rational and behavioral decision making

7/29/2019 Rational and Behavioral Decision Making

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Rational and Behavioral

Decision Making

GAUTAM KUMAR

CLASS ROLL NO. -15

MBA Ist Sem

2008-09


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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 totallyrelated to maximization of objectives.


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THE RATIONAL DECISION MAKING PROCESS:

1.INVESTIGATE THE SITUATION.

-Define problem.

-Diagnose cause.

-Identify decision objectives.

4.IMPLEMENT AND MONITOR

-plan implementation

-monitor implementation and

make necessary adjustment .

2.DEVELOP ALTERNATIVES

-Seek creative alternatives.

-Do not evaluate yet.

3.EVALUATE ALTERNATIVES AND

SELECT THE BEST ONE

-Evaluate alternatives.

-Select best alternatives.


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STAGE 1: INVESTIGATE THE SITUATION:

1. DEFINE THE PROBLEM:

2. DIAGNOSE THE CAUSE:

3. IDENTIFY THE DECISION OBJECTIVES:


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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


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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 therest of the organization?


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Peter Drucker has offered the followingfour criteria for making the right choice

among available alternatives:1.The risk

2.Economy of effort

3.Timing4.Limitations of resources


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Stage 3. evaluating alternatives

Is the

alternativefeasible

no

yes

Drop the alternative

Is theAlternativesatisfactory

no Drop thealternatives

YesWill the

alternative

have Positiveconsequences ?

NOYES

Drop the

AlternativesConduct the further

evaluation


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STAGE 4: IMPLEMENT AND MONITOR THE

DECISION

Resources must be acquired and allocated asnecessary.

Managers set up budgets and schedules for the

actions they have decided on,allowing them tomeasure progress in specific terms.

They assign responsibility for the specific taskinvolved

Budget,schdules and progress reports are allessencial to performing the management functionsof control.


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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 tomake 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.


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LIMITATIONS FOR THE RATIONAL DECISION

MAKING

It requires a great deal of time.

It requires great deal of information.

It assumes rational, measurable criteria areavailable and agreed upon.

It assumes a rational, reasonable, non-political

world. The Bounded rational decision making

model: a realistic approach.


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ASSUMPTION OF THE MODEL

Problem clarity

Known options

Clear preferences Constant preferences

No time or cost constraints

Maximum payoff


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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


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Value-Focused Thinking

THINKINGABOUTVALUES

facilitating

involvement in

multiple-

stakeholder

decisions

creating

alternatives identifying

decision

opportunitiesuncovering

hidden

objectives

interconnecting

decisions

guiding

information

collection

improving

communication

evaluating

alternatives

guiding

strategic

thinking

Adapted from Keeney, 1992


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DESCRIPTIVE DECISION THEORY (BEHAVIORAL

THEORY)/THE ADMINISTRATIVE MODEL

Behavioral decision making is to understandhow people make decisions and how they can

make decision making process more effectiveand efficient.

This type decision making allows for onlythree unique systems of decision:

INDIVIDUALISM

COLLABORATION

POWER AND AUTHORITY


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According to Simon ,people have only alimited, simplified view of problems confrontingthem because of certain reasons:

They do not have full information about theproblems.

They do not possess knowledge of all the possiblealternative solutions to the problems and theirconsequences.

They do not have abilities to process competitiveenvironmental and technical information.

They do not have time and resources.


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DIFFERENCES BETWEEN DESCRIPTIVE DECISION THEORY AND THE ADMINISTRATIVE MODEL

THE RATIONAL ECONOMIC MODELTHE ADMINISTRATIVE

MODEL

Perfect rationality Bounded rationality

Perfect knowledge of problems ,consequences Imperfect knowledge of

problems ,consequences

Normative Descriptive

Exhaustive search for a number of alternatives Search for a seeminglyfeasible feasible

alternative rather than anexhaustive list

Optimal decisions Satisficing good enoughfor adequate decisions

Concentration on technical-economic terms ,and quantifiable variables. The decision making process

receives inputs both from

quantifiable and non-quantifiable variables


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BOUNDED RATIONALITY AND SATISFICING

DECISIONS

According to the behavioral theory, optimally is anutopian concept. Real life challenges ,time and costlimitations, political pressures from internal andexternal 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 thatare only good enough, rather than ideal. Suchdecisions are referred to as SATISFICING DECISION


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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 affecttheir future in a negative way.


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Information

Process

abilitiesExternal

factors

Time and

cost

limits

Decision

makerOrganizationalobjectives Personalfactors

Satisficing

Decision

Factors Leading To Bounded Rationality And Satisficing Decisions


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Observation

Questions

Hypothesis 1Hypothesis 2

Hypothesis 3Hypothesis 4Hypothesis 5

Experiment

Reject

Hypothesis1 & 4

Hypothesis 2Hypothesis 3Hypothesis 4

Experiment

RejectHypothesis

2 & 3

Hypothesis 5

Predictions


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REFERENCES:

www.wikipedia.org

http://www.sage-

ereference.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
http://www.wikipedia.org/http://www.sage-ereference.com/edleadership/article_n11.htmlhttp://www.sage-ereference.com/edleadership/article_n11.htmlhttp://www.sage-ereference.com/edleadership/article_n11.htmlhttp://www.sage-ereference.com/edleadership/article_n11.htmlhttp://www.sage-ereference.com/edleadership/article_n11.htmlhttp://www.wikipedia.org/


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THANK YOU

rational and behavioral decision making

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