Managers and their not-so rational decisions

By S. Trevis Certo!, Brian L. Connelly, Laszlo Tihanyi
Mays Business School, Texas A & M University, College Station, TX 77843-4221, USA

Abstract
Today’s corporate environment requires managers to be excellent decision makers.
Their ability to make fast, widely-supported, and effective decisions will, in large
Part, shape the performance of their firms. In this article, we describe two cognitive
Systems that influence decision making. System 1 refers to a process that is fast,
Effortless, and intuitive. System 2 is a slow, controlled, and rule-governed decision making
Process. Both are important to a wide variety of managerial decisions, and
They interact with each other. There are, however, a number of forces at work that
Hinder the effectiveness of these processes. For example, we know from prospect
Theory that managers are unwilling to incur loss, so much so that they often make
Irrational decisions based on a small probability that they could avoid such loss.
Another example, the escalation of commitment, explains why managers may
Continue to dedicate resources to failed projects. We describe these and other
Biases, with a view toward helping managers better understand the problems of

Risk
1. Managerial decision making
Each day, practicing managers around the globe
Make decisions, some of which are more important
Than others. Based on the prominence of decision
Making in everyday life, researchers in various disciplines
– both within and outside of business
Schools – have examined the ways in which individuals
Make decisions. That various disciplines
Within business schools have studied decision making
Should come as no surprise, as managers make
Decisions that span the various business functions.
Webster’s Dictionary defines decision as “the act
Of making up one’s mind.” Hastie (2001) suggests
That decisions involve three main components:
Courses of action (i. e., alternatives), beliefs about
Objective states and processes (including outcome
States), and desires (i. e., utilities) that correspond
To the outcomes associated with each potential
Action-event combination. Stated more simply,
Hastie suggests that good decisions are those
Which link decision-makers’ utilities with decision
Outcomes.
In business settings, managers make various
Types of decisions. Managers may make relatively
Minor decisions that are primarily operational or
Tactical in nature. For example, a manager may
Need to decide which type of napkins to stock in a
Restaurant. In contrast, managers may make more
Strategic decisions that involve larger outlays of
Capital. Such strategic decisions may include, for
Example, potential acquisition targets or host
Countries for foreign direct investment.
A decision implies that an individual has access
To two or more alternatives. Some decisions may
Involve many alternatives, such as “Which country
Should we enter to begin our globalization effort?”
In contrast, other decisions may involve only two
Alternatives (i. e., “yes/no” decisions), such as “Should
I hire this individual to work in our department?” In
Fact, Henry Mintzberg studied the decision-making
Processes used by executives and found most decisions
That executives faced were yes/no decisions
(Mintzberg, 1975).
The decisions managers make vary in risk and
Uncertainty. Although some managers use these two

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Managers and their not-so rational decisions