1. Bounded rationality
When faced with a complex problem, most people respond by reducing the problem to a level at which it can be readily understood. This is because the limited information processing capability of human beings makes it impossible to assimilate and understand all the information necessary to optimize. So people satisfy themselves that is, they seek solutions that are satisfactory and sufficient.
Since the capacity 'of the human mind for formulating and solving problems is far too small to meet the requirements for full rationality, individuals operate within the confines of bounded rationality. They construct simplified models that extract the essential features from problems without capturing all their complexity. Individuals can then behave rationally within the limits of the simple model.
How does bounded rationality work for the typical individual? Once a problem is identified, the search for criteria and alternatives begins. But the list of criteria is likely to be far from exhaustive. The decision maker will identify a limited list made up of the more conspicuous choices. These are the choices that are easy to find and that tend to be highly visible. In most cases, they will represent familiar criteria and previously tried and tested solutions. Once this limited set of alternative is identified, the decision maker will begin reviewing it. But the review will not be comprehensive. Not all the alternatives will be carefully evaluated. Instead, the decision maker will begin with alternatives that differ only in a relatively small degree from the choice currently in effect. Following along familiar and well-worn paths, the decision maker proceeds to review alternatives only until he or she identifies an alternative that is “good enough” — One that meets an acceptable level of performance. The first alternative that meets the “good enough” criteria ends the search. So the final solution represents a satisfying choice rather than an optimum one.
One of the more interesting aspects of bounded rationality is that, the order in which alternatives are considered is critical in determining which alternatives is selected. In the fully rational decision-making model, all alternative are considered, the initial order in which they are evaluated is irrelevant. Every potential solution would get a full and complete evaluation. But this isn’t the case with bounded rationality. Assuming that a problem has more than one potential solution, the satisfying choice will be the first acceptable one the decision maker encounters. Since decision makers use simple and limited models, they typically begin by identifying alternatives that are obvious, ones with which they are familiar and those not too far from the status quo. Those solutions that depart least from the status quo and meet the decision criteria are most likely to be selected. A unique and creative alternative may present an optimizing solution to the problem. However, it is unlikely to be chosen because an acceptable solution will be identified well before the decision maker is required to search very far beyond the status quo.
2.2 Intuition
Intuitive decision making has recently come out of the closet and into some respectability. Experts no longer automatically assume that using intuition to make decisions is irrational or ineffective. There is growing recognition that rational analysis has been overemphasized and that, in certain instances relying on intuition can improve decision making.
There are a number of ways to conceptualize intuition. For instance, some consider it a form of extrasensory power or sixth sense and some believe it is a personality trait that a limited number of people are born with. We define intuitive decision making as an unconscious process created out of distilled experience. It doesn’t necessarily operate independently of rational analysis, rather, the two compliment each other.
When are people most likely to use intuitive decision making? Eight conditions have been identified.
i. When a high level of certainty exists.
ii. When there is little precedent to draw on.
iii. When variables are less scientifically predictable.
iv. When “facts” are limited.
v. When facts don’t clearly point the way to go.
vi. When analytical data is of little use.
vii. When there are several possessible alternative solutions from which to choose, with good arguments for each.
viii. When time is limited and there is pressure to come up with the right decision.
Although intuitive decision making has gained in respectability in people especially in North America, Great Britain follow rational analysis which is approved way of making decisions — to acknowledge they are using it. People with strong intuitive abilities don’t usually tell their colleagues how they reached their conclusions. Since rational analysis is considered more socially desirable, intuitive ability is considered more socially undesirable. Intuitive ability is often disguised or hidden.
3.Problem Identification
Problems don’t come with flashing neon lights to identify themselves. And one person’s problem is another persons acceptable status quo. So how do decision makers identify and select problems?
Problems that are visible tend to have a higher probability of being selected than ones that are important. Why? First, visible problems are more likely to catch a decision maker’s attention, second is concerned with decision making in organizations. Decision makers want to appear competent and “on top of problems”. This motivates them to focus attention on problems that are visible to others. Don’t ignore the decision maker’s self-interest. If a decision maker faces a conflict between selecting a problem that is important to the decision maker, self-interest tends to wind out. This also ties in with the issue of visibility. It’s usually in a decision maker’s best interest to attack high-profile problems. It conveys to others that things are under control. Moreover, when the decision maker’s performance is later reviewed, the evaluator is more likely to give a high rating to someone who has been aggressively attacking visible problems than to someone whose actions have been less obvious.
4. Alternative development
Since decision makers rarely seek an optimum solution, but rather a satisfying one, we should expect to find a minimal use of creativity in the search for alternatives. And that expectation is generally on target.
Efforts will be made to try to keep the search process simple. It will tend to be confined to the neighbours of the current alternative. More complex search behaviour, which includes the development of creative alternative, will be resorted to, only when a simple search fails to give a satisfactory alternative.’
Rather than formulating new and unique problem definitions and alternatives, with frequent journeys into unfamiliar territory, the evidence indicates that decision making is incremental rather than comprehensive. This means decisions makers avoid the difficult task of considering all the important factors, weighing their relative merits and drawbacks and calculating the value for each alternative. Instead, they make successive limited comparisons. This simplifies decision choices by comparing only those alternatives that differ in relatively small degrees from the choice currently in effect.
The picture that emerges is one of a decision maker who takes small steps toward his or her objective. Acknowledging the non-comprehensive nature of choice selection, decision makers make successive comparisons because decisions are made and remade endlessly in small comparisons between narrow choices
5. Making choices
In order to avoid information overload, decision makers rely on heuristics or judgmental shortcuts in decision making. There are 2 common categories of heuristics — availability and representativeness. Each creates biases in judgment. Another bias that decision makers often have is the tendency to escalate commitment to a failing course of action.
i. Availability Heuristic
Many more people suffer from fear of flying than fear of driving in a car. The reason is that many people think flying is more dangerous. It isn’t of course. But the media gives a lot more attention to air accidents, so we tend to overstate the risk in flying and understate the risk in driving. This illustrates an example of the availability heuristic, which is the tendency for people to base their judgments or information that is readily available to them. Events that evoke emotions, that are particularly vivid or that have occurred more recently, tend to be more available in our memory. As a result, we tend to be prone to overestimating unlikely events such as plane crash. The availability heuristic can also explain why managers, when doing annual performance appraisals, tend to give more weight to recent behaviours of an employee than those behaviour of 6/9 months ago.
ii. Representative heuristic
Literally, millions of inner-city African, American boys in the U.S. talk about the goal of playing basketball in the NBA. In reality, they have a far better chance of becoming medical doctors than they do of playing in the NBA, but these kids are suffering from a representative heuristic. They tend to assess the likelihood of an occurrence by trying to match it with a pre-existing category. We all are guilty of using this heuristic at times.
iii. Escalation of commitment
Another bias that creeps into decisions in practice is a tendency to escalate commitment when a decision stream represents a series of decisions. Escalation of commitment is an increased commitment to a previous decision in spite of negative information. It has been well documented that individuals escalate commitment to a failing course of action when they view themselves as responsible for the failure. That is, they “know good money after bad” to demonstrate that their initial decision wasn’t wrong and to avoid having to admit they made a mistake. Escalation of commitment is also congruent with evidence that people try to appear consistent in what they say and do. Increasing commitment to previous actions conveys consistency.
Escalation has obvious implications for managerial decision. Many times an organization has suffered large losses because a manager was determined to prove his or her original decision was right by continuing to commit resources to what was a lost cause from the beginning. Additionally, consistency is a characteristic often associated with effective leaders. So managers in an effort to appear effective, may be motivated to be consistent when switching to another course of action may be preferable. In actuality, effective managers are those who are able to differentiate between situations in which persistence will pay off and situations in which it will not.
Titany answered the question on September 7, 2021 at 11:17