As Seen in CFO Studio Magazine Q1/Q2 2016 IssueScreenshot (39)

Architects of Decision-making

Daniel Kahneman, winner of the Nobel Prize in Economics, coined two terms to describe decision-making methodology. System 1 is quick, instinctive, and often emotionally based. System 2 is slow, logical, and methodical. Although today’s C-suite executives are often pressured by workload and time constraints to adopt the System 1 approach, it is the deliberate, analytical System 2 method that prevents snap judgments and poor decision-making.

John Beshears and Francesca Gino of Harvard Business Review use the term Decision Architect to describe the C-suite executive’s role in decision-making. Using the System 2 approach requires cognitive effort, but the results are a strong foundation for sound decision-making. The three main steps to System 2 include:

(1) Define the Problem. Determine exactly what data is needed to get a clear understanding of the issue. Make no assumptions.

(2) Diagnose Underlying Causes. Have poor decisions been made by managers? If so, it is usually due to one of two underlying causes: insufficient motivation and/ or cognitive biases. Identify these.

(3) Design the Solution. Structure how information and options are presented to managers to encourage good decision-making.

The methodical approach to System 2 thinking helps C-suite executives to be the architects of sound, logical decision-making, which then filters down to the rest of an organization.

Copyright 2017