Leadership and Strategic Decision Making Under Exogenous Shocks Such as COVID-19

Leadership and Strategic Decision Making Under Exogenous Shocks Such as COVID-19

Jim A. McCleskey (Western Governors University, USA)
DOI: 10.4018/978-1-6684-4358-3.ch005
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This manuscript addresses three topics relevant to the field of leadership and strategy. The topics include the effect of individual and group decision processes on leadership decision-making, the newest directions and developments in the strategic leadership literature, and the effect of exogenous shocks such as COVID-19 on leadership decision-making. It includes a thematic literature review on individual and group processes in leadership decision-making. It addresses affective and cognitive processes, cognitive biases and heuristics, group decision-making, and affective and cognitive processes in individual decision-making. It describes the latest literature on strategic leadership decisions under uncertainty and artificial intelligence as an aid to decision-making. It includes a discussion of exogenous shocks such as COVID-19 on strategic leader decision-making. It also describes the impact of exogenous shocks on small and medium-sized enterprises, crisis management, stress on decision-makers, effective decision-makers, and leader behaviors that impact crisis decision-making.
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Leadership Decision-Making

No topic is as essential to success in leadership as effective decision-making. Unfortunately, leadership decision-making is a complex, fuzzy, and challenging topic for practitioners and scholars. Decision-making occurs inside the black box of organizational leaders’ and members’ minds and often within a vast array of corporate boundaries and communication links (Kleinbaum & Stuart, 2014). Despite the challenging terrain of organizational settings, people carry out decision-making, and decision-makers are simply individuals or small groups. The distinctive ability of humans to make good decisions and choose appropriate means to achieve relevant goals has resulted in unprecedented historical advancement and success (Hastie & Dawes, 2010). Multiple group and individual processes affect decision-making, and they can be divided into categories based on whether the processes are affective or cognitive (Vinokur, 1971). Some recent research publications in strategy development and execution discussed cognitive biases, strategic decision-making, and the context of uncertainty. Other published work examined the use of simulations to approximate decision-making situations, artificial intelligence (AI) as an aid to decision-making, and the quest for temporary competitive advantage (Acciarini et al. 2020).

The COVID-19 pandemic created a profound exogenous shock to societal and economic structures. This shock landed on all organizations but appeared to create an incredibly challenging situation for small and medium-sized firms due to their unique characteristics. The new reality created by the pandemic ushered in a severe crisis and the need for novel approaches to business decision-making. The correct lens for examining the outcomes involves an application of crisis management and leadership decision-making under crisis. The challenges associated with COVID-19 and the pandemic profoundly impact all areas of organizational and social life, and leadership decision-making is no exception.

Key Terms in this Chapter

Heuristics: Are simple, efficient rules, either learned or inculcated by evolutionary processes. These psychological heuristics have been proposed to explain how people make decisions, come to judgements, and solve problems.

Conformity: Is behavior in accordance with socially accepted conventions or standards.

Ambiguity Intolerance: Is a psychological construct that describes when individuals view ambiguous stimuli or events as a threat.

Mental Accounting Bias: Is when people treat assets as less fungible than they really are and then become susceptible to biased thinking, also known as the “two-pocket theory.”

Crisis Management: Is the process by which a business or other organization deals with a sudden emergency situation.

Meaning-Making: Is the process by which people interpret situations, events, objects, or discourses, in the light of their previous knowledge and experience.

Ambiguity: Is the quality of being open to more than one interpretation, i.e., inexactness.

COVID-19: Is defined as illness caused by a novel coronavirus called severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2; formerly called 2019-nCoV), which was first identified amid an outbreak of respiratory illness cases in Wuhan City, Hubei Province, China.

Availability Bias: Is the human tendency to think that examples of things that come readily to mind are more representative than is actually the case.

Loss Aversion Bias: Is when a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain.

Habits: Are a settled or regular tendency or practice, especially one that is hard to give up.

Crisis: Is a time of intense difficulty, trouble, or danger.

Affect: Is emotion or desire, especially as influencing behavior, or action.

System One: Is our faster, automatic, intuitive, and emotional mode of thinking.

Competitive advantage: Is a condition or circumstance that puts a company in a favorable or superior business position.

Decision-Making: Is the process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Group Processes: Are the behaviors of the members of small working groups (usually between three and twelve members) as they engage in decision-making and task performance.

System Two: Is our slower, more effortful, and deliberate mode of thinking.

Exogenous Shocks: Are unexpected or unpredictable events that occur outside an industry or country but can have a dramatic effect on the performance or markets within an industry or country.

Leadership: Is the action of leading a group of people or an organization.

Black Swan Event: Is an unpredictable occurrence that is beyond what is normally expected of a situation and has potentially severe consequences.

Affective: Is relating to moods, feelings, and attitudes.

Consensus: Is a general agreement or unanimity.

Consistency Effect/Consistency Bias: Is people's tendency to judge their own interpersonal behavior in a given situation in accordance with their general self-images, even if their actual behavior in the situation is partialled out.

Groupthink: Is the practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility.

Familiarization: Is the branch of mathematics concerned with the analysis of strategies for dealing with competitive situations where the outcome of a participant's choice of action depends critically on the actions of other participants.

Familiarity Bias: Is the idea that when people are faced with a choice between two gambles, they will pick the one that is more familiar to them.

Social Validation: Is a psychological phenomenon where one or more passive individuals follow or conform to the actions of others within a group.

Rational Choice Modeling: Is when individuals use rational calculations to make rational choices and achieve outcomes that are aligned with their own personal objectives.

Individual Processes: Are psychological processes that occur within individuals that cannot be seen whose existence can be inferred on the basis of people's behavior.

Representativeness Bias: Is a mental shortcut that we use when estimating probabilities. When we’re trying to assess how likely a certain event is, we often make our decision by assessing how similar it is to an existing mental prototype.

Pattern Recognition: Is the ability to detect arrangements of characteristics or data that yield information about a given system or data set.

Strategy: Is an action that managers take to attain one or more of the organization's goals.

Ownership Bias: Is a decision-making bias that leads to an individual's tendency to prefer their own ideas over others' during the design process.

Resilience: Is the ability to withstand adversity and bounce back from difficult life events.

Artificial Intelligence (AI): Is the theory and development of computer systems able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.

Regret Aversion Bias: Is when the decision-maker refuses to make any decision because of the fear that the decision will turn out to be wrong and may later lead to feelings of regret.

Bias: Is prejudice in favor of or against one thing, person, or group compared with another, usually in a way considered to be unfair.

Desirability of Options Bias: Is when decision-makers incorrectly estimate probabilities in either direction that favors their preferred alternatives.

Leadership Strategy Formation: Is a coordinated set of activities undertaken by leadership and designed to help firms outperform their competition to achieve above-average returns and profitability.

Herding Bias: Is a tendency to follow what others are doing or thinking, i.e., following the rest of the herd without thinking.

Sense-Making: Is the action or process of making sense of or giving meaning to something, especially new developments and experiences.

Brainstorming: Is a group discussion designed to produce ideas or solve problems.

Cognitive Bias: Is a systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make.

Machine Learning: Is the use and development of computer systems that are able to learn and adapt without following explicit instructions, by using algorithms and statistical models to analyze and draw inferences from patterns in data.

Ambiguity Aversion: Is a preference for known risks over unknown risks. An ambiguity-averse individual would rather choose an alternative where the probability distribution of the outcomes is known over one where the probabilities are unknown.

Overconfidence Bias: Is a tendency to hold a false and misleading assessment of our skills, intellect, or talent.

Two-Pocket Theory: Is when people treat assets as less fungible than they really are and then become susceptible to biased thinking, also known as the “mental accounting theory.”

Affective Bias: Is the tendency to differentially prioritize the processing of negative relative to positive events and is commonly observed in clinical and non-clinical populations.

Management: Is getting things done through other people utilizing the skills of planning, organizing, leading, and controlling.

Diffusion of Responsibility: Is a sociopsychological phenomenon whereby a person is less likely to take responsibility for action or inaction when other bystanders or witnesses are present.

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