Rational and Behavioral Decision Making

GAUTAM KUMAR CLASS ROLL NO. -15 MBA Ist Sem 2008-09

RATIONAL DECISION MAKING

The term rationality implies and value maximizing choice within certain limits. The rational decision making is generally helpful in making non-programmed decisions. The is one that is logical and follows the orderly path from problem identification through solution. Rational is totally related to maximization of objectives.

THE RATIONAL DECISION MAKING PROCESS:

1.INVESTIGATE THE SITUATION. -Define problem. -Diagnose cause. -Identify decision objectives.

2.DEVELOP ALTERNATIVES

-Seek creative alternatives.

-Do not evaluate yet.

4.IMPLEMENT AND MONITOR -plan implementation -monitor implementation and make necessary adjustment .

3.EVALUATE ALTERNATIVES AND SELECT THE BEST ONE -Evaluate alternatives. -Select best alternatives.

STAGE 1: INVESTIGATE THE SITUATION:

1. DEFINE THE PROBLEM:

2. DIAGNOSE THE CAUSE:

3. IDENTIFY THE DECISION OBJECTIVES:

STAGE 2.DEVELOP ALTERNATIVES: 1.Brain storming 2.Nominal group technique 3.Delphi method 4.Consensus mapping

5.Past experience
6.Developing different visionary eyes

STAGE 3:EVALUATE THEALTERNATIVES AND SELECT THE BEST ONE AVAILABLE

1.Is this alternative feasible ?

2.Is the alternative a satisfactory solution ?

3.What are the possible consequences for the rest of the organization?

Peter Drucker has offered the following

four criteria for making the right choice among available alternatives: 1.The risk 2.Economy of effort 3.Timing 4.Limitations of resources

 Stage 3. evaluating alternatives

no Is the alternative feasible yes Is the Alternative satisfactory Yes Drop the alternative

no

Drop the alternatives

Will the alternative have Positive consequences ?

YES

NO

Conduct the further evaluation

Drop the Alternatives

STAGE 4: IMPLEMENT AND MONITOR THE DECISION

Resources must be acquired and allocated as necessary. Managers set up budgets and schedules for the actions they have decided on,allowing them to measure progress in specific terms. They assign responsibility for the specific task involved Budget,schdules and progress reports are all essencial to performing the management functions of control.

 5.Potential risk and uncertainties, that is earlier evaluation-of-alternatives stages must be kept in mind. 6.Adecision is no better than the actions taken to make it reality. Even if decision is a good one ,if others are unwilling to carry it out, then the decision will not be effective. 7.Action taken to implement a decision must be monitored.

LIMITATIONS FOR THE RATIONAL DECISION MAKING

It requires a great deal of time. It requires great deal of information. It assumes rational, measurable criteria are available and agreed upon. It assumes a rational, reasonable, non-political world. The Bounded rational decision making model: a realistic approach.

ASSUMPTION OF THE MODEL

Problem clarity Known options Clear preferences Constant preferences No time or cost constraints Maximum payoff

RESTRICTED FACTORS INTERVENE FOR BEING PERFECLY RATIONAL

Impossible to state the problems accurately Not fully aware of problems Imperfect knowledge Limited time and resources Cognitive limits Politics

Value-Focused Thinking
creating alternatives uncovering hidden objectives identifying decision opportunities

guiding strategic thinking evaluating alternatives

THINKING ABOUT VALUES

interconnecting decisions

improving communication facilitating involvement in multiplestakeholder decisions guiding information collection

Adapted from Keeney, 1992

DESCRIPTIVE DECISION THEORY (BEHAVIORAL THEORY)/THE ADMINISTRATIVE MODEL

Behavioral decision making is to understand how people make decisions and how they can make decision making process more effective and efficient. This type decision making allows for only three unique systems of decision: INDIVIDUALISM COLLABORATION POWER AND AUTHORITY

 According to Simon ,people have only a

limited, simplified view of problems confronting them because of certain reasons: They do not have full information about the problems. They do not possess knowledge of all the possible alternative solutions to the problems and their consequences. They do not have abilities to process competitive environmental and technical information. They do not have time and resources.

DIFFERENCES BETWEEN DESCRIPTIVE DECISION THEORY AND THE ADMINISTRATIVE MODEL

THE RATIONAL ECONOMIC MODEL

THE ADMINISTRATIVE MODEL

Perfect rationality
Perfect knowledge of problems ,consequences

Bounded rationality Imperfect knowledge of problems ,consequences

Normative

Descriptive

Exhaustive search for a number of alternatives

Search for a seemingly feasible feasible alternative rather than an exhaustive list
Satisficing good enough for adequate decisions
The decision making process receives inputs both from quantifiable and nonquantifiable variables

Optimal decisions
Concentration on technical-economic terms ,and quantifiable variables.

BOUNDED RATIONALITY AND SATISFICING DECISIONS

According to the behavioral theory, optimally is an utopian concept. Real life challenges ,time and cost limitations, political pressures from internal and external constituencies force the decision maker to work under conditions of bounded rationality. Thus instead of searching for and choosing the best alternatives, many managers accept decisions that are only good enough, rather than ideal. Such decisions are referred to as SATISFICING DECISION

According to Hitt ,Middlemist and Mathis satisficing can occur for various reasons:
1.Time pressure 2.A desire to sit through a problem quickly and switch onto other matters. 3.A dislike for detail analysis that demand more refine techniques. 4.To avoid failure and mistake that could affect their future in a negative way.

Factors Leading To Bounded Rationality And Satisficing Decisions

Information Process abilities

External factors

Time and cost limits

Organizational objectives

Decision maker

Personal factors

Satisficing Decision

Observation

Questions

Hypothesis 1 Hypothesis 2 Hypothesis 3 Hypothesis 4 Hypothesis 5

Experiment

Reject Hypothesis 1&4 Reject Hypothesis 2&3

Hypothesis 2 Hypothesis 3 Hypothesis 4

Experiment

Hypothesis 5
Predictions

REFERENCES:
www.wikipedia.org http://www.sageereference.com/edleadership/article_n11.html Management by Ricky W. Griffin Eighth edition (2005) Indian Adaptation Management by J. A. F. Stoner, R. Edward Freeman Fourth edition. Human Behavior in Organization by John Neuston

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