Analysis of the Behavioral Decision Making Theory
Analysis of the Behavioral Decision Making Theory| Introduction: For many of us, when we take a look at a multinational corporation, we become fascinated by its image, such as its revenue, massive head quarters, the span of chains it has in different countries etc. We tend to judge by its magazine features and attributes. We measure the company’s success based on those attributes. However, success for every company, no matter the size, always starts from the interior.
In order to become reputable, the company needs to have skilled workers, solid internal resources, plenty of capital, and most important managers and executive leaders. In general it’s the company’s strength of management that determines how the company will operate. The theory of management can be traced back to the times of the pyramids in Egypt. As time went by, different ideals and perspectives about management emerged. One of the most notable was during the 1950’s, when a man named Herbert Simon laid the foundation for a management theory based on a psychological perspective: The Behavioral Decision making theory.
In short, the theory emphasized that, managers don’t have all the information on all possible consequences and alternatives, created from their decisions. From this perspective, this theory can be applied to any professional setting. The fact is every manager, in every company has to go through this cognitive limitation process, when it comes to decision making, which makes this theory applicable and true in its terms. Biography/History:
Herbert Simon as a child was educated in the Milwaukee’s public system schools where he started to develop interests in science. His parents seemed to have the most influence on his extra ordinary thinking. They installed in him, to be curious, and to question the unthinkable. Upon graduating high school, Simon attended The University of Chicago and pursued a degree in political science. During his tenure at The University of Chicago, Simon was able “to conduct a study of the administration of the Milwaukee Recreation Department.
It was this study that later on inspired him to focus on how administrators made decisions” (Gale Group, 2008). It was then, he became dissatisfied with the traditional decision making theories models such as the Comprehensive rational, and began to further analyze decision making. After graduating from the University of Chicago, Simon was hired by the International City Managers Association and began to be recognized as an expert. Simon described, the most important years of his scientific career between the years 1955-1956. It was during this time that Simon along with Allen Newell and Clifford Shaw began using computers to study problem-solving behavior” (Gale Group, 2008). While doing this, they would observe individuals as they worked through problems, and recorded the subject’s explanations on those logical problems. They would than input the feedback into a computer program. “Together, Simon, Allen, and Shaw developed Logic Theorist and General Problem Solver, the first computer programs to simulate human reasoning in solving problems” (Gale Group, 2008).
This work was at the foundation of the developing field of artificial intelligence and would later lead to him write the second version of Administrative Behavior, which laid the foundations of bounded rationality. For his ground breaking research, Simon received offers to teach at Carnegie Mellon University, where he structured their School of Business Administration, however his greatest accomplishment would come in “1978 when he received the Nobel Peace Prize, in economic science for his research into the decision-making process within organizations” (Gale Group, 2008).
Simon passed away at the age of 84, in 2001. He will always be remembered as the originator of Bounded rationality, and a man that stood for science and discovery. Summary of Management Technique: Taking a further look into the basis of the Behavioral Decision Making theory, it seems as if human behavior is strongly influenced by motives, there is always a motivation force generated by some purpose, which can be the foundation on why a person makes a decision.
The combination of incentives and consequences determine why we make certain decisions. When Alfred Simon created the foundation of the behavioral management theory, he seemed to put a lot of emphasis on one term: Bounded Rationality. By definition it is stated to mean “managers attempt to make rational decision, but their thinking is constrained by human limitations” (Hitt, Black, & Porter, 2009). In general the term itself is a property of decision making that reflects on manager’s cognitive limitations.
John DW Morecroft, professor at Sloan School of Management, at the Massachusetts School of Technology, states that “individuals faced with complex decisions are unable to make rational decisions because they can’t generate an feasible alternative and collect or process information that will permit and predict all consequences of their future decisions” (Morecroft, 1985). In a sense as humans, we lack that cognitive ability to asses every single alternative, and consequences, that can lead to the perfect decision.
Manager’s cognitive limitation aren’t the only factor that delays the decision making process, and causes them to decide on the least viable solution, many other factors come into play. For example the nature of the company itself plays a large role, on what types of decisions need to be made. A high tech IT company has to make rapid decisions constantly because it is in a very demanding environment, where technology/equipment is always improving.
There are some external factors as well as internal factors that come into play when making decision, both need to be analyzed before any rational decision can be made. Some external factors are the environment that the company is surrounded by. For example different laws and regulations in different countries can prevent managers to make prime decisions, also economic and transportation factors can create huge discrepancies that can create large amount of delays. Internally one must look at the company itself. What kind of procedures and norms has it established?
Or does the company have the resources such as financial or capital or human, to allow a certain decision to be further monitored and implemented? The manager himself is a factor alone. Meaning does this particular manager have the experience? Is a new manager fresh out of college or a senior level executive? What types of values does the manager hold? What kind of stress and pressure is the manager in? Are his decision usually structured or unstructured? Another major factor that comes into play during decision making is technology.
Herbert Simon himself stated “technology enhances our abilities to accomplish our goals, it provides alternative routes, it makes us aware of new needs, allows us to set new visions, and it’s a tool that allows us to analyze and understand complex systems” (Simon, 1973). The word technology doesn’t always have to relate to computers or machines, it can also be considered to be knowledge and resources. The more technology a company has the more options a manager has to make a stronger educated decision. There are many factors that affect decision making. But Managers have founded many ways to get around these factors.
Companies work together to create a more effective way to allow for employees and managers to decide on future decisions. “The reason why good decisions are made is due to specialization and narrowing of decision making response that occur in those organizations” (Morecroft, 1985) this statement implies that the most common organizational process for simplifying decision making come from team work and fluid communication, along with “factoring, creating goals and incentives, having authority and culture, sticking with routine, and satisfying” (Morecroft, 1985).
In simple terms, factoring is a term of networking ideas throughout the organization; it’s a way to get everyone involved, to get more ideas and alternatives flowing. Naturally humans are goal oriented; we set goals on specific terms, which determine what information is considered important in making our decisions and what can be left behind. The more goals managers set that are accomplishable, and the more that are achieved results in greater source of morale and motivation, which is used to tackle on new issues and problems within an organization.
The most common way that managers simplify the decision making process is through satisficing. Meaning that managers accept the first alternative that meets the minimal requirements, rather than pushing further. When it comes to satisficing, managers also rely on heuristics or past experiences that can relate to high levels of success. Managers don’t plan to spend all of their time on particular problem, and in most cases managers that are more experienced than others usually try to relate current situations with previous ones and compare the information they have to make an acceptable choice of action.
In an environment which emphasizes efficient decision making and implementing them on a precise time frame, satisficing seems the best way to go, instead of trying to find the perfect alternative solution. Industry Applications: In terms of real world applications, the Behavioral Decision making theory is one that is applicable to every firm or company. The reason being, every manager/executive will go through some reasoning limitations when put in a position to make an important decision.
Different managers might come up with solutions faster than others, but they also might have more experience, and a structured environment. But in a world where everything is rapidly changing, improving, and developing, time is money so decisions need to be made to optimize every opportunity at hand. A manager’s responsibility is to make decisions at times of concern, no matter what company, big or small; it’s a universal job description. The Behavioral Decision making theory simply explains that, the decision process isn’t always as easy and smooth as it seems on paper.