BU3413:

BUSINESS STRATGEY
Miss Sithmi Ranawaka
MBA (UK), MSc Entrepreneurship & Innovation (UK), BSc International Business (UK)
Lecturer I Research Supervisor I Entrepreneur
https://www.linkedin.com/in/sithmi-ranawaka-551198200/
 Learning Outcomes
• Decision Making as an integral part of the strategic function
• Barriers to Strategic Decision Making
• Cognitive Bias
• Heuristics
• How humans make decisions?
• How to avoid undercurrents?
 Subjective Biases in the Decision-making Process
Decision making is inherently a cognitive activity, the result of thinking that may be either rational or irrational (i.e.,
based on assumptions). Individual characteristics including personality and experience influence how individuals
make decisions. As such, an individual’s predispositions can either be an obstacle or an enabler to the decision-making
process.

Often characterised as a ‘rational’ systematic

step-by-step process:

1. Set objectives
2. Understand problem
3. Determine options
4. Evaluate options
5. Choice

Problems routinely challenge the cognitive capacities of managers, managers meet such challenges with limited
information processing capabilities
 Types of Cognitive Bias
Biases distort and disrupt objective contemplation of an issue by introducing influences into the decision-making process
that are separate from the decision itself. Individuals are unaware of the biases that can affect judgment. The most common
cognitive biases are confirmation, anchoring, halo effect, and overconfidence.

1. Confirmation bias: This bias occurs when decision makers seek out evidence that confirms their previously held
beliefs, while discounting or diminishing the impact of evidence in support of differing conclusions.
2. Anchoring: This is the overreliance on an initial single piece of information or experience to make subsequent
judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, which can limit one’s
ability to accurately interpret new, potentially relevant information.
3. Halo effect: This is an observer’s overall impression of a person, company, brand, or product, and it influences the
observer’s feelings and thoughts about that entity’s overall character or properties. It is the perception, for example, that if
someone does well in a certain area, then they will automatically perform well at something else regardless of whether
those tasks are related.
4. Overconfidence bias: This bias occurs when a person overestimates the reliability of their judgments. This can include
the certainty one feels in her own ability, performance, level of control, or chance of success.
 How do Humans make decisions?
• Decisions are made explicitly whenever one consciously combines beliefs and values in order to choose a course of
action. They are made implicitly whenever one relies on a ritualized response (habit, tradition) to cope with a choice
between options.
• Real-life decisions made by people with some kind of expertise are investigated in the context of limited time,
conflicting goals, dynamically changing conditions, and information sources of varying reliability.
• Failure to carry out rightful sequence of stages of the normative decision-making process
*Normative decision theory is concerned with identification of optimal decisions where optimality is often determined by considering an
ideal decision maker who is able to calculate with perfect accuracy and is in some sense fully rational.

• Are prone to hold distortions in judgement

• Humans ignore objective data they also focus too much credence on irrelevant data.

• Adopt satisficing behaviour

• Pseudo decision-making model: The pseudocertainty effect is the tendency for people to perceive an outcome as certain
while it is actually uncertain in multi-stage decision making.

• Imitative behaviour: human crowds to display imitative tendencies (or the so-called ‘herd’ behaviour) in their decision
making.
 How the brain work?
• Decision-making is a recurrent, ubiquitous cognitive process and a consequential part of human behavior. A
decision is made out of a set of items based on specific criteria. It is widely accepted in cognitive science that
damage to the frontal lobe in the brain impairs one’s ability to make a decision (Ratcliff & Rouder, 1998).

• The Prefrontal Cortex (PFC) and hippocampus are the most critical parts of the human brain for decision making.
• The decision-making process contains four steps:
• In the first step, some initial stimuli produced by sensory inputs, excite a set of hippocampal neurons as part of
the neural system.
• In the second step, a set of secondary stimuli arrives in the hippocampus, and the stimulus driven neural
response is produced as initial information for two entry stimulus sets in the hippocampus.
• In the third step, the initial information is sent to PFC. The PFC determines the additional required information
and retrieves complementary information from the hippocampus (Wang, 2008).
• In the last step, the PFC decides the proposed controlling process

• https://www.youtube.com/watch?v=2zxOBbAbQkA
Wall Street journal (WATCH)
 Use of Heuristics
A heuristic is a mental shortcut that allows people to solve
problems and make judgments quickly and efficiently. These
rule-of-thumb strategies shorten decision-making time and
allow people to function without constantly stopping to think
about their next course of action.

Heuristics are mental short cuts that reduce the cognitive burden
associated with decision making (Shah & Oppenheimer, 2008)

1) Affect Heuristics: Affect heuristics are based on positive and

negative feelings that are associated with a certain stimulus. It
typically involves quick, reactionary feelings that are based on prior
beliefs. (Advertisements)
2) Availability Heuristics: Availability heuristics are judgments
people make regarding the likelihood of an event based on
information that comes to mind quickly. When people make
decisions, they typically rely on prior knowledge of an event.
(Investors)
3) Representative Heuristics: Representative heuristics occur when
we evaluate the probability of an event based on its similarity to
another event. 
An Eaxplme of a Huretisc
• I cnduo't bvleiee taht I culod aulaclty uesdtannrd waht I was
rdnaieg. Unisg the icndeblire pweor of the hmuan mnid, aocdcrnig
to rseecrah at Cmabrigde Uinervtisy, it dseno't mttaer in waht
oderr the lterets in a wrod are, the olny irpoamtnt tihng is taht the
frsit and lsat ltteer be in the rhgit pclae. The rset can be a taotl
mses and you can sitll raed it whoutit a pboerlm. Tihs is bucseae
the huamn mnid deos not raed ervey ltteer by istlef, but the wrod
as a wlohe. Aaznmig, huh? Yaeh and I awlyas tghhuot slelinpg was
ipmorantt! See if yuor fdreins can raed tihs too.
 People respond to their map of
reality and not the reality itself.
We operate through our maps of
subjectivity and not the objectivity
of the situation.
All of us have lenses which we sift
through to make sense of the world

The Misdiagnosis of Joshua Bell

http://www.youtube.com/watch?
v=hnOPu0_YWhw&feature=player_detailpa
ge
 Value Attribution
“Value attribution, after all, acts as a quick mental shortcut to determine what's worthy of our attention. When
we encounter a new object, person, or situation, the value we assign to it shapes our further perception of it,
whether it's our dismissal of a curiously inexpensive antique we find at a flea market or our admiration of a
high-priced designer bag in a chic boutique. Imagine, for instance, stumbling upon a discarded armoire on
the street. Do you use it for the rare treasure it might be? Or is your knee-jerk reaction that something must be
wrong with it? In the same way, value attribution affects our perceptions of people. We may turn down a pitch
or idea that is presented by the "wrong" person or blindly follow the advice of someone who is highly
regarded".

Once individuals attribute a certain value to something, it dramatically alters their perception of subsequent
information. It affects individuals even when the value is assigned completely arbitrarily (Randomly).
Therefore, once people attribute value to something, it is very difficult to view it in any other light. And this has the
power to derail objective, professional judgement. 
 Diagnosis Bias
Diagnosis Bias: This refers to the propensity to label people, ideas or objects based on our initial opinions of them -
and our inability to reconsider these judgements once we have made them.

No matter how much evidence contradicts our diagnosis. Human beings tend to not be able to stay neutral for very
long, which makes this even more susceptible.

1) Dismissal Of The Facts

2) Credence To Irrelevant Factors
3) Labelling

"Each day we are bombarded with so much information that if we had no way to filter it, we'd be unable to
function. Psychologist Franz Epting, an expert on understanding how people construct meaning in their
experiences, explained, "We use diagnostic labels to organise and simplify. But any classification that you come up
with," cautioned Epting, "has got to work by ignoring a lot of other things - with the hope that the things you are
ignoring don't make a difference. And that's where the rub is. Once you get a label in mind, you don't notice things
that don't fit within the categories that do make a difference".
 How To Avoid Such Undercurrents

Avoiding Value Attribution And Diagnosis Bias

•Keep evaluations tentative

•Become comfortable with complex, contradictory information
•Consider problems from different angles
•Introduce a self-imposed "waiting period" before making diagnostic judgements

"Whether we're shopping at a clearance outlet or a chic boutique, we sometimes need to fight our tendency to
consciously dismiss an item because of its price. Instead, we should ask ourselves, "If I got this item as a gift,
would I like it? If it cost $1 - or $1,000 - how would my perception of it shift?" The more we become aware of the
factors affecting the perceived value of a person or object, the less likely we are to be swayed by value
attribution."
 Conclusion
Organisations by nature are irrational and they spawn a version of rationality that is
opposed to the rationality of human values.
When the organisation itself is deemed rational what goes on with it will be deemed
rational.

‘Given the influence of many levels of thought in managerial decision making, it

becomes more apparent why the best that a rational decision maker can hope for is a
satisficing outcome. Maximising then, is not simply difficult, it is intrinsically
impossible.’ (Harrison, 204, 1996)