Managerial Decision Making: Rational, Nonrational, Ethical, and Group Approaches

Managerial Decision Making: Rational, Nonrational, Ethical, and Group Approaches

Introduction to Decision Making

• This chapter compares rational and nonrational decision making, explains how managers make legal and ethical decisions, describes evidence-based management and business analytics, compares four decision-making styles, and outlines the basis of group decision making.

System 1 vs. System 2 Thinking (Daniel Kahneman)

• Psychologist Daniel Kahneman, winner of the $2002$ Nobel Prize in Economics, describes two kinds of thinking:
  • System 1: Intuitive and largely unconscious. It operates automatically and quickly. It's our fast, automatic, intuitive, and largely unconscious mode, e.g., detecting hostility in a voice or judging object distance.
  • System 2: Analytical and conscious. It's our slow, deliberative, analytical, and consciously effortful mode of reasoning, activated for tasks like filling out a tax form or parking a car in a narrow space.

Rational Decision Making

• Definition: Typically involves four stages.
• Stage 1: Identify the Problem or Opportunity
  • Determine the actual versus the desirable state.
• Stage 2: Think of Alternative Solutions
  • Include both obvious and creative options.
• Stage 3: Evaluate Alternatives & Select a Solution
  • Consider factors such as ethics, feasibility, and effectiveness.
• Stage 4: Implement & Evaluate the Chosen Solution
  • For successful implementation, managers need to do two things:
    • Plan Carefully: Especially if reversing an action is difficult. Some decisions may require written plans.
    • Be Sensitive to Those Affected: Consider how people may feel about changes (inconvenienced, insecure, fearful), which can trigger resistance. Giving employees and customers latitude during transitions can help.

Critique of the Rational Model

• Nature: The Rational Model is prescriptive, describing how managers ought to make decisions, not how they actually make them.
• Unrealistic Assumptions: It assumes managers have:
  • Complete information.
  • Can make an unemotional analysis.
  • Are acting solely for the organization's best interest.
• Common Hindrances to Perfectly Rational Decision Making:
  • Complexity: Problems are often exceedingly complex and beyond full understanding.
  • Time and Money Constraints: Insufficient resources to gather all relevant information.
  • Different Cognitive Capacity, Values, Skills, Habits, and Unconscious Reflexes: Managers have personal limitations and biases.
  • Imperfect Information: Managers often have fragmentary information about alternatives and consequences.
  • Information Overload: Too much information for one person to process.
  • Different Priorities: Some data are considered more important, leading to certain facts being ignored.
  • Competing Goals: Other managers or colleagues may have conflicting goals.

Nonrational Decision Making

• Nature: Nonrational models are descriptive, detailing how managers actually make decisions, not how they should.
• Two Models:

1. Satisficing Model (Herbert Simon)

• Economist Herbert Simon proposed that managers are bound by many restrictions, making true logical action impossible.
• Bounded Rationality: Managers' rationality is limited by these restrictions.
• They do not exhaustively search for the