available no decision making is required. Just
leave the problem to take care of itself, with time. Useful data may emerge later as
things happen and progress or worsen. Procrastination, therefore, is also a decision
making process; to wait and watch for some time and defer decision making.
