Factors affecting decision making process in organizations

Document Type:Thesis

Subject Area:Management

Document 1

Business risk 5 1. Strategic risk 6 1. Market risk 6 1. Financial risk 7 1. Compliance risk 7 1. Summary 7 1. Decision-making heuristics, bias and risk preference 8 1. Decision-making heuristics 8 1. Decision-making bias 9 1. Risk preference 11 Chapter two 12 2. Deloitte 12 2. Application of decision-making heuristics 12 2. Decision-making bias in Deloitte 13 Chapter three 14 3. Conclusion 14 4. Reference 15 Executive summary This paper reviews the factors affecting decision making process in organization, using Deloitte as a practical example. Business organizations face new ideas that affect the optimal objective of making profits for the longest time possible with minimal costs. Risks in the corporate world differ in nature and are influenced by individuals’ experiences which affect preferences in seizing entrepreneurial activities. Evaluation of four types of risks presented in the first chapter is important, to realize the basis for undertaking any risk for a business organization. Deloitte, an accounting firm, has provided real-world application of the theories affecting business risk. The third chapter looks at the conclusion of the paper. Chapter one 1. Introduction Daily involvement of human beings in productive activities faces potential dangers that limit maximum production, leading to low gains. Risks vary from individuals to an organization’s internal and external environment. Factors hindering full exploitation of an individual’s productivity are caused by psychological experiences, or external environmental conditions, such as heavy tasks, hazardous ingredients used in production processes, and unconducive weather conditions. Potential threats presented to an organization include stiff competition from other producers of similar products, production methods, customer preferences on product quality, and technology that poses security concerns. Business success relies on the management to assess and evaluate different scenarios threatening productivity and profitability of operations conducted.

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Decision-making processes help to evaluate the risks involved in the organization. This paper will review the concept of risk management in organizations. Defining risk The risk is a characteristic influencing individuals’ perception based on the occurrence of unwanted patterns of outcomes (Zadeh, Fu & Tanaka, 2014). Scientifically, the risk is determined by exposure to hazards, affecting individuals’ rational. Medical experts study scenarios are influencing normal physiological process causing changes, thus resulting in sickness. Exposure to risks by a vast population leads to catastrophic epidemics, such as the spread of malaria in regions with tropical climates caused by mosquitoes thriving in such favorable conditions. In economics, the risk is differentiation in actual gain as compared to speculated gain (Heckman, Comes & Nickel, 2015). Investors evaluate opportunities before applying capital to the operations, therefore speculating on the projections.

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However, other factors present a hindrance to the investment, causing a reduction on the speculated projections, thus posing a risk to the investment. Business risk Business risk is a pessimistic idea, where organizations focus on the worst outcomes and losses involved after a production period. Contrary to the definition of risk in this paper, where risk is defined as the exposure to undesired factors causing harm, the term in the business perspective shows acceptance of the unwanted outcome in case it happens. Business risk allows for investors to conduct the operations, rather than avoiding the idea. The standard definition of risk demands evasion from exposure to harm, but in business, it calls for alternatives in decision-making processes that help to reduce further losses. Sadgrove (2016) states that business risks involved include decision making risks, market risk, compliance risks, and financial risk.

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Pricing strategy is determined by evaluating the market segment’s affordability of the product, and experienced to be perceived. Stages of product life cycle have different pricing to cope with the targeted market. However, marketing risk involves the uncertainty of a product’s acceptance by customers. Assessment of the targeted market helps to understand the market gap in need of a bridge. This assessment provides a speculation for profitability to provide products to the market. However, different regions change laws to suit locals, resulting to compliance risks, as the product presented to a market within the region is only acceptable if the business complies with the laws. Increase in costs due to interpretation of the laws, and production process reduce returns speculated from penetrating the market, increasing the business risk. Uncertainty in authority regulations increase compliance risk, therefore, decision making risk is compulsory, to develop lawful strategies that help in the long-term success of the business.

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Summary Uncertainty in running a business depends on the management, for ensuring the success in the long-term. Decision-making risk aims to develop tactics that suit the market with better quality and sustain competitive strength. Decision-making process relies on experiences of the management team and environmental factors of the business. Pattern variation among decision-makers is influenced by decision heuristics, bias and risk preferences. Decision-making heuristics Individuals have a tendency to solve problem fast by applying the simplest solution and ignoring other methods and possible outcomes. Heuristics are patterns used by the brain to choose the easiest option to evaluate a problem, aiming to effectively solve the presented problem. This ignorance configuration results to biases that individuals perceive on new ideas, when making decisions. The theory insists that individuals use the acquired knowledge unintentionally when presented with a similar problem, due to cognitive laziness.

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The individual uses the perceived knowledge to answer different questions by using pervious experiences. Decision-making bias Perceived judgement results to strong resolve, leading to unswerving ideas that are negative in decision-making. Cognitive bias provide a short time when solving problems due to the availability of immediate ideas due to perceived judgement. Individuals have the ability to recognize personal biases, but persist on using such judgement, considering expertise in the field and authority in business management. Sunflower bias results from following only the management’s decisions. Laziness to find new ideas due to dependence on management’s is a sunflower bias. Attribution error stems from a member of the management listens an individual with desirable achievements only. However, autocratic management tend to validate an idea if it resembles a member’s suggestion leading to confirmation bias.

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Risky shift is a decision bias affecting groups, where members ignore individual risks in participating in a business, focusing on the risk involved when the group acts together. Compliance risk when changing regional markets by the organization is great, as different countries have different regulatory bodies that govern provision of services offered by Deloitte (Cau, 2014). As discussed earlier, strategic risk supersedes all other risks, as illustrated by Deloitte in the merges with other firms, increasing the risk, while resulting to a ripple effect by increasing risks involved 2. Application of decision-making heuristics Means-based heuristic for decision making focuses on the procedure to improve productivity, rather than the revenue produced for services provided (Goodwin & Wright, 2014). Therefore, operations meant to improve quality of services provided by organizations are outlined, considering the highest strategic risk with an expected high value.

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Deloitte trains employees on new programs developed, to ensure quality services and employee satisfaction. Indulgence in consulting services led to losses for California State Judiciary, with much confidence that the developed program would help to improve technology adoption by the judicial system. However, the project failed, causing massive financial losses, illustrating overconfidence. Guangdong Kelon Electrical Holdings Company Limited blamed Deloitte for failure to follow up on auditing a project resulting to financial losses. On their defence, Deloitte emphasized on its quality performance, based on two years with the electrical company. Such bias is considered as anchoring bias. The components of business risks help to evaluate the most urgent need by evaluating among strategic risks, compliance risks, market risks, production process, and financial risk. Investors risk resources with an aim to maximize on the returns, therefore, a business’ decision-making team is responsible for educating investors on the perceived risks and rewards from intensity of participation.

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Reference Bessis, J.  Risk management in banking. John Wiley & Sons. Supporting strategic success through enterprise-wide reputation risk management.  The Journal of Risk Finance, 17(1), 26-45. Goodwin, P. Wright, G.  Decision Analysis for Management Judgment 5th ed. Global environmental risk. Routledge. Koijen, R. S. The Cross‐Section of Managerial Ability, Incentives, and Risk Preferences. Fuzzy sets and their applications to cognitive and decision processes: Proceedings of the us–japan seminar on fuzzy sets and their applications, held at the university of california, berkeley, california, july 1-4, 1974. Academic press.

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