The Essay Explores Bounded Rationality In Decision-making.

Simon’s Theory of Rationality and Its Limitations

Question:

Discuss about the Explaining Biases In Decision-Making.

Management and business demands managers to make decisions every day on a wide range of issues. Humans make decisions regularly and these decisions are influenced some or the other factor. These factors in addition are the results of the biases that affect the decision-making. Decision-making is a process that is continuous and has to be performed either with own choice or without. Maine, Soh and Dos Santos (2015), describe decision making as the right choice at the right time for achieving excellence in organizational management.

According to Montibeller and Winterfeldt (2015), biases often hamper decision-making that further leads to failure of the organization.  The author further points out different kinds of biases that include self-interest bias, social harmony bias, action-oriented bias and stability bias.

The following essay, while introducing Herbert Simon’s quote, discusses three chief concepts that may help in explaining bias in decision-making. The essay elaborates Simon’s views on rational human choices and the influences of external forces on these choices.

 “The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world—or even for a reasonable approximation to such objective rationality” (Simon, 1957).

In the above quote, Herbert Simon speaks about the limited capability of human mind to make plans to solve complex problems. He states that the problems are bigger in size that the human mind capability to solve them. The solutions, states the author, are vital to humans as these define rational behavior or even for roughly acquiring the rationality to make decisions. The above quote is cited as the ‘principle of bounded reality’. According to the author, limited information restricts the rationality of individuals in decision-making. The limitations are not confined to information only, these go beyond cognition and time. He explains that if the principle turns out to be true then the objective of classical economic theory cannot be attained. The objective here is to predict a rational human’s behavior without having to do practical research of his psyche.

The consequences of this principle have also been described by the author. As the first consequence, the rational human would try to create a reality that involves simple models in which he acts and sustains. This simple model created by the rational man is not even approximately favorable to the model that real world has. In order to understand the rational human’s behavior, says the author, one must comprehend the means that led to the creation of the simplified model. In this way, one can decipher the psychological traits of the human that pertain to his intellect, emotion and logical thinking. Foss and Weber (2016) argue that in the present form of transaction economics, bounded rationality principle takes a back seat giving way to opportunism. However, the authors also state that an augmented form of bounded reality does mitigate problems in transaction cost economy, while opportunism takes a back seat.

External Influences on Decision-Making

In the second consequence of the bounded rationality principle, Simon explains that there has to be restrictions to human rationality otherwise; there would be no existence of administrative theory. Administrative theory rests in the fact that human rationality has practical limitations and these limitations are dynamic, depending upon the organizational setting where the individual’s decisions occur.

This paper explains the decision-making application on human mind’s rational behaviour which is used to formulate and solve any complex problems in the context of the real world. In explaining the concept of rationality by Simon, there is a need of examining rationality in terms of heuristics that are of four types. Availability, confirmation, bounded rationality and representativeness. It can be said that the theory of organization can never subsist without the rational choice of theory (Maitland & Sammartino, 2015). It is best described to be intendedly rational which is based on two species that is entrepreneur and consumer.

Heuristics are psychological decisions made by the individual to get solution of the most complicated problems. These factors help the individuals to make decisions faster but do not follow any regulations therefore have a lot of decision errors associated with the judgement conducted by the individuals. The rational behaviour relates to the decision making process based on the choices. These selections or choices are proved to be most beneficial for the individual though they do not always prove to be beneficial from monetary aspect. Simon’s research chiefly focus on the utility factor which can be emotional or other kind that assist people in their decisionmakingprocess. Simon has built his theories on these utility factors and described them in explaining common biases leading to judgmental error.

Availability Heuristic has been a mentalshortcut which depends on immediate instances coming in the mind of the people while they evaluate some particular topics, concepts, methods as well as decision. In this context, the research states that the Availability Heuristic is heavily weighed by the people (Beach & Lipshitz, 2017). For them, if something can be easily recalled, that it must be more important than the other alternative solutions because other solutions were not recalled at the time of necessity. It seems to the easiest way to form judgment for complex problems. These are basicallydone through percentage basis and probability basis. Due to this reason, these are not always accurate and lead to error in judgement. Therefore, it can be said that this kind of decision-making process is manipulative as people tend to use the readily available facts to found their beliefs hence completely biased. This concept illustrates that external manipulations anticipated to escalate the subjective involvement of simplicity of remembrance are proved to affect the extent of recall (Shepherd, Williams & Patzelt, 2015). In addition to this, these factors make the decision making process difficult to regulate the obtained approximations of likelihood or frequency. These are typicality based on the phenomenal experiences of people or on the biased samples of evoked information.

The Concept of Heuristics and Biases

The participants while making decision excessivelyrely on the various heuristics for aptitude and speed. Representative heuristic (RH) is important as it is very economical. At the time of decision making, there may be one of the two things identifiable in that case people definitely select the recognisable or known one. Here they utilize as well as reacha decision with the slightest amounts of information which they possess about the recognisable one. The research reveals that the recognized memory is perceptive, reliable and proved to be more accurate than the unknown one because even a smaller extent of recognition effects in more correct decisions (Montresor et al., 2015). In such cases, even a smaller amount of biasness can be present in judgement. Some people useadditional information simultaneously withusing their Representative Heuristics because they cannot rely only on the recognisable factors alone while making decision.

According to Harrison, Mason and Smith (2015), Simon’s theorydefines Bounded rationality to create a way between the pre-established ends with the paths to reach the decided ways. It is explained as an assumption which points out the limits to the reasoning powers of the agents yet looks at the concept of judiciousness within the existing constraints (Toplak, West & Stanovich, 2017). However, these have specifications in terms of value therefore, these are beyond the extent of science. The relation drawnby the factors of bounded reality between pre-established and desired goals, completely depends on theevaluation of the decision. This concept requires to point out all possible options, predicting of consequences followed by these possible options and finally measuring or evaluating all sets of options with consequences. From all these sets of alternative options including their consequences, one is selects in the decision making procedure.

This concept has proved to be vital for any organisation, which requires proper acknowledgement of all the possible options. It also needs contemplation about the outcomes of the all alternative options and the valuation and measurement of the outcome of the consequences of each of the options but in doing so it often makes biased decisions (Elbanna, Kapoutsis & Mellahi, 2017). People often tend to make approximations which leads to fall towards the anchor parts whereas the real values tend to be far away from the primarily planted anchors. Through bounded rationality, it can overcome natural bias and ascribe to perfectly rational decisions.

Conclusion

Therefore, it can be concluded that the concept of rational behaviour gets biased by the human skills as well as limited knowledge.  To achieve the essentialobjectives and decided goals, these conceptsby Simon are vital to be discussed. The notion of rational behaviour as associated biases described under the light of heuristics namely availability, representativeness and bounded awareness. These have been considered with the limitations of influences that are commonly external to human beings. The essay highlights these various concepts in the light of arguments from different scholars who have significant contributions to this domain. In addition, the essay presents a detailed discourse on the statement made by Herbert Simon on the principle of bounded rationality. He made a significant contribution to the world of decision-making by proposing this concept. The essay tries to establish a connection between heuristics and biases in decision-making by explaining Simon’s quote. A systematic approach has been maintained in the essay to explain the quote and the concepts related to it.

Arguments from Scholars

The research conducted by Herbert Simon to delve into human cognition to dig out the possible reasons for biases in decision-making yielded fruitful results. However, it did not influence the community at large. He rejected the perfect rationality outright and invented a new principle of bounded rationality. His approach further accentuated the confines of the cognitive system, the transformation of practices due to proficiency, and the direct experimental study of cognitive processes included in decision-making (Matters, 2018). The report shall analyze the effectiveness of his principles and concepts by presenting scenarios of decision-making from the real world. Further, the report will examine the relevancy of Simon’s concepts of rationality by applying these to the given scenarios. In addition, it will analyze the methods used to recognize bias, the strategies to overcome these and improved decision-making in the future. The two scenarios chosen for the analysis include Volkswagen’s disastrous decision to rig emission test and Motorola’s negligence to trace market development.

Launching a new product in the market could be a possible scenario where decision-making is crucial. It is vital for any company to carry out proper research and survey before launching a new product. The project manager’s role here becomes extremely important as he or she is the individual who has the responsibility to collect relevant information (York & Danes, 2014). The manager has to take several critical decisions in order to ensure successful launch of the product. The launching of a new product involves complex processes beginning with marketing strategies. Development of a new product or technology involves decisions that are extremely unpredictable and demand ample strategic intercessions and productions (Sok & O'Cass, 2015).

Volkswagen, one of the largest car-selling companies in the world, decided to launch new cars providing low carbon emitting vehicles in 2015 for the American market Ferrell et al., (2016). The decision was made by the higher management without taking due consent or advice from the other team members. With a view to take over the US automobile market, the VW Company overlooked serious ethical issues. In 2015, it was found that the cars launched in the American market failed in emissions test. Reportedly, the automobile company illicitly installed a device that evaded emissions test required to meet the EPA standards. This massive breach of ethics cost the automotive giant heavily as it had to see the back of its former CEO Martin Winterkorn who was forced to resign, following the scandal (Reuters.com, 2018). The company was accused of following a culture of silence where the subordinates kept mum on the issue and allowed the top officials to make irrational decisions that led to the company’s inevitable downfall. Volkswagen rationalized its decision to rig emissions test by pointing out the extremely competitive market and the strategies to survive in it. The concept of bounded rationality helps explain this bias in decision-making by the VW officials. The company officials tried to rationalize their wrong decision by putting the blame on external factors like market competition and strategy for survival (Fortune.com, 2018).

Implications of Bounded Rationality in Organizational Management

Another scenario that may explain bias in decision-making in the real world is that of Motorola, the cell phone manufacturing company. The company was high on profits with over 22% market share during the 2006-2007 periods (Albrecht, 2015). However, it failed to recognize the ongoing developments in the cell phone market and lagged behind in launching new brand of smart phones. By 2010, brands like Apple had already taken over the market leaving Motorola with no choice but sell its old phones at a low price. The decision to delay the launch resulted from the inability of the management team at Motorola to use information correctly.

Herbert Simon proposed the concept of ‘satisficing’, which is formed by combining the words ‘satisfy’ and ‘suffice’ to explain bias in decision-making. According to him, humans tend to look for options that are satisfactory enough to suffice their desire, without even trying to search through other viable options. In this way, they tend to make decisions that often yield unexpected and unwanted results. In technical terms, this concept refers to bounded awareness or bounded rationality. The concept is useful to explain the bias that occurred in the case of Volkswagen. The company had all the relevant information about the US market and its rules and regulations yet it decided to go ahead with the launch of low carbon emitting cars. The kind of bias that occurred in this decision-making scenario is anchoring bias. Montibeller and Winterfeldt (2015) define anchoring bias as fixation on initial information and inability to regulate for consequent information. Anchoring bias can be attributed to the concept of bounded rationality where individuals fail to notice valuable information. The case of Volkswagen can also be understood from the viewpoint of the availability concept. This explains that people take decisions based on the availability or ease of executing an idea (Taylor et al., 2017). Volkswagen targeted the US market, observing customer’s tendency to opt for vehicles that were affordable as well as environment friendly. They found it easier to lure the target market by claiming to produce cars with low carbon emissions. The decision to cheat emissions test by installing devices to evade EPA standards was a result of this availability heuristic.

In case of Motorola, the bias that affected the decision-making process is the framing bias. Phillips et al., (2016) argues that framing bias in decisions occurs when individuals or companies fail to analyze developments in the market and make escalating commitments. Motorola made commitments to introduce advanced smart phones to meet the demands of the changing market dynamics but it was too late. Here, the concept of representativeness can be used to explain the bias. Representativeness refers to the choice made by people based on the similarities of behaviors or objects (Bordalo, Gennaioli & Shleifer, 2017). However, they fail to realize that behaviors that represent something majorly do not always imply likelihood. The makers of Motorola mobile phones relied heavily on the customer behavior and thus paid the price.

Conclusion

Biases in decision-making occur frequently and none can evade or protect themselves from these biases. Aczel et al., (2015) present various methods to measure biases in decision-making. Precisely, the methods include individualized scores, constructing validity, motivation and comparability. In this case, the evaluation or measurement of bias is applied to two scenarios, one of Volkswagen and the other of Motorola. The Volkswagen case involved anchoring bias that prompted leaders to resort to unethical ways in order to attract profit. Individualized scores can be given to individuals at the company who were more susceptible to bias. Comparability refers to variations in vulnerability to bias in decision-making (Rezaei, 2015). The decision of employees at Volkswagen to stay silent on the issue despite knowing everything can be measured by this method. Decision-making biases at Motorola can be assessed by the method of constructing validity. People at Motorola suffered from framing bias that can be measured by analyzing their behavior of neglecting ongoing developments by being over dependent on instincts (Morewedge et al, 2015).

According to a report published in the Harvard Business Review, companies need to make five important steps to overcome bias. First is to comprehend the systematic errors that can occur while making decisions. Second, decide whether behavioral factors are the main causes of poor decisions. Third, identify the specific primary causes. Fourth, restructure the entire process to alleviate the biases and fifth, assess the solutions thoroughly (Hbr.org, 2018). Applying theses strategies can largely help organizations overcome biases while making decisions. Helfat and Peteraf (2015) are of the view that managers must possess the cognitive capacity to make decisions by sensing, seizing and reconfiguring the potential impact of change on organizations.

A comprehensive study and research on the methods and strategies of decision-making can greatly help individuals overcome biases in decision-making in the future. This would in turn assist managers and leaders to make improved decisions that involve thorough analysis of all the factors of the surrounding. It is however important to mention that decisions will be biased no matter how careful individuals are while making those. It is because individuals do not possess the capability to be perfectly rational.  It can be observed that the later decisions taken by the VW Company were the reflections of the outcomes of the previous decisions (Aurand et al., 2017). The culture of silence that was prevalent in the company and that nobody confessed about was brought to the fore by the new CEO, Matthias Mueller.

Conclusion

In view of the discussion above, it is imperative to state that Herbert Simon’s take on biases that affect decision-making process is concrete and can be applied to any situation. His rejection of perfect rationality was not accepted initially by many theorists, as they believed it to be unscientific. However, Simon’s bounded rationality principle did create ripples in the academic world concerning economics. The above report argues in favor of Simon’s concepts and principles while evaluating his statement on bounded rationality. In the report, focus has also been put on the three specific concepts namely availability, bounded awareness rationality and representativeness that explain bias in decision-making. Two real world scenarios – Volkswagen diesel scandal and Motorola’s product launch failure – have been discussed to explain biases. Methods to measure bias have also been mentioned in the report. In addition, the report highlights the strategies that may help individuals overcome bias in future.

References

Aczel, B., Bago, B., Szollosi, A., Foldes, A., & Lukacs, B. (2015). Measuring individual differences in decision biases: Methodological considerations. Frontiers in psychology, 6, 1770.

Albrecht, D. J. (2015). Product Standardization and Product Design Modularity: A Case Study of Motorola and the Mobile Handset Market. Browser Download This Paper.

Aurand, T. W., Finley, W., Krishnan, V., Sullivan, U. Y., Bowen, J., Rackauskas, M., ... & Willkomm, J. (2017). The VW Diesel Scandal: Engaging Students via Case Research, Analysis, Writing, and Presentation of Findings. Journal of Higher Education Theory and Practice, 17(7), 10-21.

Beach, L. R., & Lipshitz, R. (2017). Why classical decision theory is an inappropriate standard for evaluating and aiding most human decision making. Decision Making in Aviation, 85.

Bordalo, P., Gennaioli, N., & Shleifer, A. (2017). Diagnostic expectations and credit cycles. The Journal of Finance.

Elbanna, S., Kapoutsis, I., & Mellahi, K. (2017). Creativity and propitiousness in strategic decision making: The role of positive politics and macro-economic uncertainty. Management Decision, 55(10), 2218-2236.

Ferrell, A., Ondracek, J., Saeed, M., & Bertsch, A. (2016). Failed Decision-making at Volkswagen. In Annual Eurasian Business Research Conference. Manila, Philippines.

Foss, N. J., & Weber, L. (2016). Moving opportunism to the back seat: Bounded rationality, costly conflict, and hierarchical forms. Academy of Management Review, 41(1), 61-79.

Harrison, R. T., Mason, C., & Smith, D. (2015). Heuristics, learning and the business angel investment decision-making process. Entrepreneurship & Regional Development, 27(9-10), 527-554.

Hbr.org. (2018). Leaders as Decision Architects. Harvard Business Review. Retrieved 5 February 2018, from https://hbr.org/2015/05/leaders-as-decision-architects

Helfat, C. E., & Peteraf, M. A. (2015). Managerial cognitive capabilities and the microfoundations of dynamic capabilities. Strategic Management Journal, 36(6), 831-850.

Maine, E., Soh, P. H., & Dos Santos, N. (2015). The role of entrepreneurial decision-making in opportunity creation and recognition. Technovation, 39, 53-72.

Maitland, E., & Sammartino, A. (2015). Decision making and uncertainty: The role of heuristics and experience in assessing a politically hazardous environment. Strategic Management Journal, 36(10), 1554-1578.

Matters, W. H. S. (2018). Algorithmic Social Sciences Research Unit.

Montibeller, G., & Winterfeldt, D. (2015). Cognitive and motivational biases in decision and risk analysis. Risk Analysis, 35(7), 1230-1251.

Montresor, A., Addiss, D., Albonico, M., Ali, S. M., Ault, S. K., Gabrielli, A. F., ... & Levecke, B. (2015). Methodological bias can lead the Cochrane Collaboration to irrelevance in public health decision-making. PLoS neglected tropical diseases, 9(10), e0004165.

Morewedge, C. K., Yoon, H., Scopelliti, I., Symborski, C. W., Korris, J. H., & Kassam, K. S. (2015). Debiasing decisions: Improved decision making with a single training intervention. Policy Insights from the Behavioral and Brain Sciences, 2(1), 129-140.

Phillips, W. J., Fletcher, J. M., Marks, A. D., & Hine, D. W. (2016). Thinking styles and decision making: A meta-analysis. Psychological bulletin, 142(3), 260.

Reuters.com. (2018). Timeline: Volkswagen's long road to a U.S. Dieselgate settlement. U.S.. Retrieved 4 February 2018, from https://www.reuters.com/article/us-volkswagen-emissions-timeline/timeline-volkswagens-long-road-to-a-u-s-dieselgate-settlement-idUSKBN14V100

Rezaei, J. (2015). Best-worst multi-criteria decision-making method. Omega, 53, 49-57.

Shepherd, D. A., Williams, T. A., & Patzelt, H. (2015). Thinking about entrepreneurial decision making: Review and research agenda. Journal of management, 41(1), 11-46.

Simon, H. A. (1957). Models of man; social and rational.

Sok, P., & O'Cass, A. (2015). Examining the new product innovation–performance relationship: Optimizing the role of individual-level creativity and attention-to-detail. Industrial Marketing Management, 47, 156-165.

Taylor, J. P., Ashworth, S. L. J., Petrovich, S., & Young, C. A. (2017). Inducing an availability heuristic on the Wason selection task overrides the matching bias. Journal of Cognitive Psychology, 29(4), 508-519.

Toplak, M. E., West, R. F., & Stanovich, K. E. (2017). Real?World Correlates of Performance on Heuristics and Biases Tasks in a Community Sample. Journal of Behavioral Decision Making, 30(2), 541-554.

York, J. L., & Danes, J. E. (2014). Customer development, innovation, and decision-making biases in the lean startup. Journal of Small Business Strategy, 24(2), 21.