Bounded rational decision making defined as an ability and willingness to follow a reasoned, unemotional and logical approach in decision making.
A very important issue on the subject of decision-making is rationality.
What is rationality?
When is an effective decision made rationally?
Ideally, people acting or deciding rationally must have a clear understanding of alternatives by which goals can be reached under existing circumstances and limitations.
Also, they must have the information and the ability to analyze and evaluate alternatives in the light of the objective set forth.
Finally, they must have the willingness to come to the best solution by choosing the alternative that most effectively satisfies the accomplishment of the goal.
Rationality may be defined as an ability and willingness to follow a reasoned, unemotional and logical approach in perceiving the objectives in evaluating the means through which objectives are to be achieved.
In an objectively rational context, the decision-maker has a clear idea of the problem, opportunities, and alternatives backed by complete knowledge about them.
In the real world, it is very difficult to make decisions in a completely rational manner.
Rationality is an ideal concept as rational decisions are perfect and without any fault.
But in real-life situations, several practical considerations are likely to interfere with the attainment of an ideal condition.
In fact, rationality shows how the decisions should be made and not how decisions are actually made.
Bounded Rationality in Decision Making
As has already been said, to assume rationality in its perfect sense is unrealistic and unrepresentative of actual human behavior.
March and Simon rightly say that people seldom achieve complete rationality, particularly in managing.
Nobel Laureate Herbert A. Simon coined the concept of “bounded rationality” or limited rationality taking into account the human and environmental realities.
Principles of Bounded Rationality
- As no one can make a decision affecting the past, decisions must operate for the future and the future almost in all cases involves uncertainties.
- The capacity of the human mind to perceive, retain and retrieve complete knowledge and information on past, present and future events is not unlimited. Again, information is neither readily available nor is it a free commodity. The cost of information collection vis-a-vis its reliability and relevance is an important consideration.
- It is difficult to recognize all the alternatives that might be followed to reach a goal, because of human cognitive constraints. It is neither necessary nor feasible to generate the entire set of alternatives. The computational capabilities of the decision maker are also limited. In most cases, not all alternatives can be analyzed, even with the latest analytical techniques and tools like computers.
- With all his’ knowledge and intelligence, the average decision maker has his own soft emotions. He cannot completely shut off his subjective viewpoints from influencing the decision process.
Because of the limitations mentioned above, a decision maker would rather be more interested in a choice which is satisfactory and sufficient.
In other words, a manager must settle for limited rationality or “bounded” rationality.
Since it is not possible for managers to be fully rational in practice, they sometimes compromise with their dislike of risks—their desire to “play it safe”—to interfere with the desire to reach the best solution under the circumstances.
This has been termed “Satisfying”, that is, choosing a course of action that is satisfactory or good enough under the circumstances.
The Process of Rational Decision Making
Rational decision making is a multistep process for making choices between alternatives. It is a cognitive process which is made by following a logical step by step process.
In this process, the emphasis is on thinking things through and also on weighing the outcomes and alternatives before arriving at- a final decision. Effective decision-making process requires a rational choice of a course of action.
7 steps of rational decision making are given below:
- Define the Decision Situation.
- Identify Decision Criteria.
- Allocate Weights to the Criteria.
- Identifying Alternatives.
- Evaluating Alternatives.
- Selecting the Best Alternative.
- Implementing Chosen Alternative and Evaluating the Result.
Define the Decision Situation
The model begins by defining the problem. A problem exists when there is a discrepancy between an existing and a desired state of affairs (Pounds, 1969).
It is impossible to make a rational decision unless one can clearly define the problem or context in which the decision needs to be made.
- Why does a decision need to be made?
- What will be the outcome if no decision is made?
- What outcome is desired?
- What is preventing that outcome from being realized?
The answers to these questions should be known by the decision makers.
Identify Decision Criteria
Once a decision-maker has defined the problem, he or she needs to identify the decision criteria that will be important in solving the problems.
In this step, the decision maker determines what is relevant in making the decision. This step brings the decision maker’s interests, values, and similar personal preferences into the process.
Identify criteria is important because what one person thinks is relevant to another person may not. Also, keep in mind that any factors not identified in this step are considered irrelevant to the decision maker.
Allocate Weights to the Criteria
After identifying all the criteria, the decision maker will give weights to these. The main purpose of this is to give importance to the criteria which are most important in nature.
Basically, in this way, the decision maker will give them the correct priority in the decision.
Identifying Alternatives
The key to this step is not to limit one too obvious alternatives or to what has worked in the past.
This step requires the decision maker to generate possible alternatives that could succeed in resolving the problems. The better decision’s come from being open to multiple alternatives.
It is often helpful to consult trusted adults or experts in the area in which the decision needs to be made.
Evaluating Alternatives
As the decision makers evaluate each alternative, they should be looking at the likely positive and negative consequences associated with each. It is unusual to find one alternative that would completely resolve the problem.
As they consider positive and negative consequences, they must be careful to differentiate between what they know for a fact and what they believe might be the case.
The more the evaluation is fact-based, the more confident he/she can be that the expected outcome will occur.
Selecting the Best Alternative
When acting alone or as part of a group, this is the natural next step after evaluating each alternative. In general, the best alternative is the one with the highest degree of probability that it will resolve the problem and the least amount of risk.
Implementing Chosen Alternative and Evaluating the Result
While this might seem obvious, it is necessary to make the point that deciding on the best alternative is not the same as doing something. The action itself is the first real and tangible step in changing the situation. It is not enough to think about it or talk about it or even decide to do it.
A decision only counts when it is implemented. In the final step, the result is to be evaluated.
That means after implementing the decision, whether the problem is solved or not will be evaluated. If the problem remains or has worsened, the steps of the decisionÂmaking process need to be repeated until an acceptable resolution has been found.
Effective decision making requires that the decision maker understand the situation.
Most of the people will consider an effective decision to be one that optimizes some set of factors, such as profits, sales, employee welfare, and market share. In some situation, an effective decision may be one that minimizes loss, expenses, or employee turnover.
These can only be possible when the decision maker follows the above steps.
Assumptions of this Model
The rational decision-making model We just described contains a number of assumptions. These assumptions are-
- Problem Clarity: The problem is clear and unambiguous. The decision maker is assumed to have complete information regarding the decision situation.
- Known Options: It is assumed the decision maker can identify all the relevant criteria and can list all the viable alternatives. Furthermore, the decision maker is aware of all the possible consequences of each alternative.
- Clear Performances: Rationality assumes that the criteria and alternatives can be ranked and weighted to reflect their importance.
- Constant’ Preferences: it is assumed that the specific decision criteria are constant and that the weights assigned to them are stable over time.
- No Time or Cost Constraints: The rational decision maker can obtain full information about criteria and alternatives because it is assumed that there are no time or cost constraints.
- Maximum Payoff: The rational decision maker will choose the alternative that yields the highest perceived value.