Author: Paweł Wyszomirski

The text was initially published in Polish language in J. Dzieńdziora (Ed.), Paradigms of contemporary management of organizations. WSB University.

The main product of a company is decisions. More than 50 years ago, the myth of rational decision making by organisations and managers collapsed. Recent studies show that decision-makers make different decisions based on the same data. Behavioural and evolutionary theories change organisations into infinite battlefields of internal decisions and environmental influences. The decision-making process should change with the development of a company and not only stay in line with its management model but also protect decision-makers against basic cognitive errors and noise. The review presents an analysis of the management models on the decision-making process in companies based on scientific articles.

Introduction

Every organisation, no matter what it produces, is a decision factory. Some of these decisions are made according to clear rules, but many are complex, time-consuming and multi-faceted. In addition, they cannot be easily controlled. Their quality can only be ensured by taking care of the quality of the processes leading up to them. (Kahneman et al., 2019)

The value of wrong decisions is difficult to estimate. According to Daniel Kahneman, the cost of errors, caused only by the noise in making them, is in the billions of dollars annually. In addition, managers misjudge the scale of mistakes made at the organisational level. They estimate that such mistakes affect between 5 and 10 per cent of decisions, and can be as high as 70 per cent. Seniority or experience do not improve the accuracy of their assessment here. (Kahneman et al., 2016)

Since the 1960s, there has been an ongoing debate in management theory at what level decision-making processes should be analysed in order to capture the right subject for analysing them. Cyert and March opened up the 'black box' of the internal mechanisms of organisations. Until now, they had been assumed to be a unity. The new perspective had them seeing decision-making in organisations as the product of collections of individuals with varying degrees of interest, knowledge or identity. (Cyert & March, 1992)

Since then, corporate decision-making models have been looked at from new perspectives by theorists from the evolutionary school (Stanczyk, 2016), perspective theory (Domurat, 2008) or cognitive error and noise (Kahneman et al., 2016), among others. They introduce a view of decision-making not only as a product of sets of individuals, but also of the relationships between them, which often themselves produce errors.

Given the above rationale, this study aims to demonstrate the impact of governance models on corporate decision-making. In addition, it shows, using the example of the Mediating Assessments Protocol (MAP), how to design decision-making processes with lower error rates.

The first part of the paper analyses the framing of decision-making processes in behavioural and evolutionary theory. This is followed by a presentation of management models and the decision-making process. The next part is a discussion of the main cognitive errors and the phenomenon of noise. The last presents the concept of choice architecture using the MAP protocol as an example.

The decision-making process in behavioural theory

Organisation theory, until the publication of Herbert Simon's books Administration Action and Organisation Theory (together with J. G. March) in the 1940s and 1950s, did not explain decision-making, and especially decision-making in companies, in more detail. (Gavetti et al., 2012) It was not until the behavioural school, based on the paradigm of strategic behaviour, that management was shown to be the science of using actions or tools that had already been tried in practice and produced the expected result. (Lisinski, 2011)

The behavioural school thus undermines the sense of optimising organisational decision-making processes based on rational choice theory. According to H.A. Simon, J.G. March, R.M. Cyert or H. Mintzberg, it is more important to study the actual decision-making and implementation processes than to give guidelines, as they are often based on the theory of bounded rationality. (Gierszewska, 2002)

Simon challenged the dogma of the rationality of choice. The human mind has a limited capacity to formulate and solve complex problems. It cannot indefinitely collect all available data, process and analyse it to make a fully rational choice. It seeks to make "good enough" choices, in line with the principle of bounded rationality. According to this principle, the first option that satisfies us and meets our expectations is chosen (satisfice / satisfaction rule). Similarly, economic agents act in a similar way, seeking to find satisfactory solutions rather than 'maximising' ones, i.e. good enough but not the best. (Simon, 1972)

Simon's work at the organisational level was further developed by Cyert and March, who published in 1952. 'Behavioural theory of the enterprise'. These three publications gave impetus to the Carnegie School (Carnegie School) in management thinking. Its three foundations were the organisation as a proper object of study, decision-making as a method of studying organisations, and behavioural credibility as a principle to build theory. (Gavetti et al., 2007)

With their publication, Cyert and March have opened up the 'black box' of the internal mechanisms of organisations. Until now, they had been assumed to be a unity. The new perspective had them seeing decision-making in organisations as the product of collections of individuals with different degrees of interest, knowledge or identity. These differences led to the identification of interesting phenomena such as internal conflicts or sub-goal optimisation (satisfaction rule). These, in turn, had important implications for the analysis of corporate behaviour and performance. (Argote & Greve, 2007)

A key element of the new approach was to make decision-makers realise that they lack complete knowledge and constantly have to seek information and that, despite this, their decisions do not conform to the assumptions of rational choice theory. In fact, the decision-making process is governed by quite different rules. The postulate of the Carnegie School was to show how organisations can achieve feasible rationality rather than perfect rationality.   (Gavetti et al., 2012)

In practice, the top management sets the organisation's objectives. However, they are implemented through the decision-making process at least at two levels of management - in addition to the top management also at lower levels. Two main criteria are used for evaluation - available financial resources and the overall impact on the health of the company. In addition, decision-making is influenced by the availability of information and the cost of collecting and processing it. (Ahuja, 1999)

Another example of this approach is the need to take into account the emotional states (affects) that influence decision-making. According to Cristofaro, managers should assume that a decision is the product of multi-level emotional affects, each of which can be controlled. To do so, they must first gather data on the emotional architecture (affective architecture) of the organisation. They should identify both the general climate of the organisation and the emotional attitudes of individual groups and individuals. In the next step, they develop ways and tools to regulate the emotional state of the entire organisation. (Cristofaro, 2019)

It should be noted that at the level of economics (e.g. Marschak's and Radner's team theory), companies are still treated similarly to individuals when making decisions. A new perspective could be offered by psychology. Many psychological studies, deal with group decision-making, but they are usually conducted in laboratory conditions, for a short period of time and with individuals with no previous experience of collaboration. They are therefore not easily transferable to management. Argote and Greve identify this area as an important research direction and encourage analyses to better understand decision-making in organisations. (Argote & Greve, 2007)

The decision-making process in evolutionary theory

In the 1980s, the evolutionary paradigm emerges in management science. The object of evolution is the organisation. It is defined as a unique set of organisational routines. It is a system that has unique properties that individual routines, when analysed separately, do not have. Routines can evolve or die, depending on whether the organisation as a whole evolves or dies. In this way, the evolution of an organisation is synonymous with the evolution of routines. There are also important clues in the literature about the study of evolution. Three units can be analysed: (1) routines and competences in the organisation; (2) organisations as a whole; (3) populations or communities. (Stańczyk, 2016)

Considering these three levels of analysis, it is important to realise that the individual conceived as a manager or even the organisation as a whole has quite weak decision-making power when it comes to the selection process. However, this does not mean that it is completely powerless. The selection process is not the 'invisible hand', but the result of the influence of political decisions taken by the dominant organisation. In this view, the decision-making processes have to be considered over a long period of time and, in addition, are not subject to the classic evaluation of economic benefits. The selection that takes place only informs the fact that organisations are moving towards a better fusion with their environment (including that created by other organisations). This bonding can be very dangerous when conditions in the environment change unexpectedly. Therefore, anastomosis should not be analysed solely as a positive aspect. (Strużyna, 2011)

Management models

A management model is the choices made by top management about how they define objectives, motivate effort, coordinate activities and allocate resources. Characteristic management models can be a key competitive factor for some companies. (Birkinshaw & Goddard, 2009)

In recent years, the management literature has focused very much on the sphere of leadership. This narrows the field of research. Leadership is about the qualities and behaviours that make us worth following. Management is about how we get the job done by others - it is about the day-to-day efforts to set goals, motivate effort, coordinate activities and make decisions. (Birkinshaw & Goddard, 2009)

The above definition is of course one of many possible ones. The management model is defined in a similar way by (Guillén, 1994), (Mintzberg, 2013), (Hamel & Breen, 2007), among others. This group of researchers points out that by asking the question "what is your management model?", we are actually asking a fundamental question for the organisational world - "what does your company really do and how does it do it?".

Michael Mol and Julian Birkinshaw analysed the 50 most important management innovations that have happened in the last 150 years (Mol et al., 2008) and 30 companies currently in the market looking for new models in this area (Birkinshaw & Mol, 2006). Their aim was to formulate the main principles that govern management. They summarised their research in a 4-dimensional model of the Framework for Dimensionalizing Management (Birkinshaw & Goddard, 2009)

The authors do not provide an answer as to which management model is best. They point out that the very 'management model' in place in a given company may be unconsciously mismatched with the life cycle of the company. Managers should look at the hidden rules governing how management is implemented in a company. This is especially true today when many companies, especially online companies, are experimenting with new forms of management using new technologies. (Birkinshaw & Goddard, 2009)

The authors adopt four groups of key management activities, defining objectives (setting management goals, approaches to motivating individuals) and measures (coordinating activities, decision-making), which together form the Framework for Dimensioning Management. These give us, in effect, four archetypes of management models:

• Planning model - large companies operating with clearly defined short-term objectives, a clearly defined management process and hierarchical decision-making (e.g. Exxon, Wal-Mart). Often these are well-performing large listed companies.

• challenge model (quest model) - an alternative approach to the planning model in which control over means decreases but increases over goals. This model is often found in fast-growing companies where the founder has a clear vision but encourages employees to implement it through various means. In large companies, this model is implemented when they want to regain energy and move away from bureaucratic procedures.

• Scientific model - this is the inverse of the challenge model. Here the means are mainly controlled and the goals can be open-ended. This is, for example, the scientific development model. The goal is defined very broadly - the pursuit of knowledge. However, the means to get there are very strongly defined, e.g. publishing scientifically peer-reviewed articles, giving scientific lectures, citation rules.

• discovery model - in the last model, goals and measures are very poorly controlled in the management process. This seems to be a recipe for chaos, but most start-ups operate in this model. They operate in a high-potential environment, but their success is built on many trials and failures. (Birkinshaw & Goddard, 2009).

An important element of the Framework for Management Dimensioning is decision-making in companies. The extremes here are that managers rely solely on their own knowledge and experience and that managers draw on the knowledge of subordinates, but also cede part of the responsibility for decisions to them. The authors emphasise that in both cases cognitive errors such as groupthink are not avoided. (Birkinshaw & Goddard, 2009)

It should be noted that the authors also mapped the views of the management of over 70 UK private and public sector organisations on the changes in management models taking place over a five-year horizon. Executives felt that intrinsic employee motivation and bottom-up organisation of work, as well as collective knowledge, would become increasingly important. Setting clear goals in the medium term would become less important. (Birkinshaw & Goddard, 2009)

Decision-making process

Decision-making is the process by which one selects a preferred option or series of actions from a set of possibilities, based on specific criteria or strategies. (Wilson & Keil, 1999) Decision-making is one of the 37 basic cognitive processes distinguished in the layered reference model of the brain (LRMB). It is an interdisciplinary area of interest for many sciences. (Yingxu Wang et al., 2006) 

Decision theories can be divided into two paradigms: descriptive and normative. The first talks about how people actually make decisions and is based on empirical observations and experimental studies of the choices they make. The second about how they should make them and assumes the rationality of the decision-maker, who is guided by well-defined preferences and follows certain choice rules. These processes can be very elaborate. E.g. the 19-step decision-making process proposed by Edwards. (Edwards & Fasolo, 2001)

However, we can identify three main components of decision-making: the decision situation, the decision-maker, the decision process. In the decision-making process itself, we also have three main components: decision goals, sets of choices, sets of criteria or choice strategies. (Wang & Ruhe, 2007)   

The decisions themselves can be divided into four main categories, to which specific decision-making strategies can be assigned:

• intuitive (arbitrary strategies - based on the easiest or most familiar choice; preference strategy - based on inclinations, hobbies, tendencies, expectations; common sense strategy - based on axioms and judgement),

• empirical (trial-and-error strategy, experimentation strategy, experience strategy - based on existing knowledge, consultation strategy - based on professional consultation; estimation strategy - based on a rough estimate),

• heuristic (rules strategy - based on scientific theories, ethical strategy - based on judgement and philosophical beliefs, representativeness strategy - based on a general rule of thumb, accessibility strategy - based on limited information or local maxims, anchoring strategy - based on assumptions or prejudices),

• rationales, which we can divide into static and dynamic. The first case is when the decision maker, when making decisions, does not affect the change in the conditions under which he or she made the decision, such as we have in game theory and the prisoner's dilemma. (Wang & Ruhe, 2007)

It should be noted that the majority of basic decision-making strategies can be assigned to the intuitive category first on the list. This means that it is even a decision-maker unfamiliar with more advanced techniques who can make important and wise decisions every day in a few seconds. (Wang & Ruhe, 2007)

More sophisticated decision-making techniques are worth using in situations where they can bring benefits that outweigh the costs. The criterion for selection can be, for example, the level of possible risk associated with the decision to be made: certainty conditions (we know the consequences of the decision), risk conditions (different consequences are possible and we know the probability of their occurrence) and uncertainty conditions (we do not know the probabilities of the consequences of a decision).

An important strand of decision-making theory is the psychological approach, which attempts to explain irrationalities in the behaviour of decision-makers, particularly related to the level of risk. The theory of subjective expected utility is developed here, based on the work of mathematicians John von Neumann and Oskar Morgenstern, who presented it in The Theory of Games and Economic Behavior. (Neumann et al., 1953)

The theory of subjective expected utility assumes that the decision-maker seeks to maximise the utility of the outcome. Utility, in turn, is the greatest chance of achieving the desired goal. The decision-maker is therefore guided by some imagined future state and compares the various outcomes of his or her action with it. (Domurat, 2008)

Cognitive errors and noise

In the 1950s, however, many deviations from the theory of subjective utility in decision-making were noted. In 1979, Kahneman and Tversky proposed an alternative explanation by formulating prospect theory. They concluded that fear of risk exists, but rather only in the area of gains. In the area of losses, on the other hand, risk aversion prevails. (Domurat, 2008)

Table 1. provides an overview of the cognitive pitfalls and heuristics used in the work of teams. It is based on a literature review by (Abatecola et al., 2018) related to management errors and includes, among others, key findings from an article (Kahneman et al., 2011) or a book (Bazerman et al., 2013). 

An additional element in decision-making is noise. (Kahneman et al., 2016) writes that 'wherever a decision is made - there is noise, and usually more of it than we expect. As a rule of thumb, it can be assumed that no professional or manager can predict well the reliability of their decision. The only way to make a correct assessment is to conduct a noise audit." The main problem in decision-making is people, who are influenced by a myriad of different factors, from their mood to the time that has passed since their last meal or the weather. Noise is the erroneous assumptions about the reliability of decisions made by individuals within an organisation in similar situations. With the same data at different times or by different people in similar positions, radically different decisions can be made. The surest way to eliminate noise is to use algorithms. Even the simplest will perform better in repetitive situations than humans. (Kahneman et al., 2016)

Choice architecture and decision-making model

Analyses of cognitive errors and hype show that it is natural to expect people to make mistakes. This is not just related to the field of management, but every sphere of life. One study on treatment errors showed that anaesthetists themselves were responsible for 82 per cent of critical accidents in intensive care units. This was because they confused the tubes through which drugs were dosed. The solution to this problem was to differentiate the connection ends in the apparatus, thus physically blocking the possibility of confusion. (Vicente, 2004)

This is an example of choice architecture. Products or services are designed to anticipate possible user errors and facilitate the optimal choice in a given situation. This can be done, for example, by the number of options presented, the way they are described or by proposing a default option. (Thaler et al., 2013)

An example of this is the Mediating Assessments Protocol (MAP), proposed by Daniel Kahneman for decision-making in organisations. It consists of three steps:

• Define the assessment areas in advance. The decision-maker at the outset identifies a few key areas that are crucial for undertaking the evaluation. E.g. when acquiring a company, only synergies in the areas of revenue and management skills are taken into account.

• Use fact-based, independent sources for assessments. Those analysing the situation should not influence each other. Even if they are dealing with a different issue of the case. Everyone gathers information and makes decisions on their own in the chosen area of assessment.  

• Make a final assessment after the sub-assessments have been completed. Unless a fact comes to light beforehand that undermines the meaningfulness of the whole process (e.g. accounting fraud in the acquired company), the final decision should only be discussed once the assessments in each of the established areas have been undertaken and discussed.  

The use of MAP is possible both for strategic decisions and for recurrent decisions. In both, it avoids groupthink. In the case of the former, it provides the basic structure for making them. It gives the decision-maker the opportunity to reflect consciously on key aspects of the issue, responding to the risks associated with prospect theory. In the case of iterative decisions, it facilitates learning and correction of wrong decisions. 

Summary

Decisions made at various levels within companies, if the decision-makers are human, are subject to errors. In repetitive situations, this can be avoided by incorporating automated algorithms into the process. However, this is not always possible. (Kahneman et al. 2016) We can distinguish between the following types of decisions in companies: intuitive, empirical, heuristic and rational, which we can divide into static and dynamic. (Wang & Ruhe, 2007)   

The management model itself does not affect the quality of decision-making. However, for a company to thrive, the decision-making model should be aligned with the management model and the development stage of the organisation (Birkinshaw & Goddard, 2009).

The paper presents several tools for adjusting the management model for optimal decision-making. The Framework for Dimensionalizing Management identifies what stage of development an organisation is at and what management archetype is optimal for it. (Birkinshaw & Goddard, 2009) Table 1. presents a checklist of ways to deal with basic cognitive errors in team decision-making (Abatecola et al., 2018). Also discussed is the Partial Assessment Protocol by Daniel Kahneman, which exemplifies the construction of decision architecture in companies. (Kahneman et al. 2016)

The main limitations of the completed research procedure relate to the selection of literature for the study. Items of key relevance to the selected areas were used, but a full review of the literature was not carried out according to protocols e.g. PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses).

Identified avenues for further research are the use of choice architecture to create decision-making protocols within companies that are aligned with management model archetypes, including those at early stages of development (e.g. the discovery model). This should facilitate decision-making at different stages of organisational development.

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