Rationality and Decision Making Process
Discuss About The International Review Of Business And Finance.
This essay is a brief introduction of different applications of decision making process implemented by the human minds in order to solve complex problems of the real life world. This essay describes the famous quote of Herbert Simon that stats that the human minds is too small to solve real world complex problems at its own. In his research Simon explained the concept of rationality in terms of heuristics. Further report explains three different concepts of rationality that evaluate the bias of decisions making process. It is stated that any individual theory of an organization cannot survive without any rations decision taken by the organization authorities or managers of the company. At the same time it is equally true that the theory of rationality cannot exist without an organization theory. Therefore, both are interdependent. The term heuristic refers to the decisions taken mentally by the human beings living in the society (Arthur Jr, Bell, Villado, & Doverspike, 2006).
Main motive of the quote stated above is to explain the capacity human mind is little to solve the complex problems without any help. Rational behaviour required for the real world demands for the solution of such complex problems. The above statement about the interdependency of rational behaviour and organization theory has been proven contrary by Robinson Crusoe. The rational behaviour aspect explains that hoe people make their decisions without evaluating the result of their decisions and the environment in which their decisions would fail or succeed (Sarin, 2017). These decisions taken this way are fast and independent of the factors that might influence the decision making process. On the other hand the rational behaviour of people refers to a type of decision making process that depends on so many factors influencing the process. These diversified aspects motivated or encouraged human beings to make decision which are beneficial to them in terms of monetary as well as non-monetary aspects. These benefits may be obtained in terms of monetary aspects or through the fulfilment of human being’s emotional needs. Whereas, Simons on the other hand constantly attempted to create a theory which involve both human beings and several other characteristics of heuristics (De Martino, Kumaran, Seymour, & Dolan, 2006).
Heuristics can be defined as the rules of thumb making decisions easier especially in case of complex decisions and making decisions in an environment of high uncertainty helping in the reduction of complexity in assessing and predicting the values of judgement (Chang, Wu, & Lin, 2009). There heuristics are such as Representativeness, Availability Bias, and Anchoring. In case of time limitations these heuristics are useful to make quick decisions but sometimes these heuristics may lead the decision to biases (Sarin, 2017). Representativeness heuristic refers to the similarity of the event with its parent population or degree of resemblance of an event with is population. This refers to the tendency of making decisions based on stereotype mentality (Elbanna, 2006). For example, if two brothers are showing their love for each other then they are representing their parents’ or grandparents’ upbringing for their children. In the similar way if any decision resembles with any of its parent population they this decision is said to be biased on representativeness heuristic. There are four different variants of representativeness heuristic that are sample size ignorance, base rate ignorance, conjunction fallacy and innumeracy. Sample size ignorance refers to the decision making process which leads to the ignorance of accounting the sample. In this variant people make decisions from only few samples (Gigerenzer, & Gaissmaier, 2011). Base rate ignorance heuristic involves the dealing of individual’s characteristics and ignores the fact that how common are these categories in the given situation. Another variant, conjunction fallacy refers to the ignorance of the basics of decision making that is fundamental law of probability. While making decisions sometimes, people rely too much on representativeness that they forget to count the influence of probability. Innumeracy defines that generally people are very bad with numbers which makes then more attentive towards bigger number rather than smaller ones. This results in giving more weightage to the bigger numbers.
Heuristics and Decision Making Process
Availability bias heuristic refers to the tendency of people to judge the repetition of something based on the availability. This heuristic bias works on the basis of two major questions which are i) How frequent the incident or situation is? ii) Have they seen already something similar to the requirement? (Salas, Rosen, & DiazGranados, 2010). This particular heuristic bias states that events which can be recalled easily have higher probability of occurrence. For example, in stock trading market this bias is manifested as the preference is given to the investigation of smaller and familiar companies to obtain the information easily instead of following the fundamental principle like diversification in portfolio management for its optimization (Elwyn, et al, 2012).
Another heuristic bias, Anchoring is defined as a phenomenon used in situation where initial values are required and decision biased towards these initial values because different initial values will lead to different results. This makes the variant also known as bounded awareness. There are two major explanations to define Anchoring. First one is based on the degree of uncertainty to which the true value is related. In this explanation decision makes adjusts his or her answer away from the obtained anchoring value to make take it into plausible range. Second one is based on cognitive laziness. This states that people are cognitively lazy to move away from anchoring value as this will require extra efforts. This particular explanation of anchoring is best suitable for irrelevant anchor (Ho, Xu, & Dey, 2010)..
This discussion concludes that in order to manage the procedural business aspects, people have to evaluate their decision making skills and rationality to make decisions for computation alternatives. This evaluation is essential to select best among the computation alternatives and to produce satisfactory results to achieve their desired goals. The extant of these evaluations to compute the information for both behavioural and economic theories is explained by the procedural rationality. Irrespective to the fact that these heuristics may lead to deviation from the ideal decision, some psychologist are showing their interest in decisions makers who use these heuristics as a tool of decision making process.
In this report is brief information about a real world scenario of decision making. In this scenario company had made a decision based on the three heuristics mentioned in the above essay. Decision making scenario, application of the above mentioned heuristics and four answers to the questions given in the case are explained in this report. Report also explains the concept of low capability of human minds in making decisions for complex situations. This real world scenario explains the decision making process to be biased with the influence of different heuristics used in making such decisions. In this report the real world scenario is analysed in the basis of three heuristics as Representativeness, Availability Bias, and Anchoring.
Real World Scenario
In the year 1952, The Boeing Company had implemented a decision to manufacture domestic aircrafts for the first time. The Boeing is an American organization that design, manufacture and sell Aircrafts. Today this is the most dominating company in aviation industry. This reputation of the company is the result of many crucial decisions made by the company in the past. These decisions made by the company took lot of courage of its leaders in making such decisions, their hard work and equal contribution of employees in proving these decisions right to the world. In the year 1952, following the World War II, The Boeing was the only company manufacturing aircrafts and at the same time America was restructuring its civilian production of the aviation sector. The best of their time, B-52 bomber and Companion tanker were the evidences of manufacturing best products by the company. These evidences had proven that the company uses best of the best products in order to improve their products with the help of the best technology available at the time. At that time these military jets were not commercially feasible for air-transportation because the conversion of these military jets in commercial airlines required a huge investment which could easily put the company at its bottom line (Paur, 2010). This risk made only safe choice of being in the same industry and manufacture defence aircrafts nations were demanding more at that time. But that time president of the company, William McPherson had made a prototypical decision. This decision was to invest in the manufacturing of civil aviation products instead of being the manufacturer of single product that is defence aircrafts. At that time company was making a good profit from their previous business but company president made such decision. With this decision company president planned to switch their business from the existing product to a completely new product. This investment was too risky as it was the revolutionary decision in the aviation industry introducing commercial aviation products to the world.
President of the company believed that the decision will be beneficial for the company in terms of making business and expanding its product range in the industry. Although he was pretty convinced that the decision will definitely enhance the growth rate business but at the same time he was risking the company future by making this huge investment in a new project. This decision had zero tolerance of wrong decision while executing the decision.
Application of Heuristics
This decision made the company directors to think several times. After convincing most of the members of board company made an investment of $16 million in the same year to manufacture their first product Boeing 707. This was the first ever transatlantic jetliner to the US and was about to change the history of manufacturing company. With the time passing world has shown its interest in using Boeing 707 as major transporting vehicle. Nations increases use of Boeing 707. In a few decades this product became an iconic culture of transportation. Till date, this decision of manufacturing Boeing 707 is the greatest achievement of the company. This achievement of the company was praised by the company president along with other multinational organizations. In the year 2014, BBC reported that according to the media reports company had invested $135 million which was more than the total worth of the company at that time (Glancey, 2014). This clearly states that the decision was the biggest of all time as no company has taken a decision of investing more than its total worth in a single project till date.
- As discussed in the above essay this heuristic variant refers to the presentation of parent population or product. Although Company had initiated the work on this product as the decision was having a strong context of representativeness of its previous products in the market, the decision was completely biased it had a low probability.
- While talking about the bias of decision company should not make decision based on its own predictions (Puncheva, 2008).
- This aspect requires assessing the statistics for the decision to be taken by the company. This assessment is defined as the looking for the profit margin of business while taking decisions ().
- There is no certain method to measure this type of bias.
- This would influence the decision for a short term but would restrict the company to achieve what it achieved with the decision.
- This heuristic bias the decision to satisfy the human mind rather than optimizing the real situation. People with such heuristic bias make decision only for their mind satisfaction not for the company growth requirements (Naqvi, Shiv, & Bechara, 2006).
- The decision of the company was biased with this aspect as the company had enough resources and efficiency to make profit easily but it choose to enter in a completely new segment of the industry.
Conclusion
Analysis of the above report concludes that company decision was fair enough according to the decision making theory but it was completely biases with the heuristics of the decision making process. report states that the company has decided to against the waves by investing such huge amount in a single project that too on a project that was contradicted by the decision making theories. This report relates the decision taken by the president with different heuristics of the decision making process.
References
Arthur Jr, W., Bell, S. T., Villado, A. J. & Doverspike, D. (2006). The use of person-organization fit in employment decision making: an assessment of its criterion-related validity. Journal of applied psychology, 91(4), 786.
Chang, C. W., Wu, C. R. & Lin, H. L. (2009). Applying fuzzy hierarchy multiple attributes to construct an expert decision making process. Expert Systems with Applications, 36(4), 7363-7368.
De Martino, B., Kumaran, D., Seymour, B. & Dolan, R. J. (2006). Frames, biases, and rational decision-making in the human brain. Science, 313(5787), 684-687.
Elbanna, S. (2006). Strategic decision?making: Process perspectives. International Journal of Management Reviews, 8(1), 1-20.
Elwyn, G., Frosch, D., Thomson, R., Joseph-Williams, N., Lloyd, A., Kinnersley, P. & Edwards, A. (2012). Shared decision making: a model for clinical practice. Journal of general internal medicine, 27(10), 1361-1367.
Gigerenzer, G. & Gaissmaier, W. (2011). Heuristic decision making. Annual review of psychology, 62, 451-482.
Glancey, J. (2014). Boeing 707: The Aircraft that changed the Way we Fly. Retrieved from; https://www.bbc.com/culture/story/20141020-the-plane-that-changed-air-travel
Ho, W., Xu, X. & Dey, P. K. (2010). Multi-criteria decision making approaches for supplier evaluation and selection: A literature review. European Journal of operational research, 202(1), 16-24.
Naqvi, N., Shiv, B. & Bechara, A. (2006). The role of emotion in decision making: A cognitive neuroscience perspective. Current Directions in Psychological Science, 15(5), 260-264.
Paur, J. (2010). July 15, 1954: Boeing 707 makes first flight. Retrieved from https://www.wired.com/2010/07/0715boeing-707-test-flight/
Puncheva, P. (2008). The role of corporate reputation in the stakeholder decision-making process. Business & Society, 47(3), 272-290.
Salas, E., Rosen, M. A. & DiazGranados, D. (2010). Expertise-based intuition and decision making in organizations. Journal of management, 36(4), 941-973.
Sarin, A. B., (2017). An Understanding of Roel of Heuristic on Investment Decisions. International Review of Business and Finance, 9(1). pp. 57-61
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
