Weekly Business Insights from Top Ten Business Magazines | Week 313 | Leading & Managing Section | 2

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 313 | September 8-14, 2023

The Potency of Shortcuts in Decision-Making

By Sebastian Kruse et al., | MIT Sloan Management Review | September 06, 2023

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How do CEOs make good decisions? At a time when senior leaders have access to more data and sophisticated analytics tools than ever before, the central challenge of making good decisions about hiring, product development, and resource allocation is increasingly not a lack of information. Rather, it is knowing how much information is enough, and how to use it.

However, a growing body of research shows that CEOs may often be better off putting more trust in the simple rules of thumb known as heuristics. These usually spring from a leader’s direct experience, are applied deliberately, and frequently result in superior decision outcomes.  Research finds that heuristics work best under three conditions.

1. When the decision environment is noisy. In such an environment, more information is unlikely to lead to a better understanding of a specific decision problem. Using heuristics under such conditions filters out noise in the decision-making process.
2. When decision makers face a highly dynamic environment. In this case, information becomes outdated quickly, and using outdated information can diminish decision quality. 
3. When obtaining large amounts of information is difficult. In the case of hiring, for example, it’s impractical or costly to obtain extensive information on every potential candidate. Employers instead have to rely on a few pieces of information, such as a candidate’s CV and their impression of a candidate’s performance in an interview.

In order to gain the advantages of speedier decision-making with heuristics and still maintain decision quality, CEOs who employ them should consider the following actions:

1. Use heuristics in the right context. Heuristics are effective in environments that are noisy and dynamic and where information is hard to obtain.
2. Develop and refine your own heuristics. Effective heuristics are not arbitrary — they are developed through careful reflection and an understanding of difficult business problems. Heuristics are reliable when they capture causal regularities in a simple rule, but they can introduce bias when they do not capture a causal link. Reserving space for careful reflection when generating heuristics may therefore be time well spent for CEOs.
3. Share and explain the story behind a heuristic. The heuristics developed by CEOs will serve as decision guidelines for many members of an organization, who will themselves apply rules. However, because heuristics are very short and simple by nature, they don’t convey the logic behind them. Sharing the story about why a heuristic was created increases the chances that employees will remember and apply it.

3 key takeaways from the article

1. At a time when senior leaders have access to more data and sophisticated analytics tools than ever before, the central challenge of making good decisions about hiring, product development, and resource allocation is increasingly not a lack of information. Rather, it is knowing how much information is enough, and how to use it.
2. A growing body of research shows that CEOs may often be better off putting more trust in the simple rules of thumb known as heuristics. These usually spring from a leader’s direct experience, are applied deliberately, and frequently result in superior decision outcomes.  Heuristics work best in environments that are noisy, dynamic and where information is scarce.
3. In order to gain the advantages of speedier decision-making with heuristics and still maintain decision quality, CEOs should consider the following actions:  use heuristics in the right context, develop and refine your own heuristics, share and explain the story behind a heuristic.

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Topics:  Decision-making, Strategy, Leadership