Improving the Decision-making by Managers: Choice Architecture

Decision-making and Valuation

Best Practices
Anneke Zwart
Student (University), Netherlands

Improving the Decision-making by Managers: Choice Architecture

A different approach towards improving decision making is 'Choice Architecture'.
In every organization, employees tend to make decisions that will neither benefit their employer nor themselves. According to Beshears (2015), this happens not because those employees are stupid, but rather because of certain patterns in the human brain that lead us to:
- Underestimate the time needed for a certain task;
- Neglect critical information;
- Overestimate our own ability to perform certain jobs;
- Fail to take advantage of company benefits that are in our best interests.

The author argues that its very difficult to rewire such patterns in our brains. Rather than focusing on rewiring the wires, it could be possible to adjust the ENVIRONMENT in which decisions are made. By doing so, the likelihood of employees making better decisions is increased.

The following 5 steps are recommended:
1. UNDERSTANDING THE WAY DECISIONS ARE MADE: The author argues that - in order to being able to make the right decisions - it is important to understand the process of processing information that leads to making decisions. There are basically two ways of processing information:
1.1. Automatic, quick, instinctive decisions, based on emotions.
1.2. Slow, conscious and logical decisions.
Each of the different ways has its strengths and weaknesses. For example, the quick way of decision making uses intuition and rules of thumb which makes decisions to be made effortlessly. However, if intuition are wrong or emotions befog judgements and make the poor, the second way of decision making should come in. However in many cases intuitive or emotion-based decision-making are over-relied on and go unchecked by the second way of decision making. This is by no means an attempt to say that intuitive decision making should in all ways be suppressed so as to make right decisions. Rather a carefully consideration of whether certain decisions are made with an appropriate balance of processing information.
2. ASSESSING THE APPROPRIATENESS OF BEHAVIORAL ECONOMICS: Definition of the problem: the author argues that behavioral economics tools are not the sole way of solving problems. Therefore it is important to first determine whether the root cause of the issue is human behavior/whether people are behaving in ways that contradict their own interests, or whether the problem can be broken down into more manageable pieces. If so, then behavioral economics should be a tool that can tackle the issue.
3. IDENTIFYING UNDERLYING CAUSES: the author argues that there are basically two underlying causes of bad decision making: lack of motivation and cognitive biases. These underlying causes are often a result of over-reliance on intuitive and emotion-based decision making being unchecked by logical and deliberate decision making.
4. DESIGNING SOLUTIONS: The design of solutions can start once the underlying causes of poor decision making have been detected. A particular way that is useful is introduced by Thaler and Sustein (2008): choice architecture. The idea is that decision making can be improved by deliberately structuring how information and choices are presented to them / structuring the choice environment in such a way that it nudges people towards sound decisions. In such a way, employees retain their freedom to make decision that serve their interests while simultaneously nudging people towards better decisions. Such alterations to the choice environments make big improvements possible at low or no costs.
5. TESTING SOLUTIONS: The last step involves the testing of the proposed and desired solutions, so as to assess whether the chosen path will actually achieve its goals. According to the authors, testing solutions helps managers to both prevent mistakes and to give them insights that can enhance their decision-making.

Sources:
Beshears, J. (2015). Leaders as Decision Architects. HBR May 2015
Thaler, R. and Sustein, C. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness

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