Behavioural Concept of Rational Choice (Biased Rationality)
Discuss About The Theoretical Context Of Institution Reform.
It has been observed that in the Models of Man by Simon (1957), the conception of “Bounded Rationality” was first dealt with, for the 1st time. Several year later the author also introduced a concept known as “Procedural rationality”. Although the conception of “Procedural rationality” was not described in detail in the first book “Models of Man”, the concept was implicitly present. The significance of this theory is not in the important concepts expressed through this theory, rather, by means of this theory, Simon puts forward some elements he conceptualises in high criticism of various aspects of “mainstream economics” something that never happened completely before later part of the 1950s prior to the materialisation of the verses like satisfice or bounded rationality or administrative man. Pertaining to psychology, Simon was leaned more on the electoral process more than the consequence itself and referred to this disposition as procedural rationality. In 1957, Simon’s chief motive was to shift the limelight towards the shortcomings of the conventional economic theory rather than stressing upon conceptualising a new model. Hence the basic focus of the analysis would be on the discussion of the negative expositions of the pre-existing theory that were done by Simon. The stepping stones of the evolution of his proposed theory were laid in his critical attitude towards the linguistic as well as conceptual tools (Simon, 1997). On one side there is the classical approach of Herbert Simon, whereby he utilised the instrumentality of rationalism and clinged on to a biased rationalistic approach. Simon also showed support towards the conception that in any organisation the primary objective is to maximise along the lines of efficiency, patronised by the neoclassical theory in terms of maximisation of profit or maximum cost of cost. However, on other side, Simon showed acceptance towards the fact that human action haven not always been rational and that rationality is itself delved into several limitations (Cristofaro, 2017). According to Joseph Mahoney, the most distinct and relevant ideas presented by Simon under this proposition is the difference between fact and value based decisions. Only decisions that are factual, might be falsified (Tong, 2017). Value based decisions can be evaluated on qualitative terms but never determined as right or wrong. In fact Simon’s definition of being “rational” is totally analogous to being “efficient” in another sense. Hence, it can easily be stated that according to Simon’s conception of Bounded rationality, organisational rationality and economic efficiency are stringently similar (Delannoi & Dowlen, 2016).
Game Theory and Economic Behaviour
Simon’s empirical means required a direction to rationality on the basis of falsifiable as well as countable conception of efficiency patronised by the means end schema. As an outcome, the instrumental perception of rationality is found rejecting any different value propositions owing to the dearth in scientific status. As an initial approach the concerned conception, Simon defines that rationality is being an attribute of behaviours. Then he spotted some limitations of this kind of classical rationalism, which became evident as an outcome of his empirical requirements. The form of substantive rationality that Simon uses in 1957, is actually an implied and subtle form of procedural rationality because of its scientific status being lofty. In his attempt to describe substantive rationalism as akin to global rationality, he somehow connects the term with the traits of classical as well as neo classical economics (Jones, 2017). Once after considering the limitations in rationality and after successful coinage of the conceptualisation of bounded rationality, in his later article in 1976, he brought out a new conception of procedural rationality in order to address the various concepts arising to the mingling of psychology during the performance of rational activity calling the alliance of the two as the results of appropriate deliberation.
Authors of various empirical content have given consent to Simon’s proposition that economic agents cannot perform with clinically rational perfection. However Simon have focused on analysing the process of the cognitive systems for linking the theory of bounded rationality to the process of decision making. According to (Lee, Keil & Wong (2018), in the domain of economics, the following of Bayes theorem by in making their probability judgements could be misleading. Hence decision analysis is of grave importance as a tool for improving the accuracy of the decisions making of individuals. It is also debatable how much people follow the Bayes theorem while making the probability judgements. According to the views of (Palmer et al. 2014), it is evident that people while dealing with actions and/or outcomes look up for irrelevant characteristics to the level that might influence decision making. An evidence can be provided. A bit of information can affect the choice of alternatives. This phenomenon particularly known as framing effect violates some major postulates of perfect rationality. In this regard, decision making under risk might also be evaluated. The perfect rationality concept that is considered as the ideal parameter pertains to the Expected Utility Theory. The assumptions of this theory postulates that the value assigned to understated state of wealth remains invariable with the primary condition of wealth of the decision maker. However, according to (Ralph & Monu (2015), decision makers always consider losses and/or gains they would get, alongside taking in to consideration their current state of wealth. The model patronises a value function which favours deviating risks in cases of gain and undertaking risks in case of losses.
The approach of people in dealing with numbers while making predictions as well as making supposition based on probability is dealt with, in this article by Simon. Biased rationality describes the deviations in behaviour just like bounded rationality. People cannot make correct choices by doing numerical predictions and manipulating probabilities. Hence they cope up with this the complex task of decision making by pertaining to the use of heuristics (Scott et al. 2015). At times the use of heuristics helps in making right choices. However in most of the times, critical as well as systemic errors are committed by people and their decisions become biased. Three primary heuristics have been identified, namely representativeness, anchoring as well as availability (Thompson, 2017). These heuristics define the pattern of probability or frequency people pertain to while making choices. The errors caused by following these are not randomised as accepted by theory of perfect rationalism, rather there is a subtle pattern followed in committing of these errors. Simon’s propositions are again justified in the concept of biased rationalism (Woodside, de Villiers & Marshall, 2016).
Qualitative models for game calculations (in games like poker, bridge and so on) based on mathematics seemed to be impossible initially. This is because the games required the players to make independent choices at every move, especially when each move was required to be made in congruence with the other moves made by other players. The game theory was ay first proposed by J Neumann, thereby making introduction to the conception of strategy making. In this context, the minimax theorem was utilised by him. According to the statement of the theorem, a strategy helps the player to earn maximum payoff, considering that all opponents in the game are aimed at minimising the payoff earned by that respective player.
This Game theory clearly drawn from mathematical logic is also capable of describing in mathematical terms, how the strategies that helps people to take decisions in games also helps ins other context of decision making. However in order to imply this theory in analytical decision making, two basic assumptions have to be kept in mind (Seaborn & Fels, 2015). First of all, people’s preferences remain affixed under all circumstances and secondly, people are knowledgeable of all the alternative options open to them. Thirdly, it is to be assumed that under any circumstance people would be efficient enough to calculate what would be of best interest to them and lastly it is a constant fact that men would always wish to maximise their gain or their interest. However, as per Takahashi (2015), there have been some complications in using the theory in the context of real scenarios. Herbert Simons in the Models of man have also revealed deliberate criticisms of the theory in influencing the real decision making process (Simon, 1972). Simon have proposed that the theory works actively and promptly in cases of relative negligence of the others involved in the decision making process and in cases where few chances of permutation and combination is possible. According to the Views of Simon (1957), the game theory is too much simplified and works in the case of simplified approximations only. Laboratory protocols of problem solving have to be supplemented by real field studies by professionals, for instance physician involved in making diagnosis, or chess grandmasters’ hypotheses. Investment decisions that requires an in depth analysis of the pros and cons of the market should also be able to implement the Game theory. However in such cases, where there are a lot of choices and further deviations possible, Game theory fails to successfully maximise the interest of the applicant. Simon have reflected on the impact of the use of the Game Theory in case of critical incidents of uncertainty, like a war (Stanovich, 2017). Life changing decisions in a war can influence the course of last events. Strategic decisions are supposed to be such that often have to work under sub optimal targets. However the Game Theory is all planned to fulfil the interest of the immediate move of the gamer in a situation that is based on assumed probability.
South-western Airlines had been founded in 1971 as a low fare air travel agency that would offer to its customers short haul low fare service. Like any other airline company, major cost drivers of the company are the resources like jet fuel (price) and high labour charge (wages). At present the organisation have flourished and owns more than 500 Boeing air-farers and operates in 66 countries (Cameron, 2017). In this context, the CEO of the organisation took the decision of enabling the facility of online ticket booking for the customers of South Western airlines. However, after making this decision, the CEO realised that they have contract with too many call centre agents. Now the main issue before the company is downsizing. Lack of information about the condition of the company, let the CEO to take the biased decision of setting up online ticket booking portals.
The Decision maker in this case had done calculations for maximising the value of his attempts to meet the organisational goals. There were however some cognitive constraints for the decision maker because of which his rationality has been bounded. Bounded rationality itself reflects the inability of individuals to follow the model of perfect rationality. However, perfect rationality has some major inherent weaknesses. One of those is that the decision maker needs to be aware of all the possible alternatives. However, pertaining to the real world scenario, in most of the cases (like this one) the choice of alternative (here: resources) available with the decision maker is huge in count. In the end the decision making individuals might not have the mant5al capability to be stored all necessary data that needs to be considered for making a decision. Hence in absence of the requisite data, the mental calculations made by them are also faulty. This is an acute case of bounded rationality. The CEO tended to draw simplified models in his mind by considering the important features of the most current problems and may be forgot to consider the complexity associated with the processes (Weiss, Friesen & Weiss, 2017). The business, as it was evolving reflected a turbulent atmosphere where rational decision making becomes all the more difficult.
Online booking facilities, successfully ameliorate the requirements of the interventions of the call centres. Hence, extra HR in this situation is an unnecessary cost incurred by the company. At present the organisation has just introduced the facility of online booking. However the success of the company does not depend on such promotional expansion of market. Hence it is necessary that the CEO withdraws the facility from market with immediate effect and focuses on reducing and/or cancelling contract with or relocating the service domains of a certain number of call centres. Hence, the company be able to minimise the cost impact of this change management in the organisation.
In April 2008, a fire broke out due to the misutilization of a IH fire cooker by a woman. She was not there in the kitchen when the incident took place. Her attempts to fight the fire went in vain, as she suffered from major injuries. Upon experiment, it was found that a pot was used with 600 ml of oil, which actually prevented the fire from breaking out. Investigations revealed that utilization of caved centre with commercial pot resulted combustion within 6 minutes (Murata, Nakamura & Karwowski, 2015).
Optimistic biasness consists of the tendency to overestimate the consequences based on the likeliness of its occurrence. This estimation helps the personnel in averting encountering inconvenient events. One of the major drives behind this is the imagination, which provides good and positive feelings. Exaggeration at lower levels reduces the intensity of the risks, which the sufferers might suffer.
This represents the tendency to regard minor abnormalities as normal. This method reflects the tendency of refraining from projecting excessive reactions to the incidents of such intensity (Vreja, 2015). This method makes the thoughts, decisions and judgments impoverished. In this case, disobedience towards the warning possesses dire consequences leading to the undertaking of wrong decisions.
Biased rationality can be related with the error of judgment, which leads to the selected to inappropriate decisions. The main reason for this error is the biases in the learning process, which stalls the development of the decision-making process. If the woman was conscious towards the work, which she was doing, she could have prevented the fire from breaking out. Absence of consciousness indicates inadequacy in the cognitive learning, which leads to incorrect calculations (Hahn & Harris, 2014).
According to Aristotle, man is a rational animal. However, contradictions can be proposed towards the perception “animal”. This is because animals lack the power of thinking and is only expected to apply the instincts in obeying the instructions of the master. However, in this case, the woman is not directed by anyone and she is just fulfilling one of the basic duties of cooking. This needs rationality in terms of preventing the unwanted incidents. Behavior is also an important component in this aspect, which reflects the approach towards the decision-making process (Bardone & Secchi, 2017). Taking preventive measures would have been a planned action regarding prevention of the fire from breaking out. Calling the fire brigade would have been a reasoned action reflecting the intellectual and judgmental decisions.
Cognitive learning is the best way for improving the decision-making process. However, evaluation would be an innovative means for testing the feasibility of the applied skills. Taking into consideration all of the circumstances would assist the individuals in exposing rational approach. Maintaining consistency in evaluation would upgrade the standard and quality of decision-making.
The employees of the Sales Agency in Saudi Arabia were taught several instrumental key skills like as traditional sales policies, laboratory diagnostics and also negotiating contracts. However, all of the employees were taught the principles in artificial contexts. They were given very less real life training. The agency focused on strengthening the theoretical knowledge of the sales employees. The strategizing policy of the game theory can be discussed in this regard. The game theory makes a supposition for every move of the player taking into account the possible interventions from the opponents in order to minimise the payoff. Accordingly the employees have learned how to tackles obstacles in their sales endeavours. However, Simon in his Models of Man have certified the Game Theory for its lack of analogy with the teal life contexts. One of the pre assumptions of the game theory is that the player (the salesperson in this case) should stick to a single or a set of preferences all the time. However, if this happens, how might a salesperson offer a customer according to his or her choice or budget? Secondly, the theory also assumes beforehand that the player should be knowledgeable of all the alternatives open to them. In this case, how is it possi9ble to know the alternative before getting to know what argument the customer is going to make? Thirdly, according to the Game Theory, a salesperson should be able to calculate what holds the best interest for his deal to be of maximum benefit to the company. However the employees are new and unexperienced. They might not have sound understanding of the principle and policies yet. Under this circumstance, the game theory would not work at all (Cader, 2014).
Lastly, the player, according to game theory should be determined to perform a deal that gives him or her the maximum benefit. In this context, the business goal seems to have apparently fulfilled if an employee is alsways inclined at making the most profitable deals. However, little negotiation leads to market penetration in most cases. The theory considers a simplified version of all the possible pro9blemns that might arise in any case. However the real life problems are quite difficult than arranged practical sessions. Hence the employees lacked the confidence to perform in front of real customers. In this context it is of utmost importance that the employees attend some real life practical sessions that would successfully teach them the tactics of talking and dealing with real life customers’ issues and enquiries. This would help the company to create more proficient task force. However, implication of game theory in organisational contexts where the real life situations can be diverse and complex is pointless.
Reference list
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