Managerial Decision Making

Questions: 1. Identify and critically explain the four discrete concepts that have been explained by Herbert Simon? 2. Describe a specific decision making scenario and Purpose of the report? Answers: Introduction In the current complex economy research on behaviour is crucial in order to understand the human decision making. Herbert Simon is a famous researcher in the area of behavioural learning in the respect of decision-making and every analysis concentrates on realising this phenomenon. This paper is trying to highlight that a significant research line is undertaken by Simon to have an understanding about decision-making and his research on proficiency and the things that has been looked down upon by the conventional research decision making society (Zsambok Klein 2014). The main aim of the essay is to understand the various discrete concepts and critically examine the four concepts explained by Herbert Simon in the management decision making process and tries to explain biasness provided in the decisions. The four concepts that will be discussed in this paper are Bounded Rationality, Heuristics, Overconfidence and Biases.. 1. Simons Theory Simons theory bounds around the idea that when human beings undertake their decisions their rationality is restricted by the tractability of the decision problem and the cognitive restrictions of their time and minds that is available to undertake the decision. Herbert Simon therefore proposed thus proposed bounded rationality as a substitute basis for the scientific framework of decision making. It looks at decision making as sensible process of discovering an best choice of the given data available. Simon used the similarity of a pair of scissors where one blade comprises of the cognitive restrictions and the other showing the environment structure. Thinking 1 The process of system 1 thinking resembles the actions of a decision making that is effortless and fast. It does not require any extensive evaluation of the situation before undertaking a decision. The decision maker is fully aware of the scenario and therefore, undertakes the decision without even taking any consultation from others. The thinking is very spontaneous and the idea that arises in the mind is undertaken as a decision. The process is very fast and automatic as the maker of the decision does not too long time as he knows what decision he is going to take. It is an effortless and emotional decision making as the maker does not evaluate the practical and logical environment and does not care the after effect of his decision. An example can be shown in the case where a person has earned his salary for the month and spontaneously has planned to go out for a holiday. The person does not think about the future events and is ready to undertake the decision. Thinking 2 System 2 Thinking on the other hand is a contrary of System 1 Thinking as this process involves a slow, conscious approach by evaluating the current and future scenarios along with the surrounding environment where the decision is to be taken. It is a more logical and explicit method as it involves careful study of the information and what effects it might have on the surrounding environment along on individual. It is a lengthy process but the decisions obtained are accurate. System 2 Thinking is preferable while undertaking crucial decisions. An example of this concept can be given when the government of a country prepares their financial budget for an annual year. In this case, the government analyzes all the relevant information that are available to them carefully before deciding upon undertaking the decision. They look for the benefits of the society and the environment and the future effect of that decision before taking any final step to undertake the decision. This system is more ideal for an effective decision making as it gives out the best probable decision that is beneficial for everyone. Bounded Rationality An important prediction of economic theory is that every actor tries to maximize their utility. In order to do the same, they need to be ideal rational agents. The theorists of economy does not assume that all the representatives of the economy manufacture similar end outcomes, but they confirm that disappearances from the lucidity are exceptional when the wagers are crucial or the inefficient representatives would vanish as they would not endure in the environment. On the other hand, when the behavioural psychologists and economists examined the assumptions of accurate rationality theories, and it was discovered that the behaviour of the representatives is continuously variable than the thought from the view of the rational agents (Jones, Bellenger Johnston 2016). Simon explains that human are not purely rational. He has scrutinized the other theories, which are based on the basis of complete rationality. Therefore, he has introduced the principle of bounded rationality. This states that the management do not go for ultimate satisfaction of a decision but are content with standard satisfaction from a decision. The management cannot provide ultimate decisions due to constraints and limitations. A decision needs to be rational for accomplishing the required outcomes and therefore a proper measure is adopted. However, it is not easy to segregate the outcomes from the means due to ends-means chain. This end-means chain rarely a completely integrated one. The relationship between the ultimate objective and the organizational activities are even not proper. It is seen that a simple end-means chain process may not help in achieving the proper conclusion because what is an outcome at a certain point or at a certain level of a firm can be a means at some other time or at other levels of the industry. It is seen that Simon therefore, has established a base for bounded rationality theories by proposing two analysis methods (Ford Richardson 2013). The first process is to examine in the psychosomatic laboratory and in the region where the human in an appropriate straightforward decision making conditions perform as the hypothesis of decision assumes. The second process is to undertake psychosomatic experiments thereby criticizing the actual processes of the human decision takers. Simons experience of examining decision-making is through the threshold. Firstly, the decisions of humans need not be predicted in prior to follow statistical, practical and any other formals, rather it should be examined pragmatically. Secondly, there are three features that needs to be taken into consideration in decision-making namely, the kind of work, the features of the surroundings and the discrete characteristics of the cognitive process that undertakes the verdict (Wu Seidmann 2014). Finally, only in the concurrence with the gathering of the pragmatic information should frameworks of decision-making process be extended and their estimations should be evaluated with the individual behaviour. Heuristics As explained before, the approach of Biased Rationality determined the partialities in decision-making by using the heuristics. By disparity, the frugal and fast process explained that sue of prudent heuristics is sensible as it permits people to get used to their surroundings (Abatecola 2014). The analysis on Simons explanations is according to the knowledge that heuristics are helpful methods. In another condition, the use of fast heuristics is not logical always. Govindan et al., (2015) discovered two major heuristics in solving problems. The first point is that specialists are choosy; they consider only pertinent alternatives and disregard immaterial ones. The process of selectivity can be done because of the past ideas that allow the researchers to understand, which alternatives are appropriate and which one is not. Secondly, the researchers look for progressive deepening strategy. Heuristics are like a mental shortcut that is useful in undertaking decisions. It has a purpose and often turns out to be most efficient process used in various decision making situations. There are many decisions that are identified according to their urgency and therefore is limited time to use a enhanced and complex system for analysis. A system for the evaluation of heuristics based error and biases may be the cost question. The availability of heuristics in the process of decision making is helpful by easing the ease of rethinking and recalling the bias and the retrievability of bias. There exists four general heuristics namely availability heuristics, representativeness heuristics, confirmation heuristics and affect heuristics. Out of these four types confirmation heuristics will be discussed as it provides the best outcome. The confirmation heuristic is the general propensity to undertake judgments by verifying past information or beliefs rather than looking to find evidence t hat disconfirms these ideas. In anchoring, an arbitrary point of starting and regulate from that starting point after deciding whether we should adjust upward or downward. However, we would be more accurate if we never allowed the arbitrary starting point to influence our decision-making in the first place. Therefore it is seen that heuristics are helpful in simplifying the decision making process and cuts off the time to make the decision making faster and it is often seen that human beings often are unable to implement heuristics accurately due to lack of knowledge. Overconfidence One of the basic factors that influence the decision making of a human is their overconfidence. Overconfidence can be categorized into various segments namely, over precision, generalisability, over placement, over estimation and decisions that are calibrated. In order to undertake a proper decision, confidence in the judgment and ability of oneself is crucial. But the problem arises that to what extent does too much confidence has any biasness over the decisions? Overconfidence is gained through over precision, over estimation and over placement. There have been many scholars like Horngren et al., (2013) who have explained overconfidence to be the vigorous results on the psychology of judgment. Overconfidence is not only considered to be vigorous, but it is also thought to be accountable for many unfavorable results. The three forms of overconfidence are: Over Precision: It refers to the person being too much confident and sure that he or she knows the truth. They feel immense certainty in their accuracy and therefore, does not interest in examining assumptions Over estimation: This means thinking oneself to be better that than they actually are. They overestimate their productivity and control. They even overestimate the scores of their results and their attractiveness. Over placement: This process means that a person takes himself to be better than others. Bias This process refers to the any sort of partiality hat have been seen in the decision making process. There are various types of biasness that affect decision making and they are as follows: Cognitive Bias Pattern Recognition Bias Stability Bias Psychological Bias Out of these only the cognitive system will be discussed as it resembles the Simons Theory. The Cognitive Bias The theorists of decision making have accepted the frameworks of characteristics of the Cognitive System of the decision taker. The best suggestion is that the Cognitive System has two sub processes, namely sub process 1 that operates mechanically with less endeavour makes use of heuristics and sub process 2 that needs endeavour, desire and is regulation supported. The model of dual aspect was critically scrutinized and two major substitute proposals were stated. On one hand, Ferrell Fraedrich (2015) suggested that a common rationale process could lead to decision-making circumstances and in another case expert psychologists suggest that the Cognitive System includes various realm based components. 2. Purpose of the report he earlier part of the paper explained the four various discrete concepts determined by Herbert Simon for a proper and accurate decision making process in human life. The four different concepts have different features and rationales that determine the process of an effective decision making and satisfaction level of humans. In this section of the paper, the four concepts will be analyzed with the help of current scenarios (Wierenga 2016). This study will be helpful in understanding the effect of these concepts in practical life and whether these concepts are put forward any biases in decision making of mankind or even in firms. Bounded Rationality Bounded rationality, the idea that behaviour can infringe a rational aspect or is unable to obey the rules of ideal rationality but is consistent with the aim of a considerable set of objectives and goals. The definition although is not entirely satisfactory. It clarifies neither the principle being infringed nor the conditions under which a set of objectives can be thought to be appropriate. But the idea of bounded rationality has always been not properly defined in these respects (Pettigrew 2014). There are some real life examples that may be helpful in clarifying these ideas and knowledge. The principle is being violated when humans go for purchasing footwear that fits the feet of the person who has gone for purchase (a warning that will find acceptance everywhere), the actions of the customers might be to purchase a pair of shoes that one size larger than the actual size. This behaviour would be thought as bounded rational if the shoes that are being purchased were required for a wedding on the current day and if a fitting pair could be attained for someone by visiting each of the 10 geographically scattered shoe shops. In this scenario, making an idea about the decision maker as a perfectionist of comfort would lead to a problem at his selection, but the purchase of inaccurate fitting shoes looks rational enough when the customers limited idea of the retail environment is taken into consideration. In another case, when the principle is being violated just to establish an electoral boundaries in such a way as to balance the population within the voting districts created, it is seen that the action of the planners might be to make sure that merely that the two populations vary by more than one percent. This behaviour may be thought to be bounded rationality if the expense of establishing an acceptable boundary arrangement were to boost with the level of appropriateness necessary because it would then be perfect to bear minimum inequalities in district populations so save vital cost of computing (Horngren et al., 2013). In each of the examples discussed earlier, it is seen that an action is without any doubt suboptimal in a few closely explained problem of choice can be rationalised by taking into consideration the overall of the environment of decision making. In the first scenario, the purchase of a pair of shoes that is one size too large does not look accurate given the customers problem of time and the ignorance of the availability of the perfectly fitting pair of shoes in the geographical environment (Kim, MacDonald Andersen 2013). It is even seen that if the planner is unable to abide by the rules of bounded rationality then repeated widening of scope are required to preserve the vision of an optimal decision making and a proper case can be made for preserving attention to the simple problem of establishing the voting districts and for the vision of the planner to be bounded rational. Heuristics and Bounded Awareness Heuristics are like a mental shortcut that is useful in undertaking decisions. It has a purpose and often turns out to be most efficient process used in various decision making situations. There are many decisions that are identified according to their urgency and therefore is limited time to use a enhanced and complex system for analysis. A system for the evaluation of heuristics based error and biases may be the cost question. There are various scenarios that are available in practical life that will be helpful in understanding the method of heuristics. A managers mood may influence his or her decision-making. He or she may be more likely to give positive performance evaluations when in a good mood. Another example can be answering the marriage question by looking whether those who get married young are likely to have larger families than those marrying later. It is needed to be considered various situations to make an accurate comparison of the base rate of people with some trait who exhibit some characteristic relative to the base rate of people with some other trait who exhibit a different characteristic. Bounded Awareness is the routine and well defined observation that individuals make to look into the effectiveness of any important data regarding the decision making process. there exists a problem of being focus by any individual and therefore it restricts awareness about any crucial information that is available outside the range of focus. An example of bound awareness can be well explained in the case when a call in the cell phone can divert the mind of the driver that might lead to an accident. Overconfidence Overconfidence can be categorized into various segments namely, over precision, generalisability, over placement, over estimation and decisions that are calibrated. In order to undertake a proper decision, confidence in the judgment and ability of oneself is crucial. This situation can be seen by looking at situations like: Wars Stock market bubbles Strikes Unnecessary lawsuits High rates of entrepreneurial failure Failure of mergers and acquisitions These are the major issues and examples that are reasons are overconfidence having an adverse effect on the process of decision making. Out of the four examples, one example is taken into consideration. It is seen that there are high failure rates of entrepreneurial success in the area of economy due to over confidence. The owners and the management of the business undertake all the crucial business decisions and run the organization. It is often seen that the owners become overconfident think that their decision will be beneficial for the firm and without making any analysis undertake the decision. This decision may turn out to be ineffective that may lead to the failure of the firm. Bias The concept of bias holds a strong ground in the process of decision making and it is seen that humans are prone to bias while undertaking any decision. A practical life scenario can be seen if we explain an example. A multinational company is undertaking an interview process for the post of a financial manager for one of their branches. There are three persons who are undertaking the interview procedure. The branch manager of the concerned branch is heading the interview procedure. They are commencing the interview by getting known about the qualification and past history of the applicant. Out of the entire applicant, there is one applicant who is found to be a student of the same school where the branch manager did his schooling. On getting to know this information, the branch manager can get biased while undertaking the selection process as he may feel that this applicant being form his school can be appropriate person as he hails from his previous school. This decision making wil l be on the basis on bias and decision may not be accurate. (Green Jr Twigg 2014). Therefore bias has an adverse effect on decision making as well. Conclusion Therefore, the current essay tries to emphasize on the four different concepts suggested by Herbert Simon that are helpful in communication and decision making of an organizations. The four concepts of Bounded Rationality, heuristics, overconfidence and bias looks to find the best alternative option available to the organization in order to increase their market share and profit in the market. The current part of the paper therefore tries to explain the various concepts that were discussed in Part 1 of this paper and then compares these concepts with real life scenarios. This process is undertaken to make a proper comparison of the concepts and their effects on the real life experience so that an idea about the biasness on decision making regarding these concepts can be easily understood. 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