The Rational Decision Making Essay

The Rational Decision Making Essay Rational decision making, along with the thinking process that it involves, is a subject that has been vastly researched, both theoretically and empirically, and many different opinions have been, therefore, stated, since decision making is perhaps the most crucial part of human behaviour. As a result, a variety of social scientists have, at some point of their activity, occupied themselves with it and especially with its assumptions and their consequences. This essay will attempt to answer the question of what is a rational decision, by contrasting the classical to the behavioural approach of rational decision making, along with the perfect and the bounded rationality assumptions that accompany them, as well as the conditions under which they hold true. It will also, through this process, try to show that the classical approach lacks realism that would promote its widespread applicability and will further elaborate on the more realistic concept of bounded rationality. Moreover, a key part of the behavioural decision making, the heuristics process, will be presented and will serve as a bridge to the second part of the essay, which will analyse biases, the, perhaps, most important category of barriers to rational choice in organisations. Lastly, ways of overcoming those biases debiasing techniques will be demonstrated. But first, in order to decompose the essay question, two definitions will be given regarding the rational thinking and the decision making procedure. According to Baron, rational thinking is the desirable kind of thinking that each of us would want to do, if we knew our best interests, in order for our goals to be achieved in the best possible way, the ultimate of which is utility maximisation (2000, p.5). Furthermore, we are involved in a decision making process, when we choose an action of what to do or not so as to achieve a goal, after having judged a particular situation and evaluated the different possible outcomes (Baron, 2000, pp.6-8). This judgement can be spontaneous or thorough, it can be perfect or satisfactory, depending on the different theories and their elements that will be described in the main body of this essay that follows. Rational reasoning and decision-making: The two theories A rational decision is one taken under the conditions of either perfect or bounded rationality, depending on which of the two completely opposed theories is taken into consideration in order to explain our behaviour. Although these two theories are totally contradictory, a general model of rational behaviour which fits both of them was described by Simon. More specifically, he wrote that every rational behaviour incorporates some common elements such as that the decision maker will analyse only a subset of numerous decision alternatives, out of which process, possible choice outcomes will occur. Then, according to an exact pay-off function, in the classical theory, or approximate, in the behavioural one, value or utility is allocated by the decision maker to each of the possible outcomes, and the one with the higher value is finally chosen (1955, p.102). However, the two theories assume very different things and entail alterative consequences in their effort to account for a rational decision. The classical, also referred to as normative, the one that assumes perfect rationality and utility maximisation in all decisions, derives from the traditional economic theory and portrays an economic man, who, while allocating scarce resources, is also rational. He is aware of all the relevant aspects of his complex and immense environment, his system of preferences is stable and well-organised and he is so skillful in computation, that he can calculate by himself the produced utility of all the possible actions that can occur as a result of his decision and eventually, choose the one with the highest (Simon, 1955, p.99; Simon, 1979, p.493). In addition, it is possible for us to, correctly or not, predict human behaviour without actually observing it. We are able to do that, because of the way that the environment, in which this whole process t akes place, is shaped (Simon, 1979, p.496). On the other hand, the behavioural theory of rational decision-making, that originates from the theory of institutionalism the transformation of the economic theory in order to include the tied to market transactions, legal structures and is based on the concept of bounded rationality, is not as simple and brief and does not make as strong and absolute assumptions about the human cognitive system as the classical theory does. The knowledge and computational skills that the human agents possess are realistic and much weaker than the same that are taken for granted in the previous outlined theory of utility maximisation. People, in this theory, are not expected to equate costs and return at the margin, as Simon puts it. Instead, the idea of satisficing is introcuded, where humans, far from optimising, try to achieve, through their rational, but less competent than in the classical theory, reasoning, an acceptable, in terms of the gained utility, threshold. To put it plainly, lacking knowledge of relevant outcomes probabilities and of external environments state, non accurate evaluation of all possible outcomes and weak human memory are key factors for the bounded rationality theme (1979, pp.495-496, 499). Elaborating a bit further on the concept of deciding under the bounded rationality context, two are the main mechanisms that are needed in order for a decision to be made: the idea of search and that of satisficing. The decision maker must search for the alternatives for choice, if they are not given to him initially, so a theory of search needs to be included in the bounded rationality model. Moreover, because the computational skills that people possess are limited and utility of all different possible choices can not be measured precisely, they have developed a minimum satisfaction level that they want to achieve with their outcomes value, terminating their search and choosing that particular decision. Another feature of this approach is that the predictions it makes, can be easily tested through observation and empirical phenomena (Simon, 1979, pp. 495, 502-503). In an attempt to show that the behavioural theory of rational decision making is superior to the classical one, two important flaws of the latter will be briefly presented and a general, relevant to both approaches, conclusion will be drawn. A major flaw, that originates from the unrealistic notion of the classical theory, is that agents decisions are made in a context in which all relevant, present details, future expectations and risks are incorporated, according to Kahneman, an assumption which rarely holds true (2003, p.706). Secondly, the, perhaps, most important pylon for the classical theory, utility maximisation, is severely challenged, since there is no existence of evidence that this is actually happening (Simon, 1979, pp.496-497). Connected to the previous fact is the economic model that indicates negative sloping demand curves which, according to Becker, do not necessarily portray rational behaviour that aims to utility maximisation, because there is evidence that people who use other irrational decision rules, find themselves in the exact same position (1962, pp.4-5). Conclusively, regarding the two presented theories, although in relatively simple and stable decision situations where uncertainty is not present, people seek and achieve maximisation of their personal expected utility function, there are serious deviations from this procedure, when, even slightly, complicated features are introduced in the decision process. The decision attempts in the latter context are explained by the behavioural theoretic model, in which the issue of bouned rationality plays a central role. This theory explains the wide variety of empirical observations that do not abide by the classical models assumptions (Simon, 1955, pp.103-104; Simon, 1979, pp. 497, 505-506). Heuristics and their twofold connection to decision-making A subject of major importance that is closely linked to the behavioural or descriptive theory of decision-making, is the heuristic technique. Heuristics have been adopted by people as responses to complex and uncertain decision-making situations and are mental shortcuts, sometimes unconscious, that help them reason in a continuous way (Hammond et al., 1998, p.47; Tversky and Kahneman, 1974, p.1124). They are generally part of humans problem-solving process and include very selective search through problem spaces that are often immense, as Simon explains. As soon as a satisfactory enough outcome is produced, the search ends and this decision is taken, as explained in the analysis of the behavioural theory above (1979, p.507). Heuristics are widely used for the reason that they regularly accomplish the goal(s) they were summoned for, making them the, probably, most reliable and with strong properties medium towards a rational decision (Simon, 1965, p.183). One of the most common heuris tic methods is representativeness, through which, probabilities of events are calculated in respect to how resemblant of an event is another. If the resemblance is high, then the probability that one of the events derives from the other is also high. Another way to attribute probabilities and frequencies to events, is through the availability or accessibility heuristic, which indicates that elements of large categories are more easily retrieved from our memory and therefore higher probabilities are assigned to them. Lastly, the anchoring and adjustment heuristic indicates that people begin their syllogism from a familiar starting point and, usually, their final decision lies not so far from it, being only mildly adjusted (Tversky and Kahneman, 1974, pp. 1124, 1127-1128; Hammond et al., 1998, p. 48). However, the second dimension that connects heuristics to decision-making is that, through them, barriers to rational choice, may be created. The, perhaps, most important category of suc h barriers, namely biases, will be presented in the following second part of the essay and potential ways of overcoming them will be demonstrated. Biases and ways to overcome them Because of the essays length limit, the sole barriers to rational decision-making that will be analysed are biases and will be featured along with some techniques that can soften their impact. Generally, the range of biases is really wide but there are some common causes that are responsible for most of them. Stimuli in judgement and evaluation are not translated in a linear mode, creating distortion in the reasoning process, is one of the causes. A second one, is the unconscious automatisation of humans cognitive action when they are trying to recall information from their memories and their choice between a narrow information base and finally the use of inferior strategies, due to lack in superior ones, is a third (Larrick, 2004, pp.319-320). The anchoring heuristic that was mentioned in the previous section of the essay can lead to biases that influence rational decisions. This happens because our thoughts and judgements are anchored by the first impression that we have on a situation and we rarely consider new perspectives to the situation, a fact that might lead to incorrect conclusions. Nevertheless, there are ways of overcoming this bias, such as being open-minded and viewing and adopting the cognitive strategy of considering the opposite, which alters the starting point of our reasoning (Hammond et al., 1998, p. 48; Larrick, 2004, p.323). In addition, a very common bias which severely influences rational choice in organisations is when decision makers tend to choose alternatives that do not affect much the status quo. This happens often because people rarely want to hold responsibility for an action that can lead to criticism from colleagues and prefer the safer course of doing nothing, that poses a less psychological risk to them. It is also the case, that when there are many alternatives to a decision, because more effort is required in order to analyse all of them, people usually stick to the status quo. A way of overcoming this particular bias, which can have general applicability as well, is through the adoption of the motivational strategy of accountability. This technique indicates that people should, at all times, be held responsible for their actions, or in the case of the status quo bias, the non-actions, and they will have to explain the logic behind their decision. As a result, they begin to consider alter native possible decisions and, what is important, they take into account that the attractiveness of the status quo can change over time, thereby learning to evaluate decisions not only in terms of the present but of the future as well (Hammond et al., 1998, pp. 48-50; Larrick, 2004, pp. 322-323). Lastly, a bias that strongly influences the rationale of our decisions, is the sunk-cost one. According to this, employees, involved in a decision-making process, the majority of whom are managers, continue to support past choices, even if they do not seem valid any more and not surpassing them involves more losses than gains. Although most people know that these sunk-cost decisions are not relevant to the present one, they influence their minds and often lead them to making improper decisions. The reason why people seem to not let aside those decisions, is because they are unwilling, consciously or not, to admit to a mistake, as Hammond et al. underline, since that would hurt their self-esteem. People in business environments where the penalties for bad decisions outcomes are high, do not have the motive to terminate any such decision-relevant results, because they are hoping that they will be able in the future to somehow generate gains from them. The most efficacious way to tackle the sunk-cost bias is to consult the views of people who did not take any part in the decision-making process and will likely not have a biased perspective concerning it (1998, pp. 50-52). In order to avoid the possibility of getting tangled into a sunk-cost bias situation, people can engage into the technological strategy of group decision-making, in which the effective sample size of experience used to make a decision is widened, and the particular bias is statistically less likely to occur, if the groups experience and training is diverse, according to Larrick (2004, pp.326-327). Conclusion To sum up the key points of the essay, concerning the first part about rational decision-making, the classical theory, although attractive and relatively simple to comprehend, lacks a great degree of realism and applicability, since it presupposes perfect rationality and flawless computational ability of possible decisions outcomes for all human agents, a fact that leads to utility maximisation. On the other hand, the behavioural decision-making theory has been developed in order to provide an explanation to many empirical findings and data, which illustrate humans as boundedly rational, meaning that instead of optimising, they are looking for a decision alternative that meets some minimal criteria that are set by them. One of the extensions of a behavioural theory are heuristics, which are standardised judgemental operations that deal with situations that demand reasoning and assessment of probabilities. However, traps that lead to systematic syllogisms distortion, a multitudinous c ategory of which, are biases, do exist and are sometimes caused by heuristic processes. They, nonetheless, can be confronted in several ways, the most important of which is awareness of their existence. Because human behaviour and decision-making are interlinked, more chapters in the theorisation of the latter, especially in more specific areas of it, are expected.