Harvard Business Review on Decision Making

Rating:
Summary: Effective Decisions
Review: Being an effective manager requires being a good-decision maker too, having ability of using factual and quantitative information to analyze what is the most efficient decision to reach a well-defined objective. Making good decision by applied management science approach is the benefits that managers expect to learn combining with past experience to decide on what should be done. However, in the real-reality (as opposed to virtual reality, as a model), many decisions can be made under the highest-level conceptual understanding. In addition, a better understanding of decision making can be broken down into six sequential steps according to Drucker (pp. 2-19)

1. Classifying the problem in order to tell if it should be solved based on either principles or pragmatic concept. The problem can be categorized in three groups. The first group is the generic problems; for example, in a manufacturing organization, it may happen the situation like total amount of products decreasing. At this stage, the product control or engineering group will look at what is going on in a production line. To illustrate, the coupling in the pipe carrying steam or hot liquids, rather than the problem of production processing. This kind of problems frequently happens. The second group is a unique problem for the individual institution. The third group is a truly unique problem which happens out of exception. The truly unique events are rare and have to be treated individually. Unlike truly unique events, the other two groups require a generic solution. They require a rule, a policy, or a principle. Once the right principle has been developed, all manifestations of the same generic situation can be handled pragmatically by adjusting the rules to each specific case.

2. Defining the problem. After classifying the problem is generic or unique, it is quite easy to define what the problem is about that we are dealing with. However, it is the most important part of the whole decision process because sometimes the definition of the problem seems plausible but incomplete. In order to avoid this kind of carelessness, Peter F. Drucker suggested all of the decision makers check this process, defining the problem, again and again against all the observable facts and discard a definition the moment it fails to encompass any of them.

3. Specifying the answer to the problem to see if the decision is on the boundary conditions or not. A decision that does not satisfy the boundary condition is worse than the wrong definition of the problem. Therefore, before picking up the optimal solution, a decision maker has to deeply think about a question, "what are the objectives the decision has to reach?" Clearly thinking about the boundary conditions will help decision makers identify all of the possible decisions which can satisfy the needs.

4. Deciding what is right, rather than what is acceptable, in order to meet the boundary conditions. It means before paying attention on making decision acceptable by the compromise, adaptations, and concessions, we have to let the solution fully satisfy the specifications. However, if a decision maker does not know what will meet the boundary conditions, the manager cannot distinguish the difference between the right and wrong compromise. As the right and wrong compromise, Peter F. Drucker had an interesting description. The right compromise is like an old saying, "Half a loaf is better than no bread." In the contrast, the wrong compromise is like, "half a baby is worse than no baby at all." From this interesting description, it is easy to realize that deciding the right decision is more important than choosing the acceptable one.

5. Building into the decision the action to carry it out. Converting the decision into action is the most time-consuming steps in the decision-making process. It is true that we will not know the decision is the most efficient or not if we put the decision into practice. There are several questions that have to be answered before committing the decision, "Who has to know this decision?", "What action has to be taken?", "Who is to take it?", "What does the action have to be so that the people who have to do it can do it?" From those questions, it is obviously that an appropriate person who carries out the decision must have enough capabilities of adjusting his/her behavior, habits or attitudes once a decision becomes effective.

6. Testing the validity and effectiveness of the decision against the actual course of events. The feedback of decision action is the important information for a decision maker in order to realize the result of the decision model also for the future model building. However, information should be built on the direct exposure to reality, rather on decision makers themselves. Above all, six steps of decision process are the stepping stones for decision making. Although a good decision may be made under the decision-making process, sometimes the decision will still fail because of the mind of decision makers. The way the human brain works can destroy the choice we make. In the article, "The Hidden Traps in Decision Making, (pp. 143-67)" John Hammond, Ralph Keeney, and Howard Raiffa list nine psychological traps that may affect a way that a decision maker makes business decision.

1. The anchoring trap makes people give inappropriate weigh to the first information we receive. In business, for example, although it seems the decision that a manager predict how much product need to be produced by taking the former sales reports as a reference is reasonable, the old sales numbers become anchors because it may let a manager put too much attention on past event but not give enough weigh to other factors. Under this situation, it can lead to a poor forecast.

2. The status-quo trap means people may have biases on the situation we feel comfortable with so that we will not choose other alternatives even they are better. In order to make decisions rationally and objectively, a decision maker always have to keep in mind that the decision will be acted under the status quo and never consider status quo as the only alternative.

3. The sunk-cost trap is another serious biases. People always believe that successfully past decision even though it does not work anymore at the present. In order to put the suck cost away, a decision maker can listen other people's viewpoints and those people must to be those who did not experience the earlier decisions.

4. The confirming-evidence trap makes people find out the information to support an existing predilection, rather than to conflict it. On the other hand, people will try to discount the opposing information. In order to avoid the confirming-evidence trap, a decision maker can set up a clincher, let other people argue it, and listen people's advice.

5. The framing trap happens at the beginning of the decision process. When it occurs, the decision goes wrong because a decision maker has already misstated the problem.

6. The Estimating and Forecasting Traps have three minor traps,

a. The overconfidence trap makes people overestimate the accuracy of the forecasts.

b. The prudence trap causes people to be overcautious when people make decision under uncertain or risky situation.

c. The recall ability trap leads people to give incorrect weigh to recent, dramatic events.

The book rightly emphasizes the facts that a good decision not only relies on clearly defining the alternatives, collecting the correct information, and so on during the decision-making process, but also relate to the benefits and costs which are weighed accurately. Furthermore, the background, the experience of a decision maker will be one of the factors which affect the decision making. Except the factors of individuals, the economic circumstances will influence the decision and its action too.

Rating:
Summary: Theory and Practice - advice from the leading minds.
Review: There are several books from the Harvard Business Review that follow this simple format - essays on critical topics by the leading minds in the field compiled into a short book of around 200 pages. One of these critical topics is Decision Making. That topic is the focus of this book.

There are hundreds of books on management, strategy, leadership, etc. but not many are purely dedicated to treating the subject of Decision Making from a theoretical and abstract perspective. This book contains 8 short essays presenting different theories by people by Peter Drucker.

The first chapter starts off with an impressive treatment of The Effective Decision. It is impressive because of the wisdom packed into these few pages and the aptness of the title. The author (Peter Drucker) dispels the myths about the most effective decision makers being the ones that can think fast and manipulate a large number of variables in their heads. Instead he explains that the best decision makers are the ones who focus on impact instead of technique. He then systematically explains a simple process to follow to achieve the same results as the highly successful executives.

The book then moves on to topics dealing with how to make trade-offs, humble decision making (which is nothing but accepting that your first impressions may be wrong and be open to changing the direction of your thoughts as more information becomes available), interpersonal barriers, hidden traps, when to trust your gut, and analyzing problems. The essay on interpersonal barriers was very familiar to me as I had experienced the situations described several times in my own career.

The book is simple - it has no pictures, just some tables once in a while and some blank paper at the end of the book to takes notes. The size is small like a novel but very potent! When I first saw this book at a bookstore, I didn't think much of it. But I picked it up because of the Harvard Business Review name on the front cover. I couldn't put it down once I started reading the first chapter and immediately purchased a few books in this series.

These books and especially this one can be described in only one word - potent. They are like text books or Ph.D papers except they are very practical. These are some of my favorite management/business books but they are difficult to digest. Since they are abstract in nature, one has to read them very slowly and read them with total concentration. The authors don't spend time painting a picture in detail and trying to get you excited. They get straight to the point and finish it in less than 20 pages. If you read these books like you would read other books, you are likely to miss the point.

This book in particular is very unique as there aren't that many books dedicated to just Decision Making. Enjoy learning from the masters! Good luck!