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Decision Making Process, Models, Biases And Errors-Explained

In our day-to-day life, we ask ourselves questions like “What do I wear?”, “How do I go about this?” For every question we ask, we also reach a decision. “I think I’ll wear this blue shirt today”.

As humans, we are constantly choosing between alternatives and making decisions. But it is not as easy as it may seem because there is an underlying process involved in making any decision.

What Is The Decision-Making Process?

Decision-making is a cognitive process of selecting a belief or a course of action after a conscious evaluation of the existing choices and alternatives. This process is of high prominence in organizational settings as it serves as a determining factor in the growth and success of the venture. Most organizational outcomes are dependent upon the nature of the decisions made.

The Decision-Making Process

Bazerman, an author and researcher whose work focuses on negotiation and behavioral economics, in the year 1996 proposed a six step process that is employed in decision-making process and this is a rational model of decision making.

1. Define The Problem:

To make a decision, the first thing is to identify what the problem is. Define your problem in clear terms. Be clear about where you want this decision to take you. If the problem is not specific, the decision may not be precise either.

2. Identify The Objectives Of The Problem:

Once the problem has been stated, the objectives have to be defined. Why do you want to reach this decision? What is your motive behind pursuing a choice? When the answers to such questions have been successfully penned down, the objectives are found.

3. Weigh The Objective Of The Decision:

Evaluate the goal you’ve set for the decision. Make sure it is rational and will help you reach a decision that would be serving and not turn detrimental in any form. The decision-making process can be effectively strategized using decision matrix.

A decision matrix is an analytical method of evaluating options by creating a table which includes the criteria and the set of options available. When there are too many options to pick from, this method can be very beneficial in reaching a good decision. It includes the list of values in columns and rows that helps in evaluating the performance of each option.

4. Generate Alternatives To Solve The Problem:

It is always best to have alternatives to any decision you may choose to take. When plan A doesn’t work, there should always be a plan B that can be chosen instead. Alternatives offer solutions from a wider perspective as problems may have different connotations to them.

5. Evaluate The Alternatives Against The Objective:

As you may gather a few alternatives, it is essential to evaluate the effectiveness of each alternative. The pros and cons of each alternative should be considered rationally before making the decision. All the options should be carefully assessed and a final choice has to be made based on effectiveness, value and feasibility.

6. Compute The Optimal Decision:

Once you’ve made the final decision, work on it. Take the necessary actions that would take you to your desired goal. Develop a plan and ensure timely execution.

This is the rational model of decision making. Apart from this, there are other models of decision-making such as:

1. Bounded-Rationality Decision-Making Model:

This model proposes that people do not always seek to decide with the highest utility. Rather they choose an option that is just “good enough” or satisfactory. People usually pick this model of decision-making when there isn’t enough time or information to pursue a rational method of decision-making.

One classic example can be found in clothing showrooms. May be the trial rooms of showrooms usually install lights and mirrors that are of minimal quality as it is given the least concern over other important expenses. These strategies might typically make consumers look less appealing than usual.

Here, this showroom idea can be taken as a bounded-rationality decision-making model since people are looking for a “satisfactory” outcome rather than an idealistic one.

2. Intuitive Decision-Making Model:

In this model of decision making, people utilize their intuitions to reach a decision rather than factual evidence. Although this may seem like an unreliable method of making decisions, it has been successful in yielding good results; especially if it is an area of personal expertise.

For example, when Will was preparing for his math exam, he chose to spend a considerable amount of time on the Algorithm because somewhere he had a gut feeling that many questions would be picked from that chapter.

3. Recognition-Primed-Decision Making Model:

This is quite similar to the intuitive model of decision making. However, here a person recognizes a pattern in the available information. After which they pick up an action script and run it through their mind. If it is believed to work out, they would go ahead with the decision. Else, the decision would go through a few tweaks or be ditched altogether to start a new decision afresh.

Jim considered various career options in his mind before finalizing what he wanted to pursue. Initially he considered Pharmacology and after a critical evaluation of the option in terms of practicality and the scope of the subject in his country, he opted for Psychology instead.

Although it is great to believe that people use rational methods to make decisions, it is far from true. This model adopts highly rational and idealistic beliefs about humans such as humans are well aware of all the existing alternatives, they are aware of the positive and the negative consequences of the decision, they objectively make decisions and strive towards the goal of increasing their utility or economic gain.

However, humans do not always work from a rational stance. Decision-making is a complex process and hence it gives room for errors and biases. Sometimes people act without considering all the alternatives or miss evaluating the consequences or even forgo their gains from the decision. In such instances, rationality is not always a commonality.

So what are some of the errors that humans make when making a decision?

Biases And Errors In Decision Making

Bias refers to inclinations and prejudice for or against an individual or a group of individuals or a thing. When making decisions, due to various causal factors people become biased and this results in unpleasant or negative consequences.

Some of the biases that people use are:

1. Cognitive Bias:

Cognitive biases are systematic errors that people make when thinking which affects judgments thus resulting in poor decisions. Das and Teng, researchers worked concentrate on the biases in decision-making process, divided cognitive biases into four broad categories such as:

a. Presuppositions And Prejudices:

People bring in their prior beliefs and assumptions when making decisions and not being open to new and challenging ideas and opinions.

b. Limited Alternatives:

People seek lesser alternatives, reduce their decision-making process to a smaller construct and rely on their intuitions rather than rationality.

c. Overlooking Past Experiences:

This is when people usually view problems as unique rather than taking lessons from past experiences. They rely on their judgments rather than rational probability.

d. Assumed Manageability:

People usually have the tendency to overestimate their ability to make decisions and the level of control and believed that they can correct the consequences of the decisions along the way.

2. Selective Use Of Information:

During the information-gathering stage of decision-making, people usually use mental shortcuts to save time and effort. These shortcuts have been useful in many instances and yet lead to biased conclusions when making crucial decisions.

People usually overestimate the importance of the information that they have gathered during the early stage of the decision-making process.

The mind is wired in such a way that it prefers reaching a solution in the easiest possible way and adopts “heuristics” rather than doing it as the rational model suggests. Heuristics are mental shortcuts that allow solving problems and making judgments quickly and efficiently.

People rely on these “rules of thumb” more than practical solutions. To believe that using a motorbike would always result in accidents due to previous past experiences is an example of heuristics.

Due to the overuse of intuitions, heuristics, assumptions and prior beliefs, the information-gathering process becomes less reliable and as a result, affects the quality of the decision arrived.

3. Overconfidence Bias:

Of all the detrimental things, overconfidence receives the highest score. People generally tend to overestimate their skills and capabilities.

For example an amateur chess player is more likely to feel overconfident compared to his competent counterparts. This happens as a result of the Dunning Kruger effect which says that incompetent people usually overinflate their skills compared to the ones who are competent.

Overconfidence in decision-making can cause people to turn a blind eye to some of the most important aspects of a decision. It was found in a study that when people claimed they were 65 to 70 percent confident that they were right, they were only 50% right. Those that claimed were 100% percent right were only 70 to 85% right.

People who are the weakest are the ones most likely to overrate their abilities and the ones who are much more knowledgeable are more likely to undervalue themselves.

4. Anchoring Bias:

“First impression is the best impression” is a famous quote. It is a natural tendency in humans to strive to make a great first impression on people. However, this is a cognitive error. Anchoring bias happens when people rely on their initial opinions about something to reach a decision. This occurs because our mind gives a disproportionate amount of emphasis on the first information it receives.

For example, when Laura saw Jane for the first time, she was hitting someone in the face and so she concluded that Jane was an aggressive person. Even if Laura saw her laughing with others, later, she would assume that Jane was being fake. This tendency is widely used as an advantage by advertisers, writers and politicians etc. to create a positive impression of them and their brands among people.

5. Escalation Of Commitment:

Sometimes commitment can become the driving factor in taking terrible decisions. Sounds shocking right? Escalation of commitment happens when a person feels committed to the previous decision despite having faced negative consequences and chooses to continue with the same faulty decision.

For example, Kyle has been running his tech startup for 3 years although it hasn’t been yielding good profits. Yet he still chooses to run the business and not shut it down because he feels that he has invested a lot into the business. This is the case because when their commitment towards their decision escalates, they start taking the responsibility for failures.

This phenomenon can also be applied in the context of relationships. Sometimes, people stay in difficult relationships believing that they have made too many “investments” in the relationship for them to leave.

Claudia had been in a toxic relationship with her husband Mark for seven years. Although she has faced every kind of abuse with him, she still chooses to stay with him because she feels committed to the marriage, children, family and feels an intense level of responsibility for the choice she made.

6. Confirmation Bias:

Confirmation bias is the error in thinking where a person accepts and internalizes information only if it aligns with their values and beliefs. If any information goes against their values, they choose to simply reject it or try to find loopholes and inconsistencies in the piece of information.

This is another form of biased in decision-making as it allows the mind to see only parts of information while being resistant to other potentially important pieces of facts.

7. Availability Bias:

Our minds like to make shortcuts to reach quicker and more efficient decisions. Availability bias is when a decision is reached based on the information that can be retrieved quickly.

For example, when children and even adults are usually asked to come up with a word for the alphabet “A”, they instantly come up with the word apple or aeroplane.

8. Randomness Error:

Randomness error is to find patterns and meaning in otherwise random data or information. In simple terms, this involves trying to make meaning out of random, co-incidental information and events. Such an error mostly occurs due to superstitious beliefs or irrational thinking.

For example, seeing a black cat and believing that the day would be disastrous as a black cat signifies a bad omen.

Another example would be a manager choosing to suspend an employee because he believes that the employee has been deliberately ignoring calls and urgent messages. But in reality, the employee had lost his mobile phone.

9. Representative Bias:

Representative bias is when two similar situations are perceived to bring the same outcome. This is when a person compares two situations because they seem similar to each other.

For example, to compare a person who is built, tall and with a short haircut to a gym trainer or a fitness enthusiast because people with those features usually hail from such professions or interests.

How To Avoid Making Biased Decisions?

Let’s face it. Errors are costly and they’re growing to be costlier. So how can we avoid making bad decisions? What can save us the cost of terrible decisions?

After many years, psychologists have finally concluded how our decision-making process can be improved.

  1. Formal Analytic Process: It is a natural tendency for humans to use intuition to make decisions as they seem like the most reliable source of advice. However, it may not be helpful at all times as they prevent one from logically evaluating a situation and making a much more rational decision.
  2. Outsider Perspective: It has been found that taking outsider’s perspectives when making decision can help arrive at a healthy decision. When a person is too much into their own head, they are likely to overlook important information necessary for the decision. It has been shown to reduce overconfidence in decision-makers about their knowledge, the time taken to reach a decision and the success of the decision.
  3. “Consider The Opposite”: This is to ask the decision maker to consider taking a decision which is opposite to what they’ve decided. This reduces decision biases such as overconfidence, hindsight bias and anchoring.
  4. Group Decisions: Another way to enhance the success probability of the decision made is to take group decisions rather than individual decisions. This can be done by making the individuals of the group more aware of statistical reasoning and making people more accountable for their decisions.
  5. Past Experiences: Lessons from past decisions can be a great source of information. It is important to retrieve the teachings of the past while making decisions to avoid making the same errors as committed earlier. Bring to your conscious mind all the things you did right and wrong and modify your decision accordingly.
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