Practical wisdom in managerial decision making

Transcription

1 The current issue and full text archive of this journal is available at in managerial decision Domènec Melé IESE Business School, University of Navarra, Barcelona, Spain 637 Abstract Purpose The aim of this paper is to present the necessity for practical wisdom in the managerial decision process and its role in such a process. The paper seeks to contrast the position with two conventional approaches based on maximizing and satisficing behaviors respectively. Design/methodology/approach Following Aristotle and Thomas Aquinas it is argued that a correct decision should consider an integral rationality which includes not only instrumental rationality but also practical rationality. The latter permits the evaluation of both means and ends from the perspective of human good. helps the decision maker to determine how a decision will contribute to the human good in each particular situation. Findings Maximizing and satisficing behaviors are based on the facts-values dichotomy, which separates business and ethics and presents a rationalistic and incomplete view of the reality. The alternative presented here sees the decision as a whole, and this is a more comprehensive understanding of the reality. Ethics is better integrated into the decision process, since it is an intrinsic part of such a process, not an extrinsic addition. Practical implications Every decision has an ethical dimension, which should be considered by managers for good decisions. is essential in perceiving such a dimension and in sound moral judgments in the of decisions. Managers do not need only skills for correct decisions, but practical wisdom and moral virtues, too. Originality/value The approach presented in the paper defeats the conventional but narrow views of managerial decision based on maximizing behavior or on satisficing behavior and introduces the categories of good and evil as the main driver for managerial decision. Keywords Decision, Behaviour, Ethics, Management activities Paper type Conceptual paper 1. Introduction Decision, a central aspect of management in all kinds of organizations, is generally understood as a process in which a problem is defined and, in order to solve it, the decision-maker structures one or more objectives. To obtain these objectives a set of alternative actions are generated, of which one is selected. Such alternatives are evaluated and compared by reference to certain criteria or standards, and finally one is chosen. Exploring and establishing appropriate alternatives and evaluating and comparing them is essential for a correct decision. A full decision- process also includes the implementation of the chosen alternative and the follow-up and control of the results. If the results are not completely satisfactory a new cycle can commence (Harrison, 1999, pp ). Frequently, the decision process is seen from a functional view driven by rational behavior or rationality. Such rationality is understood as a sort of computing capacity to obtain a predetermined goal through the most efficient means. This is the view commonly adopted in economic theory, and often applied to management. The end of rational behavior, according to economic theory, is maximization of the profits Journal of Management Development Vol. 29 No. 7/8, 2010 pp q Emerald Group Publishing Limited DOI /

2 JMD 29,7/8 638 in the case of business firms and maximization of utility in the case of people in general (Katona, 1953, p. 313). Under this perspective, what is expected from the decision- process is a maximizing behavior. Maximizing behavior has been criticized for a number of reasons (Harrison, 1999, pp ). One of these relates to a lack of realism, since managers do not know the means to attaining this goal and, in addition, their interests may be oriented to different objectives. Another is the failure to carry out considerations required to make socially responsible decisions. As an alternative, Simon proposed a satisficing behavior as a driver for decision. He argued that decision makers have bounded rationality, inasmuch as his or her information is limited, there are cognitive limitations in their minds, and there is not a finite amount of time to make managerial decisions. A satisficing behavior makes do with an alternative which meets or exceeds a set of predetermined criteria that describe minimally satisfactory alternatives (March and Simon, 1958, p. 140). Although a satisficing behavior does not have the limitations mentioned of the maximizing model, it is not free of shortcomings (Harrison, 1999, pp ). Among these, there is a risk of taking decisions based exclusively on the personal aspirations of the decision maker, without meeting the goals of the organization. In addition, contrasting with the maximization of one goal, in satisficing behavior a great variety of objectives and criteria can exist, and this introduces complexity, which may lead to decisions contrary to the best interests of the organization. A question which arises is how ethics can be incorporated under these two models. The maximizing behavior model can accept some ethical constraints, which are generally also legal constraints, such as not committing fraud, acting without deception. A satisficing behavior model allows decision makers to consider values which are satisfactory for them. Here we will discuss how both approaches have as a common premise the radical separation between facts and values, which produces a defective integration of ethics into decision. We will argue that ethics is an intrinsic dimension of any decision, and that practical wisdom is essential in perceiving such a dimension and in sound moral judgments in the taking of decisions. 2. Maximizing and satisficing behaviors rooted in the dichotomy of facts and values Maximizing behavior assumes that the decision maker is an economic person (homo oeconomicus). It has its immediate roots in the work of some economists who defend a positive economics, which is value free and focuses exclusively on facts and cause-and-effect relationships. It is based on the hypothesis that decision maker is a rational actor who tries to maximize his or her preferences, whatever these may be. At least implicitly, it assumes a radical separation between facts and values. Facts refer to the observable world while values are related to personal preferences or utilities. It is considered that the rational agent has a well-ordered and stable set of preferences, which are taken for granted. There is no discussion about preferences, since these reside in the mind of individual. The decision basically is about the relevant objective fact and focus on

3 determining and calculating alternative courses of action that will permit an optimal attainment of preferences. Inasmuch as facts are understood as mere descriptions of the reality without any ethical content, the decision- process becomes simply seen as a calculation of maximizing expected utility. Of course, preferences can have some ethical content, depending on the individual, but they are subjective, not objective. Consequently, ethics is not part of an objective evaluation of alternatives for attaining a certain goal. Normative moral judgments are extrinsic to the decision- process, which is about facts, as noted. At the very best, normative judgments, coming from a principled theory (mainly deontologist or consequentialist) can be accepted, but only as constraints within an objective maximizing function of utilities. Obviously, ethics can be also accepted if it contributes to maximizing utility, but then good behavior is only a means to avoid risks or to earn reputation, not something intrinsically valuable. The dichotomy between facts and values leads to the so-called Separation thesis, which was formulated by Freeman in the following terms: The discourse of business and the discourse of ethics can be separated so that sentences like x is a business decision have no moral content, and x is a moral decision have no business content (Freeman, 1994, p. 412). Through the separation thesis lens, rationality means exclusively economic rationality. This is a rationality based on a calculative assessment of efficiency to obtain a certain goal, using a cost-benefit analysis as the main tool. Satisficing behavior shares the facts-values dichotomy too. Herbert Simon, a genuine proponent of this approach, recognized that his position was based on Logical Positivism, a mainstream epistemological school of thought in social sciences in the first half of the twentieth century, which fully defended a radical separation of facts and values (Simon, 1976, p. 45). He stated that scientific propositions [...] are statements about the observable world and the way in which it operates. Ethical propositions, on the other hand, are expressions of preferences (Simon, 1976, p. 248). Consistently, Simon sees every moral judgment as comprised of a description of facts plus an imperative (Simon, 1976, p. 46). Correctness that is, truth or falsity of ethical propositions can only refer to their factual component because imperatives cannot be true or false. A statement about the means tending to an end can be object of objective, empirical truth, but not the end in itself, so if two persons give different answers to a factual problem, both cannot be right. Not so with ethical questions (Simon, 1976, p. 53). Actually, the dichotomy between facts and values seems quite artificial. Human understanding rather sees the action as a whole. Obviously one can describe a human action only in its technical aspects but a human action cannot be fully understood without its ethical dimension. If you say that Bernard Madoff made money by using a Ponzi scheme, this does not describe completely his actions which included a $50 billion fraud. Neither would it be an accurate description of human action involved in the causes of the financial crisis of 2008 to explain only the technical aspects of the subprime mortgage credits and how trading with subprime mortgaged-backed securities was carried out. Obviously, these facts entail important technical-financial aspects, but they are not value free at all. 639

4 JMD 29,7/8 640 From a philosophical perspective, the dichotomy of facts and values was strenuously questioned in the second half of the last century. However, it has rarely been considered that such a dichotomy underlies the two conventional managerial decision models mentioned above. This is not the place to detail the debate on the facts and values dichotomy, but it may be worth mentioning two authors, who present convincing arguments against such dichotomy: Amartya Sen and Hilary Putnam. Sen emphasized the rational character of evaluative judgments. In his view, only a few basic value judgments cannot be justified on rational grounds, but in general a rational discussion of evaluative matters is always possible (Sen, 1967). On his part, Putmam showed that the falsity of the facts-values dichotomy based on serious philosophical, linguistic and psychological arguments (Putnam, 2002). He advocated for an entanglement of fact and value considering that the neat line between prescriptive and descriptive components of evaluative judgments should be considered, at the very best, a philosophers fantasy (Putnam, 2002, p. 396). 3. Instrumental rationality and practical rationality Putnam s view seems right. Ordinary people, without philosophical prejudices, seem to perceive the reality as a whole, not as a bare fact without any moral connotation to which they add value judgments by taking values from somewhere. Going back to Madoff s behavior, a complete statement would be: Madoff committed a fraud using a Ponzi scheme. Committing a fraud is the most essential aspect of Madoff s behavior, with an evident ethical content, while using the Ponzi scheme is only a description of the tool employed. Obviously one can focus on a particular aspect of a fact, but this does not preclude the knowledge of the reality as a whole. Making an incomplete abstraction of the reality by focusing on some specific aspect, is basic to developing disciplines such as economics, psychology or sociology, but it would be an error to consider facts only in economic, psychological, or sociological terms. It is worth adding that, although in the real world there are no bare facts, many facts can have a technical content and bring about technical effects, as the Madoff case illustrates. Many other examples can be given. Thus, deciding to increase the money supply within a country is not a mere technical fact but a decision with foreseeable human consequences, although technically money supply growth affects inflation. Similarly, the announcement of a massive layoffs is often accompanied by an increasing of the share price of the company (a technical effect ), but deciding to carry out massive layoffs is not merely a technical decision, but a managerial decision with serious effects on people and on the running of the company. These examples suggest that managerial decision includes two inseparable aspects, one which is technical and another which is ethical. This is consistent with an interesting distinction introduced by Aristotle (1934) in the Nicomachean Ethics (NE) between (productive acts) and doing or acting (human acts). He used two related Greek words to express such distinction: poiesis, meaning production and praxis, meaning rational action, in the sense of conduct (do not confuse with economically rational action ). This distinction makes the existence of two types of rationality necessary: is different from doing [...] Hence the rational quality

5 concerned with doing is different from the rational quality concerned with (NE 6, 4). These two forms of rationality are commonly termed instrumental and practical. The former guides productive actions toward particular ends, the latter orients human action in the sense of living a truly human life. To give a simple example, instrumental rationality leads one to an efficient weapon, while practical rationality inquires about whether this weapon should be made and under what conditions it should be sold. In business, instrumental rationality seeks to make business operations profitable; practical rationality pursues answers about ethics, and more specifically about how people involved in such operations can grow as human beings. Aquinas (1947), in his Summa Teologiae (STh) explained that the reason that deals with things to be done for an end is the practical reason (STh II-II, 47, 2). He also affirmed that practical rationality is an intellectual discernment between good and evil (STh II-II, 94, 12). Every human being possesses practical rationality, which leads one to knowing the human good and to acting in accordance with it, guiding human actions in accordance with the human good (STh II-II, 94, 1, 3). Practical rationality also presents the human good as something which should be done. According to Aquinas, good is the first thing that falls under the apprehension of the practical reason, which is directed to action: since every agent acts for an end under the aspect of good. Consequently, the first principle of practical reason is one founded on the notion of good (STh, I-II, 94, 2). He adds that whatever the practical reason naturally apprehends as man s good (or evil) belongs to the precepts of the natural law as something to be done or avoided. 4. and its role Having practical wisdom is, therefore, to be endowed with a capacity which makes one good at thinking about what one should do, not to achieve particular goals but to live a fulfilled and worthwhile life as a whole. While certain skills foster interests related to one s own health, money, power, and so on, practical wisdom (or prudence) is a truth-attaining rational quality, concerned with action in relation to things that are good and bad for human beings (NE, 6, 5). Instrumental reason is helped by appropriate skills, which give people a certain degree of expertise. Similarly, although with some differences with skills (Hughes, 2001, pp ), practical wisdom helps with practical reason. We can refer to Enron managers to illustrate the difference between skills and practical wisdom. They performed a sophisticated fraud and no doubt they were clever individuals, possessed of excellent financial skills, but they did not have practical wisdom. Their decisions, which brought about great damage to many people, including themselves with the corruption of their personal integrity, were taken without considering a worthwhile life as a whole. Aristotle arrived at the notion of practical wisdom by considering who the persons whom we call prudent are. He stated: It is held to be the mark of a prudent man to be able to deliberate well about what is good and advantageous for himself, not in some one department, for instance what is good for his health or strength, but what is advantageous as a means to the good life in general (NE, 6, 5). 641

6 JMD 29,7/8 642 On his part, Aquinas complements this statement by affirming that a prudent man is one who disposes well of the things that have to be done for a good end (STh II-II, 47, 13), and defined practical wisdom or prudence as right reason in action (STh II-II, 47, 2). Another short, but precise definition of practical wisdom (prudence) is that given by the Catechism of the Catholic Church (n. 1806) (Libreria Editrice Vaticana, 2003): Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it. Making good decisions, according to Aristotle, requires practical wisdom: Deliberating well is a characteristic of prudent men (NE, 6, 9). This requires being a virtuous person, since practical wisdom and moral virtues, such as justice, courage and self-control, are mutually necessary: It is not possible to be good in the true sense without prudence, nor to be prudent without Moral Virtue (NE, 6, 13). The reason is that practical wisdom is developed by practicing moral virtues. A just person, for instance, is inclined to seek to act with justice. Likewise, one can describe behaviors of a generous, courageous person or one with any other moral virtue. But, one needs to determine, in each situation, what is just, generous, or courageous. The role of practical wisdom is precisely to determine what the proper means to obtain such ends are: Virtue ensures the rightness of the end we aim at, prudence ensures the rightness of the means we adopt to gain that end (NE 6, 12). Practical rationality focuses on the human action, and has as its objective reference the human good, rather than subjective or social values or aprioristic principles. Thus, employing practical wisdom and moral virtues in evaluating the morality of a decision differs from how conventional ethical theories, which are extrinsic to the action and present a rationalistic method that is applied to evaluate the acceptability of an action. introduces ethics by considering both the end or goal pursued and the means to achieve such an end from the perspective of the human good. It also differs from the common way of introducing ethics based on moral reasoning about the means using deontological or utilitarian theories. Thus, the Kantian categorical imperative is used by testing the possibility to universalize an action; and utilitarianism is applied through an arithmetical calculation of consequences in terms of utilities or satisfactions of those affected by the action. differs therefore from scientific knowledge, which is a mode of conception dealing with universals and things that are of necessity. Aristotle made it clear that prudence (practical wisdom), like art, is concerned only with things that admit of variation in accordance with each situation. However, prudence is more diverse than art, since art refers to things (production), while prudence focuses on acting (NE, 6, 1). In other words, practical wisdom refers to the right conduct in each specific situation, since each situation requires knowing how to be just, or how to live any other virtue, in this particular situation. In that practical wisdom deals with particular situations, it is suited to the grasping of the significant circumstances or consequences of each case. This contrasts with

7 moral reasoning using principled ethical theories, such as Kantianism or Utilitarianism, which may sometimes be overly rigid to be applied to single situations. helps the decision maker to discover the human good inherent in an action that a prudent person would grasp. It includes cognitive aspects coming from experience and universal principles along with other cognitive aspects generated by the specific situation. People acquire practical wisdom by repetition of virtuous acts, since, as noted above, practical wisdom is developed by practicing moral virtues. People with a low degree of practical wisdom can take advantage of practical wisdom accumulated through history, and by asking for advice from wise persons. Catholic social thought, with a wealth of practical wisdom accumulated over centuries, proposes respect for the human dignity and rights of every person and other principles, including the necessity to contribute to the common good (see PCJP, 2004), and acting with love in the truth (Pope Benedict XVI, 2009). Respect and benevolence of persons and the common good as fundamental orientation can be taken as a crucial reference in business ethics consistently with a virtue-based approach (Melé, 2009) Conclusions and practical implications The dichotomy between fact and values should be abandoned due to its lack of realism. Thus, an appropriate theory of decision should consider both the productive activity and the human conduct in such an activity (poiesis and praxis in Aristotelian terms); and the teleology inherent to both praxis and poiesis made that the evaluation of the action be not something posterior to the action but something constitutive of the action itself (Llano, 1996, p. 309). In other words, managerial decision-makers have to consider both efficiency and ethics, not as an extrinsic judgment but as inherent aspects of the action. Regarding managerial decision, what has been said means that there are neither only economic decisions, related to efficiency, nor exclusively ethical decisions, related to the human good. Any managerial decision has these two inseparable dimensions, along with others which we do not consider here, such as those related to how a decision can affect future relationships, or about the learning of the agents involved in the action. Managers need what we could be termed integral rationality, which would include both instrumental and practical rationality. In the Aristotelian-Thomistic tradition presented here, ethics is neither a constraint on the maximizing of utilities nor a mere set of criteria based on the personal or social values of the decision maker. Instead, we propose an objective ethics, the main reference of which is human good and the moral virtues related to human good. Under this premise, ethics is not limited to determining whether an alternative is ethically acceptable or to solving ethical dilemmas., helped by respect and benevolence for persons and a real contribution to the common good, not only determines what alternatives are not ethically acceptable but also helps to solve dilemmas and above all, identifies which alternative can bring about the greater human good. Practical rationality should be the main driver for decision. Productive activity has its own rules but it is not an end in itself. Aristotle made clear that productive activity is a means to something else:

8 JMD 29,7/8 644 He who makes some thing always has some further end in view: the act of is not an end in itself, it is only a means, and belongs to something else. Whereas a thing done is an end in itself (NE, 6, 2). Efficiency and utility have to be considered, but, as Pope Benedict has recently pointed out: When the sole criterion of truth is efficiency and utility, development is automatically denied. True development does not consist primarily in. The key to development is a mind capable of thinking in technological terms and grasping the fully human meaning of human activities, within the context of the holistic meaning of the individual s being (Pope Benedict XVI, 2009, n. 70). However, do not forget what decision requires of integral rationality. The technical conditions can make some ethically excellent alternatives not viable. That is what happens, for instance, when maintaining jobs makes a product uncompetitive (of course, it may be possible to maintain such jobs through alternative production). should reject ethically unacceptable alternatives and focus on the greater possible good, which includes the economic viability of the business firm. In other words, instrumental rationality and practical rationality act together to make a good decision. Last, but not least, if practical wisdom is necessary for a correct moral evaluation, and moral evaluation is intrinsic to any decision, one can conclude that managers need not only skills to make good decisions, but also practical wisdom and moral virtues. References Aquinas, T. (1947), Summa Theologica, Benziger Brothers, New York, NY, translated by Fathers of the English Dominican Province. Aristotle (1934), Nichomachean Ethics, Vol. 19, Harvard University Press, Cambridge, MA, Rackham, H. (trans.). Freeman, R.E. (1994), The politics of stakeholder theory: some future directions, Business Ethics Quarterly, Vol. 4 No. 4, pp Harrison, E.F. (1999), The Managerial Decision- Process, 5th ed., Houghton Mifflin, Boston, MA. Hughes, G.J. (2001), Aristotle on Ethics, Routledge, London. Katona, G. (1953), Rational behavior and economic behavior, Psychological Review, Vol. 60, September, pp Libreria Editrice Vaticana (2003), Catechism of the Catholic Church, 2nd ed., Random House, London, available at: Llano, A. (1996), Hacia un teoría general de la acción, in Melé, D. (Ed.), Ética en el gobierno de la empresa. V Coloquio de ética empresarial y económica, Eunsa, Pamplona, pp March, J.G. and Simon, H.A. (1958), Organizations, John Wiley, New York, NY. Melé, D. (2009), Integrating personalism into virtue-based business ethics: the personalist and the common good principles, Journal of Business Ethics, Vol. 88 No. 1, pp Pontifical Council for Justice and Peace (PCJP) (2004), Compendium of the Social Doctrine of the Church, Libreria Editrice Vaticana, Città del Vaticano, available at: roman_curia/pontifical_councils/justpeace/documents/rc_pc_justpeace_doc_ _ compendio-dott-soc_en.html

9 Pope Benedict, XVI (2009), Encyclical letter Caritas in veritate, available at: holy_father/benedict_xvi/encyclicals/documents/hf_ben-xvi_enc_ _caritas-inveritate_en.html Putnam, H. (2002), The Collapse of the Fact/Value Dichotomy and Other Essays, Harvard University Press, Cambridge, MA. Sen, A.K. (1967), The nature and classes of prescriptive judgments, The Philosophical Quarterly, Vol. 17 No. 66, pp Simon, H.A. (1976), Administrative Behavior, 3rd ed., Free Press, New York, NY. 645 About the author Domènec Melé is professor at IESE Business School, University of Navarra, Spain, and holds the Chair of Business Ethics at this institution. He has also chaired the biennial International Symposium on Ethics, Business and Society led by IESE since Professor Melé earned a doctorate in industrial engineering from the Polytechnic University of Catalonia, Spain, and another PhD degree in theology from the University of Navarra. Over the last 25 years, he has taught and written extensively in his specialization areas, which include economic and business ethics, international management ethics, corporate social responsibility, Christian ethics and spirituality in management, and philosophy of management. He is author of more than 60 scientific articles and 20 case studies. In addition he has authored or edited a dozen books in these fields. His most recent book is Business Ethics in Action: Seeking Human Excellence in Organizations (Palgrave Macmillan, New York, 2009). Domènec Melé can be contacted at: mele@iese.edu To purchase reprints of this article please reprints@emeraldinsight.com Or visit our web site for further details: