BUS401: Management Leadership

Critics of the rational model argue that it makes unrealistic assumptions in order to simplify possible choices and predictions.

LEARNING OBJECTIVE

• Summarize the inherent flaws and arguments against the rational model of decision-making within a business context

KEY POINTS

• 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.

TERMS

• 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 Model

Critics of rational choice theory – or the rational model of decision-making – claim that this model makes unrealistic and oversimplified 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 Theory

Alternative 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 Rationality

Other 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.

Source: Boundless
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