Judgement in Managerial Decision Making
1. Introduction to Managerial Decision Making
Psychological research has uncovered many of the clever and sophisticated shortcuts on which our
brains rely to help get us through the day – as well as common errors that these shortcuts lead us to
make on a regular basis. These errors can lead to relatively minor problems, such as buying the
wrong product, hiring the wrong people or selecting the wrong investment. Or big problems.
Even the brightest of people are susceptible to many of these errors. Intelligent people who receive
high scores on college entrance exams are just as vulnerable to many of these errors as are people
with lower scores.
The anatomy of decisions
Judgement= the cognitive aspects of our decision-making process.
If you don’t have alternatives to choose from, you don’t have a decision to make.
Six steps you should take when applying a rational decision-making process to each scenario:
1. Define the problem – accurate judgement is required to identify and define the problem
2. Identify the criteria – most decisions require you to accomplish more than one objective
3. Weigh the criteria – relative value on each of the criteria defined
4. Generate alternatives – identification of possible courses of action.
5. Rate each alternative on each criterion – how well will each of the alternative solutions achieve
each of the defined criteria? Carefully assess the potential consequences of selecting each of the
alternative solutions on each of the identified criteria.
6. Compute the optimal decision – multiplying the ratings in step five by the weight of each
criterion, adding up the weighted ratings across all of the criteria for each alternative, choosing
the solution with the highest sum of the weighted ratings.
System 1 and system 2 thinking
System 1 thinking refers to our intuitive system, which is typically fast, automatic, effortless, implicit,
and emotional. We make most decisions in life using system 1 thinking.
System 2 refers to reasoning that is slower, conscious, effortful, explicit, and logical. In most
situations our system 1 thinking is quite sufficient; it would be impractical for example, to logically
reason through every choice we make while shopping for groceries. But system 2 logic should
preferably influence our most important decisions.
People are more likely opt rely on system 1 thinking when they are busier, more rushed, and when
they have more on their minds.
Errors / biases are much more likely to occur in system 1 thinking than in system 2 thinking.
The two systems frequently work in tandem, with modification of the quick, initial response of
system 1 thinking after more in-depth consideration by the system 2 mind.
The bounds of human attention and rationality
Rationality= decision-making process that is logically expected to lead to the optimal result, given an
accurate assessment of the decision maker’s values and risk preferences.
The rational model is based on a set of assumptions that prescribe how a decision should be made
rather than describing how a decision is made.
1. Introduction to Managerial Decision Making
Psychological research has uncovered many of the clever and sophisticated shortcuts on which our
brains rely to help get us through the day – as well as common errors that these shortcuts lead us to
make on a regular basis. These errors can lead to relatively minor problems, such as buying the
wrong product, hiring the wrong people or selecting the wrong investment. Or big problems.
Even the brightest of people are susceptible to many of these errors. Intelligent people who receive
high scores on college entrance exams are just as vulnerable to many of these errors as are people
with lower scores.
The anatomy of decisions
Judgement= the cognitive aspects of our decision-making process.
If you don’t have alternatives to choose from, you don’t have a decision to make.
Six steps you should take when applying a rational decision-making process to each scenario:
1. Define the problem – accurate judgement is required to identify and define the problem
2. Identify the criteria – most decisions require you to accomplish more than one objective
3. Weigh the criteria – relative value on each of the criteria defined
4. Generate alternatives – identification of possible courses of action.
5. Rate each alternative on each criterion – how well will each of the alternative solutions achieve
each of the defined criteria? Carefully assess the potential consequences of selecting each of the
alternative solutions on each of the identified criteria.
6. Compute the optimal decision – multiplying the ratings in step five by the weight of each
criterion, adding up the weighted ratings across all of the criteria for each alternative, choosing
the solution with the highest sum of the weighted ratings.
System 1 and system 2 thinking
System 1 thinking refers to our intuitive system, which is typically fast, automatic, effortless, implicit,
and emotional. We make most decisions in life using system 1 thinking.
System 2 refers to reasoning that is slower, conscious, effortful, explicit, and logical. In most
situations our system 1 thinking is quite sufficient; it would be impractical for example, to logically
reason through every choice we make while shopping for groceries. But system 2 logic should
preferably influence our most important decisions.
People are more likely opt rely on system 1 thinking when they are busier, more rushed, and when
they have more on their minds.
Errors / biases are much more likely to occur in system 1 thinking than in system 2 thinking.
The two systems frequently work in tandem, with modification of the quick, initial response of
system 1 thinking after more in-depth consideration by the system 2 mind.
The bounds of human attention and rationality
Rationality= decision-making process that is logically expected to lead to the optimal result, given an
accurate assessment of the decision maker’s values and risk preferences.
The rational model is based on a set of assumptions that prescribe how a decision should be made
rather than describing how a decision is made.
