Managers and Their Not-So Rational Decisions

Business Horizons, Vol. 51, No. 2, pp. 113-119, 2008

7 Pages Posted: 30 Jul 2009

See all articles by S. Trevis Certo

S. Trevis Certo

Arizona State University (ASU)

Brian L. Connelly

Auburn University

Laszlo Tihanyi

Texas A&M University - Department of Management

Date Written: March 1, 2008

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 decisionmaking 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.

Keywords: cognitions, biases, decision making, excalation of commitment, prospect theory

Suggested Citation

Certo, S. Trevis and Connelly, Brian L. and Tihanyi, Laszlo, Managers and Their Not-So Rational Decisions (March 1, 2008). Business Horizons, Vol. 51, No. 2, pp. 113-119, 2008, Available at SSRN: https://ssrn.com/abstract=1441178

S. Trevis Certo

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Brian L. Connelly (Contact Author)

Auburn University ( email )

Auburn, AL 36849
United States
344-844-6515 (Phone)

Laszlo Tihanyi

Texas A&M University - Department of Management ( email )

430 Wehner
College Station, TX 77843-4218
United States

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