In today's fast-paced business landscape, leaders are constantly faced with a barrage of decisions, from hiring the right talent to navigating market fluctuations. However, the path to success is often shrouded in uncertainty, as crucial information can be elusive. To thrive in this dynamic environment, leaders must adopt a strategic approach to decision-making. 

In their book, “Smart Management: How Simple Heuristics Help Leaders Make Good Decisions in an Uncertain World”, Professor of Organisational Behaviour and Human Resources, Jochen Reb and his co-authors, Professor Shenghua Luan and Professor Gerd Gigerenzer, explore how heuristics can be used to make good decisions in an uncertain world. Yet, Prof Reb observes that management scholars mostly link heuristics to biases and the general approach has been to portray them negatively. This huge gap between research and practice regarding managerial decision making prompted Prof Reb’s research in the field. In practice, managers use heuristics all the time, often quite effectively. 

The decision-making power of heuristics

Managers often need to make decisions with a limited amount of information. Heuristics are rules that use this little and limited amount of information and process this information in simple ways. A more familiar term for heuristics is ‘rule of thumb’. A common managerial heuristic is imitation, such as when leaders observe the practices of industry leaders and adopt similar strategies.

“Many management researchers believe that heuristics are inferior to more complex decision-making strategies,” Prof Reb says. “While this is generally true for decision-making under certain or risky situations, it is not true when making decisions in uncertain circumstances.” As Prof Reb notes, in a risky world, we do not know outcomes but we do know the probability of something happening. For example, when a person tosses a coin, they do not know which side will show up on top but they do know the probability, which is 50 per cent for each side. However, in uncertain situations, people do not know the probabilities of various outcomes, which is often the case with events in the real world, like the COVID-19 pandemic.

In general, traditional models for decision-making recommended by academics require knowledge of the probability of something happening, which is information that decision-makers often do not have. Heuristics are more effective than traditional models as they can be used to make decisions in an uncertain world, where probabilities are not known.

An example of the superiority of heuristics to traditional models for decision-making was when the Singapore government decided to raise the consumption tax. A traditional approach would be to try to calculate the optimal tax rate, which the government could not do because it did not have the information required to do so. So the government used an incremental heuristic, which is when targets and goals are increased gradually. The authorities raised the tax rate by one per cent each year, over two consecutive years. By raising the tax cautiously and over an extended period of time, the government gave companies and consumers time to adjust.

The importance of fit when using heuristics to make decisions

In his book, Prof Reb and his co-authors also coined the term ‘smart heuristics’. Such heuristics are described as being “ecologically rational” - meaning  that the smart heuristic matches the task environment well and as a result can be more accurate, effective, faster and require less information processing than more complex decision-making strategies.”

For smart heuristics to be used successfully, the heuristic needs to fit the environment. Thus managers using heuristics need to know which ones are best for which circumstance. Prof Reb adds that “this is similar to a handyman or any other craftsman: They need to pick the right tool for the job.”

Using smart heuristics in running a business and a city

Smart heuristics can be used effectively to make hiring decisions, like when managers want to make sure that the composition of their workforce is sufficiently diverse. An example in Singapore is the government’s use of simple rules like quotas, which stipulate that no more than a certain percentage of a company’s employees can be foreigners. Another hiring rule is that a minimum percentage of employees need to be from certain minority groups, such as those with neurodiversity characteristics. This is a heuristic approach that can be used to balance different goals in the city-state. For example, how the rules specifically look like, and what percentage of a particular minority group needs to be hired, can be adjusted for different social needs at different times for Singapore’s growth.

Smart heuristics can also be used to make businesses more productive. In Singapore, some organisations use heuristics to try to improve their company’s productivity. These companies do so by setting productivity targets, for example, they might say that every year they expect to increase productivity by 3%. The companies did not choose this number because they did calculations to determine that the optimum percentage to increase productivity was by 3%. Instead, the figure of 3% was chosen because it was a challenging, yet achievable goal.

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Adopting heuristics for real-world decision-making

Alongside their complex traditional decision-making models, business schools could start incorporating the use of heuristics into their curricula to better equip future business leaders for an uncertain world. Smart heuristics can be a valuable tool for business leaders to have in their arsenal. This is especially true when traditional analysis models face their limitations, to face the complex problems they face - particularly in urban cities. Prof Reb hopes his research can be used in the future to change what educators teach about decision-making. “While there is certainly a place for analysis, business education needs to be complemented with teaching the skills to use heuristics effectively”.