Managerial Decision Making For Entrepreneurship Theory

Judgment and Decision Making Process

Discuss about the Managerial Decision Making for Entrepreneurship Theory.

Herbert Alexander Simon, a political scientist, psychologist and sociologist, researched within a large range of subjects, unified by the researches of decision making (Zsambok & Klein, 2014). “The capacity of human mind for formulating and solving complex problems is very small compared with the size of problems whose solution is required for objectively rational behavior in the real world or even for a reasonable approximation to such objective rationality” – this quote of Simon will be analyzed in this essay based on four concept of Simon that defines the bias in decision making in the workplace. This theory is also known as the concept of bounded rationality. It is beyond doubt that Simon has been a pioneer of the concepts of bounded rationality. These concepts discussed here, can be used in order to explain bias and rationality in the decision making process on the basis of explaining the concepts here. The concepts are Judgment and decision making process, Bounded rationality, Judgment heuristics and biases that are responsible for a biased managerial judgment in the organization. These concepts define the diverse influence on the though process of an individual while making an important decision.

Any kind of decision making aims to solve problem and in order to do that the procedure involves three basic activities, selecting the agendas, setting up the goals, and designing the actions; after the problem solving evaluating and choosing is generally called decision making (Ford & Richardson, 2013). Simon as a researcher focused on the understanding of human behavior and particularly the decision making. In discussing the judgment and decision making process, Simon had addressed two approaches. The first approach concerns the cognitive process in practice, not the theoretical approach to the economic theories that states decision makers have access to all the required information and unlimited time. The second goal is to prescribe how to make the good decisions. In other words, it can be said that Simon has investigated whether any competence in the decision making exists or not. This approach of Simon towards the process of decision making gives rise to another concept, biased rationality. Researchers have agreed with Simon on the economic agents not being rational, but not exactly with the concept of bounded rationality theory (Clarke, Horst & Roberts, 2015). It was found in the later researches that several times people diverge systematically from the expected outcome, decided in many theories.

Bounded Rationality

The concept of bounded rationality refers to the economic actors maximizing the utility; it also says that, in order to do it, the actors need to be rational and perfect agents. This also means that the final outcome of their taken decisions will be same if logical rules are used properly or a full cost benefit analysis is done with all the available options (Hasan, Shamsuddin & Aziati, 2013). Simon came with this concept where he defined the decision making as a search process that is guided by several aspiration levels. Aspiration levels are defined as the value of the aim variable that much be surpassed by the satisfactory decision substitute. In other words, the concept of bound rationality refers to the rational theories underlying the adaptive behavior of people. In other words, it is the idea that when the individuals make decisions their sense of rationality is limited by the decision problem, the cognitive restriction of the mind and the available time for taking the decision (Chrisman, Memili & Misra, 2014). The given quote clearly refers to the concept of bounded rationality. It refers that the decision makers act as the perfect agents who seeks a solution that is satisfactory than the optimal one. Simon proposed this theory as the alternative of the mathematical expression of decision making and the model views the decision making process as a entirely rational one of finding the optimal choice from the available information. Simon had utilized the analogy of scissors and represented one blade as the cognitive limitation of an individual and the other one as the structure of the environment. This example illustrated the process how the minds compensate for the limited resources by utilizing the known structural reliability of the environment. Simon pointed out that in most cases people are partly rational and mostly irrational in the rest part. He also states that the bounded rational agents experience several limits in solving and planning the complex problems and also in processing the information. There are several dimensions that come along with the classic model of rationality that are more realistic than the real one, while sticking within the fair formalization; those are, limiting the utility function types, distinguishing the collecting and processing the information and the possibility of having the vector utility function (Tang, Huang & Shang, 2015). In this model, Simon stated that the economic agents utilize the heuristics for making the decisions than any strict regulation of optimization. The agents are bound to act like this because of the complex situation and their incapability of processing, also work out the predictable utility of the alternate action. This gives rise to another theory of Simon in managerial decision making, Judgment Heuristics. 

Judgment Heuristics

In the sphere of psychology, heuristics are considered as the simple rules that are often used by people in order to form the judgment or make significant decisions. These are considered to be the shortcuts in the mental level, which are involved to focus on a specific aspect of a complex problem ignoring the rest (Betsch & Haberstroh, 2014). On the basis of the concept of bounded rationality by Simon, psychologists Tversky and Kahneman exhibited that there are three heuristics, which underlie the intuitive judgments. The three heuristics are representativeness, availability and anchoring and adjustment. The availability heuristic refers to the ease which brings the exact idea in the mind. If an individual estimates the frequency of the event based on the availability, the availability heuristics is used (Kappesser & Williams, 2013). For instance, people overestimate the death in the dramatic events, whereas the usual deaths are not that much overestimated at all. This happens because people use the heuristics of availability and overestimate the less available one. The next heuristics, representativeness refers to the usage of categories, for instance at the time of deciding whether an individual is a good person or not. People categorize others on the basis of things with high representativeness (Harrison, Mason & Smith, 2015). In addition to that, when people are categorizing based on the representative heuristics, the representative means two different things, the sample used for the comparison and also the relation between the sample and the thing they are categorizing. This heuristic is also an instance of the clarification that how people use cause and effect method in judgment and decision making. The third heuristics anchoring and adjustment refers to the heuristic used in several situations when people tend to estimate any number. According to the original definition of Tversky and Kahneman, this involve the start from the available number, which works as the anchor and any kind of shift from this, up or down, reach the final answer. It has been seen in several experiments that the anchor value can be random and extreme as well, although it still contaminate the estimates (Glimcher & Fehr, 2013). These heuristics along with many others impact on almost most of the decisions taken by an individual.

Several factors have a significant impact on the decision making such as biases. Bias can entirely change the final outcome of the decision, or it might influence the decision to some extent as well. Among the different kinds of biases, conformation bias is the tendency of interpreting or favoring the information in such a way that confirms the preexisted value of the individual, while they give less consideration to the other alternate possibilities (Heath et al. 2013). This is also a type of cognitive bias and people are seen to have this kind of bias while they try to gather selective information and interpret them in a biased way. Another kind of bias is anchoring bias, which refers to the general tendency of an individual of relying on the initially available information or the anchor (Toplak, West & Stanovich, 2014). While making a decision, if the individual sets the anchor as the first information available to him, the other decisions are made by adjusting with the help of the anchor. For instance, if someone likes the first dress offered to him and sets it to be the final one on the mental level, he will get biased judging the other dresses offered to him.

Conclusion

In the light of the quote by Simon, it can be seen that there are several factors that can be responsible for the final decision and in a business organization it is highly effective. Making decision is a cognitive process and it results in selection of the course of action among many other alternative options. The above four concepts show that how a decision making can be influenced by several factors in the organization. The quote by Simon clearly shows how the decision making process can be influenced by the available time and the complexity of the issue.  However, effective rational decision can result in profit in the organization.

Reference List

Betsch, T. & Haberstroh, S. eds., (2014). The routines of decision making. Psychology Press.

Chrisman, J.J., Memili, E. & Misra, K., (2014). Nonfamily managers, family firms, and the winner’s curse: The influence of noneconomic goals and bounded rationality. Entrepreneurship Theory and Practice, 38(5), pp.1103-1127.

Clarke, H.F., Horst, N.K. & Roberts, A.C., (2015). Regional inactivations of primate ventral prefrontal cortex reveal two distinct mechanisms underlying negative bias in decision making. Proceedings of the National Academy of Sciences, 112(13), pp.4176-4181.

Ford, R.C. & Richardson, W.D., (2013). Ethical decision making: A review of the empirical literature. In Citation classics from the Journal of Business Ethics (pp. 19-44). Springer Netherlands.

Glimcher, P.W. & Fehr, E. eds., (2013). Neuroeconomics: Decision making and the brain. Academic Press.

Harrison, R.T., Mason, C. & Smith, D., (2015). Heuristics, learning and the business angel investment decision-making process. Entrepreneurship & Regional Development, 27(9-10), pp.527-554.

Hasan, Y., Shamsuddin, A. & Aziati, N., (2013). The impact of management information systems adoption in managerial decision making: A review. The International Scientific Journal of Management Information Systems, 8(4), pp.010-017.

Heath, L., Tindale, R.S., Edwards, J., Posavac, E.J., Bryant, F.B., Henderson-King, E., Suarez-Balcazar, Y. & Myers, J. eds., (2013). Applications of heuristics and biases to social issues (Vol. 3). Springer Science & Business Media.

Kappesser, J. & C Williams, A.C., (2013). Clinical judgement heuristics: Methods and models. European Journal of Pain, 17(10), pp.1423-1424.

Tang, T.Q., Huang, H.J. & Shang, H.Y., (2015). Influences of the driver’s bounded rationality on micro driving behavior, fuel consumption and emissions. Transportation Research Part D: Transport and Environment, 41, pp.423-432.

Toplak, M.E., West, R.F. & Stanovich, K.E., (2014). Rational thinking and cognitive sophistication: Development, cognitive abilities, and thinking dispositions. Developmental psychology, 50(4), p.1037.

Zsambok, C.E. & Klein, G., (2014). Naturalistic decision making. Psychology Press.