Herbert Simon’s quote
Analyze the quote by Herbert Simon from his work titled Models of Man: Social and Rational.
In business, managers are responsible for making decisions on an array of issues on a daily basis. The decisions made by humans in general are influenced by certain factors either directly or indirectly (Wood, Cogin & Beckmann, 2009). Most factors result from the biases that affect the decision-making ability of humans. First, it is important to understand the process of decision-making. Ahmed et al. (2014) defined decision making as the process that involves the choice of a course of action between two or more than two probable alternatives to find a solution for a given problem.
In this essay, the three biases as discussed by Herbert Simon in his book Models of Man, Social and Rational shall be discussed. The quote by Simon will be explained in the essay to explore and understand the three concepts that explain bias in decision-making. In addition, the essay will also focus on Simon’s ideas about rational human choices and external forces’ influence 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 objective rational behavior in the real world – or even for a reasonable approximation to such objective rationality” (Simon, 1957 p. 198).
While reading the quote, one can comprehend that here Simon is talking about the capability of human mind to resolve complex problems. According to Simon, the problems encountered by the humans are much bigger than their mind’s capability to solve those. However, the author states that the solutions that are beyond the capability of the human mind are important for defining the rational behavior. In addition, the solutions provide a solid ground from which humans could even acquire the minimum ability to make rational decisions. Simon has explained the quote above as the “principle of bounded rationality” (Simon, 1957). The author elaborates that individuals restrict their ability of decision-making by having access to limited information. It is but also important to add that the restrictions are not limited to inaccessibility to information only, these cross the boundaries of time and cognition as well. Further, Simon claims that if the bounded rationality principle turns out to be completely true then the aim of classical economic theory would be hard to achieve. The classical economic objective is to foresee the rationality of behavior demonstrated by humans without the need for researching his psyche.
Heuristics and Rationality
The author then describes the consequences of the principle of bounded rationality. He states that the first consequence would be humans trying to form a reality where simpler versions of problems are there they can easily sustain. However, the version created is not even close to the real world version and this leads to the creation of unfavorable situations. Simon further mentions that in order to understand the rational behavior of humans, it is important to comprehend the reasons that caused the creation of the simplified version. This would help in decoding the psychological qualities of the humans that relate to their intelligence, feeling and logical thinking. Johns, and Gratton (2013) states that the majority of organizations in today’s world rely on the formal modeling work that is inspired from the principle of bounded rationality proposed by Simon. Roehrich, Grosvold and Hoejmose (2014) however counter this argument by stating that the modern day economics of transaction does not allow the principle of bounded rationality in the organizations. The principle is replaced by opportunism.
As the second consequence, bounded rationality principle is ought to introduce restrictions to the rationality of humans else, administrative theory would have no existence. It needs mentioning that administrative theory relies on the limitations of human rationality that are dynamic and depend on the organizational setup where individuals take bulk of the decisions.
The essay aims at explaining the decision-making function on the rationality of human mind used to create and solve the intricate problems in practical situations. To explain the notion of rationality proposed by Simon, it is important to examine or scrutinize heuristics that define rationality. The heuristics are categorized into four types: availability, confirmation, bounded rationality and representativeness. It is imperative to state that organizational theory has no existence without the presence of a rationality theory. Entrepreneur and consumer are the two species on which the rationality theory is based.
Heuristics refer to the psychological decisions made by managers to achieve possible solution to the most complex of problems. The reason that these factors although helpful in fast decision-making, lead to numerous errors is its neglect of regulations that need to be followed. Rational behavior intrinsically means making decisions that are based on choices. These choices although benefit individuals in other aspects but are not always beneficial from the financial perspective. Emotional and other such kind that help individuals make important decisions are termed as utility factors by Simon. His research focuses primarily on these factors. Simon explains biases in decision-making with the use of these utility factors.
Availability Heuristics
In decision-making, Availability heuristics refers to the mental shortcut that depends on instances that appear instantly on human mind while doing the analysis prior to making decisions. Shaban (2015) points out that in decision-making context, people give much weight to Availability heuristics because of its fast nature. It provides the easiest means to find solutions to complex problems. However, it must be noted that the concept is highly biased because of its manipulative nature as it is based mostly on percentages and probabilities. Representative heuristics (RH) on the other hand, is very essential in terms of economic viability. RH describes that in decision-making scenarios where people have the choice between two things and they choose the one, which is most recognizable. In such scenarios, individuals utilize and make a decision with least information about the recognizable choice they made. As studied by Puranam et al. (2015), the recognized memory chosen by the individual during decision-making is perceptive, reliable and more accurate than the unknown memory as even the slightest availability of information about the recognized memory results in more error-free decisions.
The next concept that one can observe from the quote by Simon that explains decision-making biases is the concept of bounded awareness. Bounded awareness is a concept that arose from the principle of bounded rationality introduced by Simon. In decision-making process, bounded awareness helps explain the ethical and unethical conduct of managers making decisions. As per this concept, human rationality in making decisions is largely bounded or restricted by situations and the computational powers of humans. Bounded awareness brings forth the common errors human make while taking decisions on frequent basis. According to Bazerman and Sezer (2016), “bounded rationality most commonly manifests in systematic and predictable mistakes, which humans make on a regular basis”. The authors further argue that despite the fact that the concept had the power of decision-bias perspective, researchers paid little attention to the misuse and faulty integration of information that formed “part of their cognitive set”. Bounded awareness results in the neglect of important things by people that help in effective decision-making because these things do not align the things they consider as important.
The last but very important concept explaining bias in decision-making is framing and preference reversal. While making choices between two options with one involving risk, decision-makers display certain framing effects. Framing refers to the reaction of individuals to a specific choice in varying ways depending mostly on its chances of loss and gain. In case of decision-making, this framing effect is largely visible as Lakshminarayanan, Chen and Santos (2011) observe, most people take risks when there is a prospect of loss and averse it when there is gain. Most researchers are of the view that individuals demonstrate risk-preference reversals when the results are framed differently. As Simon stated, humans rationalize their decision by “simplifying the choice problem to bring it within the powers of human computation”. Known as the prospect theory, this preference reversal or the framing effect is an outcome of “contradictory attitudes about risks involving gains and losses” (Tombu & Mandel, 2015).
Representative Heuristics
These concepts have proved significant for organizations that require every possible choice to be acknowledged properly.
It is thus concluded that biases in decision-making are influenced by the concepts mentioned above. Decision-making is a process that involves the consideration of every possible option available to managers. However, it requires the individual to choose these options rationally. Simon states that humans are limited by the principle of bounded rationality where their capacity to solve complex problems is much less than the complexity of the problems. The essay explored the ability of the human mind to solve problems while explaining Simon’s quote. It was found that the bounded rationality principle resulted in several consequences. Further, the essay also explored three concepts associated with bias in decision-making. These included heuristics, bounded awareness and framing and preference reversals. In addition, the essay explained the influence of these concepts in decision-making by managers in organizations. Further readings on the other concepts explaining bias with the help of Simon’s theories is suggested.
Introduction
Herbert Simon conducted the research way back in the 1950s to understand the human cognition in order to assess the reasons for bias in decision-making. His research findings are still used as the basic ground from which modern managers and researchers comprehend decision-making process. Nonetheless, the bounded rationality principle proposed by Simon failed to influence the larger management community because he rejected the perfect rationality of man. In the contemporary organizational setting, biases are commonly visible in decision-making (Huppatz, 2015).
The report tries to highlight the applicability of the three concepts mentioned in Part 1 in the real world decision-making scenario involving bias. The report will include one scenario from the real world to explain the bias in decision-making. Bias recognition, methods to overcome these and strategies will also be included in the report.
The scenario
In 2015, one of the largest automakers in the world, Volkswagen, shocked the business world when it was revealed that the company was involved in carbon emission scandals. The company was asked to recall more than 480,000 cars from the United States after the environmental protection agency (EPA) caught the company arranging software to cheat emissions test (Theguardian.com, 2018). The decision to cheat emissions test was taken to launch the new diesel-run cars in the US market before the deadline. This meant that the management had to pass the emissions test before it could sell the cars as billions of dollars were at stake. After the revelation, members within the company began blaming each other for the decision. Volkswagen’s American division CEO, Michael Horn claimed that it was not an executive decision and that some rogue software engineers had put it in place (Theverge.com, 2018). The engineers and other workers at VW criticized Horn’s remarks stating that they were pressurized by the higher authorities to stay quiet on this issue.
Bounded Awareness
Recognizing the bias
In Simon’s work titled Models of Man: Social and Rational, he proposed the term ‘satisficing’ to describe decision-making bias. The term is a combination of two words ‘satisfy’ and ‘suffice’ which means that individuals make decisions by choosing a satisfactory option to suffice their needs without attempting to search for other feasible options. Doing this, they involve in such decision-making processes that brings out negative results. In case of VW, the higher officials made a ‘satisficing’ decision to place defeat devices in the cars to cheat emissions scandal in order to earn profit at a short time.
The concept of Availability heuristics is also at play in this scenario. As already mentioned in the earlier section, Availability heuristics is the psychological shortcut that individuals take to make a decision. Under this heuristic, individuals show inclination towards weighing their judgments in terms of latest information even if it is against ethics (Baker & Hernandez, 2017). The executives at VW, who made the decision to cheat emissions test followed this heuristic as they chose to go with the latest information at hand that was the approaching of emissions test deadline. They chose to cheat emissions test so that they could sell the cars on time and earn profit.
Further, the executives at VW demonstrated the concept of bounded awareness while making the decision as they focused on limited data only. Bounded awareness, as already stated, means that people make use of information that is readily available while ignoring other important factors that might need to be searched. When making the decision to fit sophisticated software devices in the diesel cars, VW engineers did not focus on the consequences that took place after the scandal hit the company, they just obliged the orders of their senior executives (Ferrell et al., 2016).
The concept of framing and preference reversals is largely evident in this scenario. The prospect theory that forms this concept state that individuals frame their preferences or choice based on the gain or loss the decision is likely to cause. In 2009, when VW made the decision to manufacture new diesel cars for the U.S. market, they had promised that the cars would have engines with top-level safety quality with clean burning engine (Rhodes, 2016). However, the deadline for emissions testing approached sooner than they had expected and thus forged the software to pass the test. Here, the preference reversal is evident from the reversal of decision by the engineers and managers to launch the cars without building clean engines. They chose to take the risk for attaining gain.
Framing and Preference Reversal
Methods that measure biases
Biases are something that cannot be avoided by the decision-makers no matter how hard they try as is evident from the above real world scenario. However, there are certain methods to measure these biases and analyze them. Aczel et al. (2015) presents several methods by which one can measure biases that are evident in decision-making. The methods include:
- Individualized scores – it is used to measure the bias at the individual level in the company
- Validity construction – it takes place to measure the biases that occur while answering to certain decision-making questions
- Motivation – measuring the motivation employees receive at the workplace also heps in measuring the bias just like it did in case of VW
- Comparability – the variations shown by decision-makers towards vulnerability in decision-making
In Volkswagen’s case, the above methods are useful in measuring the biases that took place when the emissions cheating decision was made.
Strategies to overcome bias
As already mentioned, biases are bound to occur while making any decision especially in big companies. However, certain strategies could be followed in order to reduce the impact of these biases or make these biases positive. Forbes Magazine has mentioned several strategies to overcome these biases (Forbes.com, 2018).
- Anchoring bias – Anchoring bias occurs when managers are eager to jump to conclusions without considering every aspect. It involves making decisions at the first impression. To overcome jumping to conclusions while making decision, managers should first slow down the process, reflect upon the scenarios and options available
- Overconfidence bias – As the name suggests, this bias occurs when managers are too confident about their decisions and do not attempt to take others’ views. At Volkswagen, the higher body was too confident and did not take any advice from its engineers. It could be overcome by considering the information available at hand thoroughly.
- Gambler’s Fallacy –A type of bias that stresses on the success of past events and its influence on the success of future events. Executives at VW had been involved in numerous scandals prior to it and were successful. This made them make the decision in the present and that led to their downfall. Overcoming this bias requires deeper observance of the information or data available at hand
A thorough study on the different types of biases and reasons for the occurrence of these biases might help managers improve their decision-making outcomes in the future.
Conclusion
In the end, it can be stated that the case of Volkswagen is not the only one where the biases in decision-making have resulted in such detrimental results. Many such instances in the real world are there. The report provided a real world case of Volkswagen in order to understand Simon’s theories more elaborately. The report chose Volkswagen as the company that has been involved in biased decision-making because it is quite recent. The various biases and strategies to overcome those have been mentioned in the report as well. The report concluded with the suggestion that the company should give a deep thought into these strategies prior to making any future decision. In addition, the list of decision-making biases and concepts that explain these are in exhaustive and future studies on these are recommended
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.
Ahmed, A., Bwisa, H., Otieno, R., & Karanja, K. (2014). Strategic decision making: Process, models, and theories. Business Management and Strategy, 5(1), 78.
Baker, S., & Hernandez, M. (2017). Communicating with stakeholders when bad news is uncertain. International Journal of Public Leadership, 13(2), 85-97.
Bazerman, M. H., & Sezer, O. (2016). Bounded awareness: Implications for ethical decision making. Organizational Behavior and Human Decision Processes, 136, 95-105.
Ferrell, A., Ondracek, J., Saeed, M., & Bertsch, A. (2016). Failed Decision-making at Volkswagen. In Annual Eurasian Business Research Conference. Manila, Philippines.
Forbes.com. (2018). Retrieved from https://www.forbes.com/sites/theyec/2016/12/01/how-to-use-psychology-to-overcome-your-biases/#77d0d2506d9f
Huppatz, D. J. (2015). Revisiting Herbert Simon’s “science of design”. Design Issues, 31(2), 29-40.
Johns, T., & Gratton, L. (2013). The third wave of virtual work. Harvard Business Review, 91(1), 66-73.
Roehrich, J., Grosvold, J., & U. Hoejmose, S. (2014). Reputational risks and sustainable supply chain management: Decision making under bounded rationality. International Journal of Operations & Production Management, 34(5), 695-719.
Lakshminarayanan, V. R., Chen, M. K., & Santos, L. R. (2011). The evolution of decision-making under risk: framing effects in monkey risk preferences. Journal of Experimental Social Psychology, 47(3), 689-693.
Puranam, P., Stieglitz, N., Osman, M., & Pillutla, M. M. (2015). Modelling bounded rationality in organizations: Progress and prospects. The Academy of Management Annals, 9(1), 337-392.
Rhodes, C. (2016). Democratic business ethics: Volkswagen’s emissions scandal and the disruption of corporate sovereignty. Organization Studies, 37(10), 1501-1518.
Shaban, R. (2015). Theories of clinical judgment and decision-making: a review of the theoretical literature. Australasian Journal of Paramedicine, 3(1).
Simon, H. A. (1957). Models of man; social and rational.
Theguardian.com. (2018). Volkswagen emissions scandal – timeline. Retrieved from https://www.theguardian.com/business/2015/dec/10/volkswagen-emissions-scandal-timeline-events
Theverge.com. (2018). Volkswagen America’s CEO blames software engineers for emissions cheating scandal. Retrieved from https://www.theverge.com/2015/10/8/9481651/volkswagen-congressional-hearing-diesel-scandal-fault
Tombu, M., & Mandel, D. R. (2015). When does framing influence preferences, risk perceptions, and risk attitudes? The explicated valence account. Journal of Behavioral Decision Making, 28(5), 464-476.
Wood, R., Cogin, J., & Beckmann, J. (2009). Managerial problem solving: Frameworks, tools, techniques. McGraw-Hill Australia.
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