This is a study of the relationship of theory and practice in decision making for business and other management situations. Making decisions is the essential features of a manager's or executive's work, and on the correctness or otherwise of the decisions often hangs not only the professional fate of the decision maker, but the fate of the enterprise as well. How are these decisions made? How should they be made? These are some of the basic questions we will attempt to answer below. A decision, essentially, consists of a judgement followed by a choice. A body of models in probability and decision theory show how decisions "should" be made in terms of maximizing the mathematical probability of a favorable outcome (or minimizing the probability of an unfavorable outcome, or both. But in practice, these rules can seldom be followed; instead, decision makers rely on simpler models or "heuristics" in making real world decisions. These heuristics are in turn subject to certain persistent distorting patterns our greater comfort with the familiar, our own self confidence, our pseudo mathematical sense of "rightness." Problems of dissonance, alternatives, volition, and risks all play a part in decision making. A distinguishing feature of successful executive decision makers is found to be their tolerance of ambiguity, ability to function without clear models of possible outcomes, and lack of self delusions.
The world is run by people who make decisions. By convention we have come to call the heads of businesses and other institutions "executives," implying that their basic role is to carry out decisions made by others, such as a board of directors. The President of the United States is the "Chief Executive," charged in principle simply with executing the will of Congress as expressed in law. In fact, however, the role of the President, of CEOs, and of other "executives" is not simply to execute decisions, but, overwhelmingly...