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Managers and their not-so rational decisions

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  • Trevis Certo, S.
  • Connelly, Brian L.
  • Tihanyi, Laszlo

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 decision making and improve the effectiveness of their decisions.

Suggested Citation

  • Trevis Certo, S. & Connelly, Brian L. & Tihanyi, Laszlo, 2008. "Managers and their not-so rational decisions," Business Horizons, Elsevier, vol. 51(2), pages 113-119.
    • Handle: RePEc:eee:bushor:v:51:y:2008:i:2:p:113-119
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    Cited by:

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    10. Amel Belanes & Rym Hachana, 2009. "An Operationalisation of Managerial Risk-Taking and its Performance Implications in the Tunisian Context," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(3), pages 289-314, September.
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    13. Stefan A. Hajkowicz, 2012. "For the Greater Good? A Test for Strategic Bias in Group Environmental Decisions," Group Decision and Negotiation, Springer, vol. 21(3), pages 331-344, May.
    14. Driouchi, Tarik & Bennett, David, 2011. "Real options in multinational decision-making: Managerial awareness and risk implications," Journal of World Business, Elsevier, vol. 46(2), pages 205-219, April.
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