We make decisions all the time. Small decisions, and big decisions. Some conscious, some unconscious. Understanding what leads us to make some decisions and reject others has been a concern since time immemorial. Each field or discipline, in turn, has developed its own body of theory with the aim of understanding why we act in a certain way.
Among many interesting voices, we present that of Juan Antonio Pérez López (1934-1996), Harvard PhD, professor of Organisation Theory at the IESE Business School.
The theory that sheds light on organisational decision making
According to Pérez López, a theoretical framework is necessary to understand the improvement or deterioration of each person’s actions, particularly those of the manager. To this end, the author invites us to think that a decision-maker (and obviously, we are all decision-makers, since we all make decisions), can measure and assess, a priori, the effects of his or her decision. In this sense, and whether we like it or not, each decision has (always) a triple effect: effectiveness, efficiency and consistency. Let’s go through each of these effects.
Effectiveness is the achievement of the decision-maker’s intended goal. In other words, effectiveness is the achievement of a specific goal. Three brief examples to illustrate effectiveness: If a marketing manager sets out with her team to launch a campaign to increase sales, effectiveness in this case is the increase in sales; if a father spends his last remaining euro to play the lottery, knowing that his children are hungry, the effectiveness of the action will be winning the lottery; or if a shopkeeper in a souvenir shop in an exotic country asks tourists to enter his shop, the effectiveness will be the sale of one of his products. The market, and the current system, invites us to efficiency.
Efficiency is the decision-maker’s learning curve. In every decision, the decision-maker, whether consciously or not, whether he likes it or not, learns. One of Pérez López’s most significant contributions is that this learning can be positive or negative. Continuing with the examples, the efficiency of the marketing manager will be the knowledge developed with this campaign that will allow her to face the next decision, in this case the next marketing campaign, with increased skills and in a more efficient way. In the case of the father, efficiency is the value of learning from the decision made when gambling the last euro.
If he wins, he may think that he made the right choice, and he will be “invited” to continue making similar decisions. If he loses, he may think that perhaps it was better to spend the last euro on food. Whatever the case, efficiency is the value of learning from a particular decision. Finally, the vendor also learns from each decision. He may learn that taking care of customers gives him peace of mind, or he may also be tempted to cheat them by pricing the product much higher than it really is. If tourists buy at this price, and the deception materialises, the decision-maker learns negatively. According to Pérez López, the most problematic thing in this case is not that the seller has cheated customers, but that he has learned how to cheat. In other words, he has developed negative learning. In short, in each decision, we learn, we become more efficient, although the learning can be positive or negative, improving or deteriorating the structural quality of our decisions.
Consistency is the learning value of the recipient of the decision. It consists of others’ learning as a result of my decision. This learning will influence future interactions with the decision-maker. Of the three elements, this is the most overlooked. Let’s go back to the examples. In the case of the marketing campaign, consistency is the value of learning on the part of the team. It may be that the team has learned new skills and wants to repeat the experience with the manager, but it may also be that the manager has been too hard on the team, working too little and forcing the team to work longer hours than they should. In the latter case, the team may have learned that there is no point in working with this person, reducing trust, and in turn, the possibility of future successful interactions. In the case of the father and the lottery, the consistency is the learning of such a decision by the children (who learn from watching their father perform), and in the case of the souvenir shop, the learning of the customers from the interaction with the shopkeeper.
Don´t forget to learn (and make them learn)
Pérez López reminds us that the astute person is driven only by effectiveness and efficiency, forgetting about consistency (and this is valid for all fields). However, even if one forgets it, consistency always exists, as recipients learn from the interaction with each decision-maker, whether we like it or not, whether we are aware of it or not. The author also points out that business schools put too much emphasis on effectiveness and efficiency, forgetting to make explicit the relevance of consistency in decision making.
To improve the quality of each person’s decision making, Pérez López encourages us to think about three motives that may exist in each decision: extrinsic, intrinsic and transcendent. Extrinsic motives are those related to the satisfaction of a specific achievement (increasing sales, winning the lottery, selling the product to tourists). I am driven by extrinsic motives when I want to achieve something. Intrinsic motives are those related to learning from a decision (to improve, to learn, to advance, to feel more capable). We’re driven by intrinsic motives when we want to learn. Finally, transcendent motives are those related to others’ learning. Therefore, I am moved by transcendent motives when I want to serve, contribute, help others to grow. Therefore, if we were only driven by extrinsic motives, we would only care about effectiveness, if we were driven by intrinsic motives, about efficiency, and for transcendent motives, about consistency.
The quest for balance in decision-making
However, there are no people who are driven by a single set of motives. There are no thoroughbreds. We all, to some extent, have all three motives activated, but to varying degrees. These differences in the weights of motives in each of our decisions represent our motivational structure. Some people have extrinsic motives, others have transcendent ones, and others may have a good balance of all three.
Since human beings have the ability to assess (even if they are wrong) the consequences of their decisions a priori (he calls this ability rationality), Pérez López proposes to encourage managers, and in general all people, to reflect on their motivational structure. Organisations should also be able to assess the motivational structure of their employees. In general, we have grown in a paradigm where effectiveness and efficiency of decisions are valued. However, focusing only on these two effects has a risk, and that is that consistency (produced by transcendent motives) is the only one that explains the degree of trust between two people. If the principal only thinks about her own results and learning, the trust of her collaborators is weakened, leading to fewer chance of interactions and success in the future. If the father thinks only of himself and his learning, the relationship with the children is weakened, and if the salesman thinks only of his profits and efficiency, he develops an alienating mindset, which he can apply in other domains of his life, becoming a “cunning man” in all fields.
Therefore, as social beings immersed in a social context, it’s crucial for the organisations of the future to think of those managers and employees so that they not only have the ability to make decisions according to the effectiveness and efficiency of their plans (which must remain valid), but also based on the ability to add consistency to decision making. In other words, the leader of the future is one who aspires to make effective, efficient and consistent decisions. It is one who’s driven by extrinsic, intrinsic and transcendent motives at the same time. It is the only way to achieve mature, trusting, high-quality relationships, whether at work, at home, or in a souvenir shop.