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Making Strategic Decisions. Gillian Tett’s “Fool’s Gold” Essay


Introduction

Business management executives require skills in decision-making processes for them to arrive at strategic decisions that enhance the performance of their organisations. Arriving at the most effective decision implies that other possible alternative decisions are ignored or found inappropriate.

Evaluation of the repercussion of decisions that are left out in the development of the main strategy may help to eliminate incidences of failure. This suggests that tactical decision-making rests on the very central domain of policy building. Decisions made are equally important as those, which are not made. This assertion creates a reminder of the argument that power and rationality often go hand in hand.

This paper discusses the importance of decisions made and those, which are not made in the development of strategic initiatives with reference to Gillian Tett’s book titled Fool’s Gold in the context of rational, political, and garbage-can models for decision-making in organisations.

According to Gillian Tett, groups of small banks within JP Morgan were responsible for strategic inventions, which led to the financial crunch. Such strategic inventions were made in the absence of consent of the society. This perhaps illustrated a struggle for power as financial institutions struggled to make it big in the financial market.

Decision-making Processes

Decision-making is a fundamental concept in strategic processes that are adopted by organisations. Strategic processes are incredible since they help to share the destiny of an organisation or nation’s economic status. Over the last five decades, scholarly research has recognised the importance of strategic decision-making in boosting organisational success.

Strategic decisions are those pronouncements, which are “important in terms of the actions taken, the resources committed, or the precedents set” (Eisenhardt & Zbaracki 1992, p.17). From this definition, strategic decisions are decisions, which directly influence an organisation’s health together with its survival both in the short-term and in the long-term.

JP Morgan’s The Financial Institution reflects the capacity of strategic decisions (either made or not made) to influence the survival of an organisation. According to Gillian Tett, the global financial crunch originated here. Credit derivative decisions that are meant to enhance the performance of financial institutions resulted in a negative impact on their health together with their survival negatively in that they almost collapsed.

Rationality approach in decision-making assumes that the behaviour portrayed by people is explained by specific purposes. This implies that people have particular objectives when they engage in situations that call for decision-making (Priem 1990, p.469). The objective forms the functions of analysis of the importance of the anticipated repercussions of the actions that are prescribed by decisions.

While using the rational model in decision-making, the first phase is garnering of information, which helps in the enumeration of a set of desired actions. Several decisions propelled the circumstances leading to the emergence of the housing bubble in 2007. However, these decisions can be classified into two.

The first category includes decisions that emanate from the lending institutions while the second category involves the decisions made by the individuals borrowing from the financial institutions.

In the effort to make a rational decision, lending institutions have to consider various factors among them being political influences in decision-making such as the need to provide cheap housing to low-income earners, lending practices adopted by financial organisations, and the ease of availability of credit among others.

Upon considering all these factors, financial instruments such as collateralised debt obligations (CDOs) and deleveraging encouraged organisations to make risky investments. Analysis of alternative decisions may have resulted in the making of strategic decisions considering deleveraging as an opportunity that financial organisations would not afford to lose.

However, the decision that is not made such as the implication of engagement in risky financial investments is equally important. According to Gillian Tett (2010), in case this decision was made, organisations could perhaps have avoided the 2007-2008 financial crunch. This compares to the circumstances leading to the crisis of Cuban missiles as discussed by Anderson (1983).

The author emphasises that ExCom took into consideration a limited number of alternatives to guide actions (Anderson 1983, p.203). Furthermore, the author argues that decisions were made on the alternative that could not have solved the problems in the effort to curtail high risky situations. This highlights the importance of the decisions that were not made in affecting the crisis of Cuban missiles

Strategic decision-making process is a function of power and political struggles. The political approach to strategic decision making is founded in political science studies (Priem 1990, p.472). It opposes the rational perspective in strategic decision-making in that it denies the argument that organisations pursue super-ordinate goals agreed upon by various participants.

The political model in strategic decision-making maintains that people are not collectively rational. Rather, they are individually rational. Hence, in making a rational decision within organisations, competition and conflicts occur since people pursue different preferences (Langley1989, p.563). Thus, decisions for appropriate actions in organisations are dominated by conflicts.

A study by Bourgeois and Eisenhardt (1988) evidences this assertion by claiming that conflicts on the right course of actions for micro-computing organisations in the United States were evident among executives. Such conflicts emanate from the agreement by some people and disagreement by others on some alternatives, which influence the final decision made by organisations (Dess 1987; Langley et al. 1995).

By noting that every action has its own repercussions, which influence organisations in different ways, the role of politics in strategic decision-making is important since decisions made are equally important as decisions that are not made.

While a decision made helps to save an organisation from collapsing or making it collapse like in the case of the 2007-2008 financial crisis, the decisions that are not made may help to save or cause the failure or collapsing of an organisation.

From the political theoretical paradigm in strategic decision-making process, power is an important aspect in alternative selection. According to Pfeffer (1992), the political model of strategic decision-making reflects a powerful person’s references (p.56). This assertion is well reflected by the circumstances leading to the global financial crunch as described by Tett (2010).

Before the occurrence of the credit crunch, financial institutions were immensely leveraged. This situation increased the appetite to engage in risky investments through a reduction of the resilience capacity in the occurrence of losses (Tett 2010, p.69). Some of the financial instruments deployed to enhance deleveraging such as CDOs together with securitisation among others required decision-making.

The decisions did not take into consideration the difficulties anticipated in terms of monitoring and controlling of financial risks arising from the decisions made. This consideration was in itself a decision that was not made, but was important in helping to mitigate the implication of the decision to deleverage.

Surpassingly, banks that were highly deleveraged were the five leading banks in the US. This means that they were also pioneers in welcoming the deleveraging move. Since such banks are also the most powerful financial institutions, perhaps if they did not consent to the deleveraging move, the financial crunch could not have occurred.

Tett (2010) illustrates the concept of power struggles in strategic decision-making processes. She argues that only the elite entities in a society “maintain power not simply by gathering wealth but by ideological dominations” (Tett 2010, p.105). This means that elites determine the topics of public discussion through their decisions.

Consequently, during the explosion of derivative innovations in 2007-2008 in the consideration of the banking cadre, new structures of power were created. All power structures reinforced the decisions made by banks. This made the larger society disjointed from this centres of power until the time when the reality came flickering.

Cohen, March, and Olsen (1972) discuss the garbage-can approach to strategic decision-making. The model “describes decision-making in the highly ambiguous settings called anarchies” (Eisenhardt & Zbaracki 1992, p.27).

The model criticises the political and rational models for decision-making claiming that they do not provide adequate sensitivities to strategic decision-making processes for this ambiguous world, which is also unstable. At the heart of the model is the presentation of organisations as ambiguous entities. Such ambiguity is manifested in three ways.

The first ambiguity is problematic preferences. These are the “inconsistent and ill-defined preferences that decision makers often posses” (Eisenhardt & Zbaracki 1992, p.27). Decision makers gain knowledge of their goals by understanding actions. They must understand actions before making their choices.

Secondly, according to Padgett (1980), organised anarchies do not possess well-defined technology (p.584). This means that people do not possess adequate knowledge of the means together with the ends of the decisions they make. Such fragmented approach to decision-making implies that decisions made are as equally important as the decisions, which are not made.

Inadequate possession of understanding of the ends means that a decision to do a given action would have both precedence and an unprecedented implication depending on the manner in which people embrace and execute the action prescribed by the decision. For instance, the decision made to deleverage financial institutions was meant to enhance their performance (Tett 2010, p.104).

Unfortunately, some of the institutions took the advantage to indulge in risky investments through unsecure loans. Risks accruing from the decision to lend without consideration of the ends (resultant risks) almost made financial institutions collapse.

Organised anarchies also present the challenge of fluid participation. The “decision-making participants come and go from the decision process, with their involvement depending upon their interest and other demands on their time” (Cohen et al. 1972, p.11). Hence, arriving at the decision on the specific participants who are involved in the entire process of decision-making is hard.

From the context of the garbage model, confluence of four main factors helps in enhancing decision-making. The first factor is choice opportunities. These are situations, which create the necessity for decision-making. The second factor is solutions while participants form the third factor. Participants are persons who can choose to pay or not to pay attention to the process of making decisions.

Fourthly, problems are necessary in the process of making decisions. Considering how these four factors interact in decision-making, Cohen et al. (1972) argues, “decision-making occurs in a stochastic meeting of choices looking for problems, problems looking for choices solution looking for problems…and decisions looking for something to decide” (p.13).

From the perspective of the garbage model, chance is an important aspect of determining a decision. Timing and luck are crucial in the determination of the success of a strategic decision. In the context of Gold Fool, the invention of derivatives was untimely. Tett argues that the decisions to provide relief to the financial institutions did not have any holistic view (Tett 2010, p.168).

This caused families including those without prior knowledge on SIVs and CDOs to make their savings, jobs, and even housing to suffer. In case a decision was not made to provide derivatives, perhaps these sufferings could not have occurred. Hence, strategic decisions made are equally important as those that are not made.

Conclusion

Strategic decision-making is an interactive course of selecting among diverse options. The selection of the most appropriate alternative to solve a particular problem is driven by rationality of the decision or the appropriateness of the alternative in the solution of a problem. Alternatively, power of the decision-making participants and political influences may affect the selected alternative.

Problematic preferences characterising decision makers may also influence the choice of a particular alternative to solve a given problem. Irrespective of the models deployed to select an alternative from a set of other alternatives, every decision has implications.

Balancing of acts or evaluation of the likely implications (both negative and positive) is important to arrive at the best possible alternative that solves a given problem. Based on this assertion, through a discussion of the book Fool Gold by Gillian Tett, the paper held that deliberate decision-making rests at the very central domain of strategy building and that the decisions that are made are equally important as those that are not made.

References

Anderson, P 1983, ‘Decision making by objection and the Cuban Missile Crisis’, Administrative Science Quarterly, vol. 28 no. 5, pp. 201-222.

Bourgeois, L & Eisenhardt K 1988, ‘Strategy decision processes in high velocity environments: Four cases in the microcomputer industry’, Management Science, vol. 34 no. 8, pp. 816-835.

Cohen, M, March, J & Olsen, J 1972, ‘A garbage can model of organisational choice’, Administrative Science Quarterly, vol. 17 no. 7, pp. 1-25.

Dess, G 1987, ‘Consensus on strategy formulation and organisational performance: Competitors in a fragmented industry’, Strategic Management Journal, vol. 8 no. 4, pp. 259-277.

Eisenhardt, K & Zbaracki, M. 1992, ‘Strategic decision making’, Strategic Management Journal, vol. 13 no.3, pp. 17-37.

Langley, A, Mintzberg, H, Pitcher, P, Posada, E & Saint-Macary, J 1995, ‘Opening up decision-making: the view from the black stool’, Organisation Science, vol. 6 no. 3, pp. 260-279.

Langley, A 1989, ‘In search of rationality: The purposes behind the use of formal analysis in organisations’, Administrative Science Quarterly, vol. 34 no. 7, pp. 598-671.

Padgett, F 1980, ‘Managing garbage can hierarchies’, Administrative Science Quarterly, vol. 25 no. 2, pp. 583-604.

Pfeffer, J 1992, Managing with Power: Politics and Influence in Organisations, Harvard Business School Press, Boston, MA.

Priem, R 1990, ‘Top management team group factors, consensus, and firm performance’, Strategic Management Journal, vol. 11 no. 2, pp. 469-478.

Tett, G 2010, Fool’s Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe, Free Press, New York.

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IvyPanda. (2019, December 29). Making Strategic Decisions. Gillian Tett’s "Fool’s Gold". Retrieved from https://ivypanda.com/essays/making-strategic-decisions-gillian-tetts-fools-gold/

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"Making Strategic Decisions. Gillian Tett’s "Fool’s Gold"." IvyPanda, 29 Dec. 2019, ivypanda.com/essays/making-strategic-decisions-gillian-tetts-fools-gold/.

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IvyPanda. "Making Strategic Decisions. Gillian Tett’s "Fool’s Gold"." December 29, 2019. https://ivypanda.com/essays/making-strategic-decisions-gillian-tetts-fools-gold/.

References

IvyPanda. 2019. "Making Strategic Decisions. Gillian Tett’s "Fool’s Gold"." December 29, 2019. https://ivypanda.com/essays/making-strategic-decisions-gillian-tetts-fools-gold/.

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IvyPanda. (2019) 'Making Strategic Decisions. Gillian Tett’s "Fool’s Gold"'. 29 December.

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