Rational Decision Making

The Managerial Decision-Making Process
E. FRANK HARRISON
Fifth Edition
Copyright 1999 Houghton Mifflin Company. All rights reserved.
3-0
The Managerial Decision-Making Process

Fifth Edition
Author: E. Frank Harrison, Ph.D. Slides by Monique A. Pelletier, Ph.D.
3-1
Chapter 3
Rational Decision Making
3-2
Rational versus Nonrational Behavior

n
Rational means having the ability to reason.
Rational behavior is a core concept of decision making. Rational behavior involves the evaluation and selection of an alternative that promises to meet the decision makers objective.
3-3
Rational versus Nonrational Behavior (contd)

n
Rational behavior does not preclude the presence of emotion or passion on the part of the decision maker. Nonrational behavior means failing to act in accordance with ones best estimate of the comparative consequences attendant upon a set of alternative actions.
3-4
Rational versus Nonrational Behavior (contd)

n
Nonrational behavior may result from:

l
unreasoning commitment to a given course of action

education, training, or experience that prevents attainment of the complete picture some form of incompetence
3-5
The Concept of Maximizing Behavior

n
A maximizing decision maker is an economic person preoccupied with attaining the highest possible level of personal preferences or self interest.
There is a fixed objective and a welldefined and mutually exclusive set of alternatives.
Environmental constraints are ignored.

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The Concept of Maximizing Behavior

(contd)
n
The maximizing decision maker is able to estimate the outcome and calculate the expected value of each alternative. The maximizing decision maker simply selects the alternative offering the highest expected value in terms of the objectives.
3-7
The Case for Maximizing Behavior

n
Business organizations exist to maximize profits, sales, or growth in resources. Failure to maximize profits or other measures of business prowess is usually indicative of inefficiency or managerial incompetence.
3-8
The Case for Maximizing Behavior

(contd)
n
Managerial decision makers are therefore necessarily maximizers. Empirical evidence does not show conclusively that executives are motivated toward maximizing behavior.
Thus, the case for maximization is tenuous at best.

3-9
The Case Against Maximizing Behavior

n
The concept of maximizing behavior is flawed. The marginal analysis necessary to verify maximization is unattainable in practice. There is no evidence that high level of managerial satisfaction is attributable to maximizing behavior.
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The Case Against Maximizing Behavior (contd)

n
Limits on available information act to preclude maximization.
Human cognitive limitations work against maximization. Maximizing behavior invites criticism and limitations imposed on decision makers.
The environment cannot be disregarded.
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The Concept of Satisficing Behavior

A satisficing decision maker is one who is concerned simply with attaining a sought objective. n Satisficing behavior acknowledges the limitations of:
n
imperfect information l time and cost constraints l cognitive limitations l environmental influence
l
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The Concept of Satisficing Behavior

(contd)
n
The decision maker establishes an attainable objective and searches for alternatives until one is found that meets the objective, and a choice is made and implemented.
Satisficing behavior is open to the environment, whereas maximizing behavior disregards the environment.
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The Case for Satisficing Behavior

n
The case for satisficing behavior is centered in the concept of bounded rationality. (See Figure 3.1) Given bounded rationality, the best that a rational decision maker can get is a satisficing choice .
3 - 14
The Case for Satisficing Behavior

(contd)
n
The components of bounded rationality are:

l l l l
rational decision maker managerial objectives external environment time and cost constraints
cognitive limitations
3 - 15
The Case Against Satisficing Behavior

n
Limitations on decision makers aspirations
The need to specify objectives in advance Complexity of the choice may impose cognitive strain on the decision maker
Focus on short-term results
3 - 16
The Case Against Satisficing Behavior (contd)

n
May choose the first alternative too rapidly
Belief that a satisficing choice is a second-best decision Focus on the behavioral aspects of decision making
3 - 17
Figure 3.1 The Concept of Bounded Rationality Managerial objectives
Competitive information
Imperfect information Time and cost constraints Cognitive limitations
Environmental information
Permeable boundaries
Rational decision maker
Satisficing decisions
Technical knowledge
Managerial objectives
Managerial experience
3 - 18

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The Managerial Decision-Making Process

Copyright 1999 Houghton Mifflin Company. All rights reserved.

The Managerial Decision-Making Process

Author: E. Frank Harrison, Ph.D. Slides by Monique A. Pelletier, Ph.D.

Copyright 1999 Houghton Mifflin Company. All rights reserved.