Do leaders make strategic decisions to minimise regret?
Strategic decisions are often influenced by beliefs and predictions about the likelihood of others' actions, and less so by the anticipation of regret, according to UNSW Business School research
Strategic decisions affect the most challenging problems facing corporations, economies and societies, which feed into workplace culture, employee performance and retention. Important decisions help drive firm productivity, manage earnings and value, implement new business processes or plan for mergers and acquisitions.
Research into decision-making can help businesses understand and predict how to get the best from a manager or an executive, and at the broader level, it also helps inform government processes, sector regulation and policy reform. So what factors influence strategic decision-making?
The role of regret in strategic decisions
Past research suggests anticipated regret – the fear of experiencing shame or guilt in the future, typically about decisions being considering now – plays a role in decision-making. Such an intense and unpleasant feeling may affect a person's decisions wisely, but sometimes less so.
Indeed, a growing body of evidence suggests anticipated regret motivates actions, and regret management theory suggests people should indeed act to reduce the regret they feel or may experience rather than blame themselves. However, new research suggests there may be another crucial factor.
In a recent paper Do People Minimise Regret in Strategic Situations? A Level-k Comparison, UNSW Business School's Bernardo García-Pola, Postdoctoral Fellow at the AGORA Centre for Market Design, examines a particular problem regarding regret in situations where uncertainty stems from the decisions of others.
But it is essential to understand that avoiding regret is different from preventing risk.
"For example, if you wanted to avoid risk, you would not buy a lottery ticket, because that way you would have a sure amount of money in your pocket. However, somebody who is minimising future regret would buy the lottery ticket because he/she wants to avoid the awful situation in which he/she does not buy and the ticket turns out to be the winner," says García-Pola.
Strategic decisions come with certain risks because they could take a company into a new direction that could fail. Failure to make the right strategic decision may result in feelings of regret, leading to negative emotional burnout. Regret can even result from decisions made in incredibly uncertain environments, such as the economic aftereffects of the COVID-19 crisis.
"In the end, if we observe how things came out and realise that we could be better off having done something different, we can experience this negative sentiment about our original decision. The higher the difference between the real outcome and the alternative better outcome that didn't happen, the higher the regret," says García-Pola.
Predicting others' actions is a key factor in decision-making
In game theory – a field of study that helps us understand decision making in strategic situations – strategic decision-making is where outcomes are determined not only by the individual taking action but by other individuals' decisions. While it is a field of mathematics, its implications extend to several other areas like biology and economics. This is because most economic situations and problems are strategic: they involve markets, government policies, the prices of competitors etc.
"Studies until now have shown how it was likely that people were anticipating regret in strategic situations. That means they knew about the possibility of experiencing regret after a choice, and in consequence, they take options that minimise the amount of regret they could suffer," explains García-Pola.
However, his latest research has found those models of anticipated regret that looked successful into predicting people's behaviour were coinciding in their predictions with another successful model of behaviour not based on regret, a theory called Level-k, which assumes players in strategic games base their decisions on their predictions about the likely actions of other players.
This theory assumes bounded rationality – the idea that rationality is limited when individuals make decisions, by the mind's cognitive limitations, the time available to decide etc. Here, rationality is not unlimited as with previous models of research. So it could also be that previous research was mistakenly attributing the decisions observed to the anticipation of regret when it was not the case, says García-Pola.
What does this mean for decision-making in uncertain times?
There is little question that CEOs and managers have to be strategic in their decision-making in the current economic environment. "I think the current circumstances have enough high stakes and uncertainty that these questions are highly into play," says García-Pola.
"Being cautious, it would be a good exercise for them to analyse what would be the consequences of their decisions in all the different possible scenarios that these circumstances can lead us to. The ones that make little differences between what happened and what could have happened if chosen differently, maybe are not the best – even if they are relatively safe. These times are difficult but also full of opportunities that should at least be considered," he says.
For managers, in particular, taking into account regret might be more critical for them because typically their decision and potential outcomes that did not occur are observable to everybody.
"This could imply, not only the unpleasant sensation of regret but the perception from everybody that they have made a wrong decision with all the terrible implications that can have for their jobs, even though it was not necessarily a bad call."
He suggests managers think about the worst-case scenarios that could happen with a particular strategy and consider diversifying. "Diversifying, in general, is a strategy that can account for both points and can avoid high regrets in general," he says.
UNSW Business School's Bernardo García-Pola is a Postdoctoral Fellow at the AGORA Centre for Market Design, which draws on the expertise of Australian and international researchers from a wide range of disciplines – including game theory, experimental economics, computer science and operations research – to solve major market problems. For more information, please contact García-Pola directly.