Rational and Nonrational Decision Making
Rational Decision MakingRational decision making is a multi-step process, from problem identification through solution, for making logically sound decisions.
Learning ObjectivesExplain the characteristics of the rational decision-making process
- Rational decision making favors objective data and a formal process of analysis over subjectivity and intuition.
- The model of rational decision making assumes that the decision maker has full or perfect information about alternatives; it also assumes they have the time, cognitive ability, and resources to evaluate each choice against the others.
- This model assumes that people will make choices that will maximize benefits for themselves and minimize any cost.
- Rational decision making: A logical, multi-step model for choosing between alternatives that follows an orderly path from problem identification through solution.
- perfect information: A situation in which all data that is relevant to a particular decision is known and available to the decision maker.
The Process of Rational Decision MakingRational decision making is a multi-step process for making choices between alternatives. The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. The word "rational" in this context does not mean sane or clear-headed as it does in the colloquial sense.
The approach follows a sequential and formal path of activities. This path includes:
- Formulating a goal(s)
- Identifying the criteria for making the decision
- Identifying alternatives
- Performing analysis
- Making a final decision.
Assumptions of the Rational Decision-Making ModelThe rational model of decision making assumes that people will make choices that maximize benefits and minimize any costs. The idea of rational choice is easy to see in economic theory. For example, most people want to get the most useful products at the lowest price; because of this, they will judge the benefits of a certain object (for example, how useful is it or how attractive is it) compared to those of similar objects. They will then compare prices (or costs). In general, people will choose the object that provides the greatest reward at the lowest cost.
The rational model also assumes:
- An individual has full and perfect information on which to base a choice.
- Measurable criteria exist for which data can be collected and analyzed.
- An individual has the cognitive ability, time, and resources to evaluate each alternative against the others.
The rational-decision-making model does not consider factors that cannot be quantified, such as ethical concerns or the value of altruism. It leaves out consideration of personal feelings, loyalties, or sense of obligation. Its objectivity creates a bias toward the preference for facts, data and analysis over intuition or desires.
Problems with the Rational Decision-Making ModelCritics of the rational model argue that it makes unrealistic assumptions in order to simplify possible choices and predictions.
Learning ObjectivesSummarize the inherent flaws and arguments against the rational model of decision-making within a business context
- Critics of the rational decision -making model say that the model makes unrealistic assumptions, particularly about the amount of information available and an individual's ability to processes this information when making decisions.
- Bounded rationality is the idea that an individual's ability to act rationally is constrained by the information they have, the cognitive limitations of their minds, and the finite amount of time and resources they have to make a decision.
- Because decision-makers lack the ability and resources to arrive at optimal solutions, they often seek a satisfactory solution rather than the optimal one.
- Rational choice theory: A framework for understanding and often formally modeling social and economic behavior.
- bounded rationality: The idea that decision-making is limited by the information available, the decision-maker's cognitive limitations, and the finite amount of time available to make a decision.
- satisficer: One who seeks a satisfactory solution rather than an optimal one.
Critiques of the Rational ModelCritics of rational choice theory —or the rational model of decision-making—claim that this model makes unrealistic and over-simplified assumptions. Their objections to the rational model include:
- People rarely have full (or perfect) information. For example, the information might not be available, the person might not be able to access it, or it might take too much time or too many resources to acquire. More complex models rely on probability in order to describe outcomes rather than the assumption that a person will always know all outcomes.
- Individual rationality is limited by their ability to conduct analysis and think through competing alternatives. The more complex a decision, the greater the limits are to making completely rational choices.
- Rather than always seeking to optimize benefits while minimizing costs, people are often willing to choose an acceptable option rather than the optimal one. This is especially true when it is difficult to precisely measure and assess factors among the selection criteria.
Alternative Theories of Decision-Making
Prospect TheoryAlternative theories of how people make decisions include Amos Tversky's and Daniel Kahneman's prospect theory. Prospect theory reflects the empirical finding that, contrary to rational choice theory, people fear losses more than they value gains, so they weigh the probabilities of negative outcomes more heavily than their actual potential cost. For instance, Tversky's and Kahneman's studies suggest that people would rather accept a deal that offers a 50% probability of gaining $2 over one that has a 50% probability of losing $1.
Bounded RationalityOther researchers in the field of behavioral economics have also tried to explain why human behavior often goes against pure economic rationality. The theory of bounded rationality holds that an individual's rationality is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. This theory was proposed by Herbert A. Simon as a more holistic way of understanding decision-making. Bounded rationality shares the view that decision-making is a fully rational process; however, it adds the condition that people act on the basis of limited information. Because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality to a set of choices that have already been narrowed down by the absence of complete information and resources.
Non-Rational Decision MakingPeople frequently employ alternative, non-rational techniques in their decision making processes.
Learning ObjectivesExamine alternative perspectives on decision making, such as that of Herbert Simon and Gerd Gigerenzer, which outline non-rational decision-making factors
- The rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
- Simon defined two cognitive styles: maximizers and satisficers. Maximizers try to make an optimal decision, whereas satisficers simply try to find a solution that is "good enough" for the situation.
- Some research has shown that simple heuristics frequently lead to better decisions than the theoretically optimal procedure.
- Emotion appears to aid the decision-making process; decisions often occur in the face of uncertainty about whether one's choices will lead to benefit or harm.
- Robust Decision Making (RDM) is a particular set of methods and tools that is designed to support decision making under conditions of uncertainty.
- rational: Logically sound; not contradictory or otherwise absurd.
- heuristic: An experience-based technique for problem solving, learning, and discovery; examples include using a rule of thumb, an educated guess, an intuitive judgment, or common sense.
- cognitive: The part of mental functions that deals with logic, as opposed to affective functions, which deal with emotion.