Moral Hazard, Bounded Rationality - Assignment Example

Name) (Institution) (Grade/Course) (Tutor’s Name) 3rd November 2009 Moral hazard The recent financial bailouts by governments to lending institutions and other organizations have highlighted the issue of moral hazard and the negligence by the management. The public has been angered by government decision’s to bail out large corporations that rake in billions of profits but cannot manage to pull themselves out of a financial pit which they dug themselves. Many authors view the situation as profits being a private issue and loss a social issue to be distributed to taxpayers.1 Management experts have developed various ways to handle moral hazard in business such through stringent regulation by the government and shareholders. But what is moral hazard and what does it really mean to a manager? Though many variations in definition exist, it is viewed as inducement to increased risk taking by organizations in investments in the belief that the higher the risk, the higher the rate of return.2 This scenario is most common in lending institutions and insurance companies. To avert such a scenario, governments step in through regulatory bodies and other forms of restraints as failure to do so or weaknesses in existing bodies would lead to collapse of businesses that would impact on the overall economy. As a manager therefore, I would tend to think like an economic man and logically also. This would entail going for business opportunities with the highest form of return on shareholder value which coincidentally have a relatively higher risk. Growth in shareholder value and dividends are the most common measures of management’s performance and thus high risk taking in management decisions.3 In dealing with the situation, I would consider my moral orientation which recognizes the need to establish a professional reputation and maintain it and at the same time stick with rules and regulations set out by concerned bodies. This is because society views bankruptcy as acceptance of failure and is often linked with other social vices such as corruption and theft. Therefore, as much as I would like to stick the law and moral values, I would also need to increase shareholder value by investing in the high risk end but not the excessively high risk end. Bounded rationality  Bounded rationality refers to transactional problems that may face a manager when identifying a simple magnitude of the potential duty of coordinating activities in the office or place of work. It is also that property of an agent that acts in a manner that is virtually optimal regarding its goals as its resources will permit.4 In most cases, a manager is tied by an employee’s employment contract provisions that identify specific roles and duties to an employee or position but arising situations in the course of running an organization go beyond the provisions of the contract. The problem is caused by the fact that a manager cannot predict all possible scenarios in the workplace and draft the subsequent duties and responsibilities but can only estimate. Unfortunately, employees are legally entitled to perform only what is included in the contract. Therefore bounded rationality limits organizational performance and opportunities. There are two common forms of bounded rationality; individual and organizational. While the two are not wholly distinct, they have one plausible distinction in that organizational bounded rationality in concerned with goal conflict while the individual case does not. Simply put, theories intended at explaining bounded rationality are either normative or descriptive. As a manager therefore, bounded rationality exists in conflict in the achievement of goals and the processes and strategies in the achievement of the goals.5 Framing Decision making frames are perspectives adopted by decision makers in policy formulation and implementation process that take into considerations all the limits and constraints. It is considered to be part of the cognition theory where the frame limits one’s expectations. In a positive frame, the challenge of making an emotional correct decision is effortless as if feels right than it is in a negative frame where a lot of debate and considerations have to be made.6 In management, framing is important in that demarcates the current situation identifies available options and how to choose an effective course of action improves competence by identifying significant and insignificant information and issues helps to establish possible consequences However, in order to avoid limitation by frames, a manager should be flexible enough to allow expansion and constriction of frames in response to prevailing conditions.7 Groupthink  Groupthink occurs when a team opts to follow one option in decision making and ignore alternatives with the intention of being unanimous whereby “mental efficiency, reality testing, and moral judgment”8 are negatively impacted. Groupthink is an important aspect in management because when it is allowed to proliferate, it hampers organizational performance in various ways. This has been one of the strongest points in pointing at the weaknesses of team based structures in decision making.9 Among the most conspicuous are 1. Delusion of invulnerability and extreme optimism that encourages taking extreme risks. 2. Communal validation of assumptions where individual members ignore warnings. 3. Excessive Belief in inherent morality whereby members view their position as that which can never be challenged and therefore the group tends to ignore the moral ethical consequences of their decisions on the organization or other individuals. 4. Stereotyped perceptions of non-group members who are viewed as enemies and their views and contributions to the group are ignored as he is also perceived to be an “enemy” to the group. This results in conflict. 5. Enforced protection of the group where dissenters and critical thinkers are barred from making nay criticism of the group’s decisions. 6. Self-censorship – This hinders objectivity and creativity in an organization as each member fears to express doubts and deviate from the agreed common ideology. 7. Illusion of unanimity which may not be the case as those members who do not agree with group decisions cannot express their doubts or disagreement. 8. Self-appointed ‘mindguards’ – The group members sieve information from the top management if it threatens the existence of the group.10 To avoid such a situation, a number of ways should be employed such as:   a) The group/team leader should emphasize on the need for each member to be a critical evaluator of the other member        b) Team leaders should avoid making known prior expectations before any decision making process        c) Members of a team should seek advice and make consultation with non members of the tea on a regular basis and report back the findings o the team        d) The team or group should seek consultation services from an expert to guide in the decision making process where he can challenge the views and perspectives of the team.       e) At least one knowledgeable should specialize in criticism to help other members think broadly before making presentations.11  5. Greed and fear (as applied to business, particularly markets) While greed and fear are two of the strongest emotions in the ordinary circumstances, they even play a more significant role in business and management. Fear drives managers not to take risks in business processes such as investing in anticipation of losses while greed forces managers to make risky business decisions in anticipation of higher gains. In the stock market for instance, “Greed is responsible for driving stock prices up while fear is responsible for crashing them down”.12 Greed is excessive optimism that blind decision makers from potential risks. On the other hand, fear is excessive pessimism where decision makers prefer not to make risky decisions in fear of losses. A manager is thus faced with a dilemma on whether to hold back or to venture into a risky situation. Greed is responsible for driving up the stock prices which in return is a benefit to the shareholders. Conventionally, shareholders assess a manger’s performance through the return on investment through share stock price growth. For instance, in the early nineties, after the advent of the internet, many firms that invested in the new technology experienced high growth rates in stock share prices. This only happened as managers of such firms were willing to venture in to the unfamiliar guided by signs of high potential. This growth was most prevalent in the stock market. Unfortunately, a bullish stock market can never continue forever. When fear sets in, such as the future of the internet most notably the Y2K in 1999, stock prices drop drastically.13 Additionally greed is captured when managers are unwilling to invest fully in market research in the belief that instinct and empirical evidence indicates that there is potential in the company and that there exists a business opportunity in the market. Conservative managers, more or less viewed to be fearful insist on extensive research into a market before launching a products or service in that market. This is most common in foreign and international investments where political and cultural issues have a heavy impact on investment decisions.14 6. Confirmation bias  This refers to the fear to venture of the confirmed knowledge into the unknown. Kofta, Weary and Sedek (1998) also define it as the “selective attention to the evidence that may confirm the hypothesis and neglect the data that may refute it” (p. 235). It happens when managers tend to confirm knowledge that they already know and opt to ignore that which they do not. The New York Times reports the case of Enron’s CEO Jeff Skilling who confirmed the fears that his skills and style in managing the firm were limited to what he already knew and that he was never suspicious that someone or some people within the company had other intentions in attempts to claim he was not guilty.15 Confirmation bias in business is most prevalent in form of research, interpretation of data and recall and remembering of data. Search for information biased is most prevalent in the designing of research studies. Business researchers tend to design studies such as questionnaires where the scopes of questions they seek to ask their respondents are limited to what they assume to be important. Data interpretation may be in regards to how information collected in interpreted. For instance the significance of some data may be altered by the interpretation method thus leading to a distorted outcome. Confirmation bias is also very prevalent in auditing in firms. Managers base their decision on research conducted by their research and development team. Since business decisions are made based on the research findings, and then by extension, the decisions are biased. In the long run, the business may lose a clear and strategic focus on its goals and growth strategies. As such, manager should always seek to eliminate bias in all levels. A study in the US army showed that there are various ways of reducing confirmation bias. “Despite domain familiarity, industry personnel exhibited strong biases in their intuitive judgments, indicating that familiarity/expertise does not eliminate bias.” However, confirmation bias has been credited with a number of benefits also such providing process guidelines and saving debating time. However, Nickerson writes, “the question of the conditions under which one should retain, reject, or modify an existing belief is a controversial one.…. established beliefs. Whether it is rational is a complicated issue that can too easily be treated simplistically; however, the view that a person should be sufficiently objective and open minded to be willing to toss out any belief upon the first bit of evidence that it is false seems to me wrong for several reasons.”16 This means that there is no common understanding on how to eliminate confirmation bias and when it serves the purpose hence retained. 7. Cognitive dissonance This aspect was developed by Leon Festinger in 1957 to explain the relationship between various cognitions brought forward by psychologists. This theory states that “the perception of an inconsistency among an individual’s cognitions generates a negative interpretation state (dissonance), which motivates the individual to seek and implement a strategy to alleviate this aversive state”.17 Elliot and Devine (2003) treat cognitive dissonance as an arousal state where it affects task performance. Managers must learn to choose between beliefs that they have developed through experience and still maintain a strategic focus in business. For instance funds investors have shown a tendency for fund investors to stick with funds that perform poorly as they still believe that the funds will come around and perform exceptionally, something that they have experienced before. The case here is that the investors overemphasizes a particular fund performance by forming expectations. As such, managers may hold too much belief leading to moral hazard where they hold to something in the belief that it will one day work out as per his expectations. Managers should learn when to let go through proper market research.18 9. Satisficing This is the dilemma facing decision maker and policy makers on whether to follow optimality or go into satisfying shareholders. Satisficing is basically choosing to satisfy shareholders through policy decisions rather than go for optimality.19 This aspect is greatly influences moral hazard since managers want to preserve their positions by satisfying shareholders. Unfortunately, the trend is not sustainable in the long as the policies and decisions made do not align with industry requirements and market forces.20 On the other hand, managers may be forced by circumstances to make decisions with inadequate information. As a result managers tend to make decisions that, according to his opinion rather than going by industry facts will “make all happy.” Closely related to this bounded rationality and framing where there is limited information and restriction on available alternatives in decisions and polices and where experience and stereotyping are used to decide on the seemingly best alternative.21 12California self help philosophy The California self help philosophy dwells on optimism and positive outlook in life and situations. This philosophy seems to argue that human potential is not constrained by what the conventional minds prefers to view as perspectives but its rather the confines of our mindset that do really limit out capacities and potentials. In fact, material wealth exists in unlimited capacities if and only if we liberate our minds and act upon owning what is naturally ours. This notion empowers one with self belied that one can make no matter the situation. In doing, so the philosophy argues one can literally achieve anything in life so long as he sets his mind to it. “On the surface, some of the concepts are clothed in the jargon one typically finds in self-help books: readers are encouraged to learn to live creatively, choose freely, learn how to solve problems effectively, and so on.”22 A self help philosophy is also termed as the do-it-yourself philosophy. A good example is the Black Nationalism that saw the black people reason together and realized that the whites had no interest of the black man at heart and hence made it their initiative to have their demands and wishes known. This resulted in the nationalism movements that delivered what they wished. On the other hand, it is important to note that the Black Nationalism involved many struggles. There was a lot of resistance from the whites both in the fighting for independence in Africa to the struggle against racism in the US. Therefore, this should be denoted as a warning for those seeking to adapt a self help philosophy that the journey is long and is a painful struggle. In the fight against racism, many lives were lost, time was spent in educating the masses, and still the whites spent a lot of resources in suppressing Black Nationalism. In academic and career development context, conventional limitations such as financial resources should not be viewed as impossible to defeat. The self help philosophy argues that an individual should strive at adapting a winning attitude and mentality. How can this be developed? Critics of self help philosophy argue that the field is a scam purporting to help success hungry individuals. This is because there exists thousands of writers who each purport to have a winning strategy in life, career of academics. However, due varying circumstances and predisposing factors, they argue that authors advise their audience to follow their route to success which is impossible. Unfortunately, this seems to be a misunderstanding between the critics and the self-help philosophy proponents.23 Another context that the self help philosophy is applied is family issues. Most notable has been marriage advice and counseling. While no outsider can solve a marriage, the marriage counselor plays a facilitator’s role. He provides a convenient forum through which the actors in the marriage can find a common ground. The counselor plays no active role in making decision between the couples but advises them on the beast ways to go about the decision making process such as consultation and communication. In the family context also, is the issue of substance abuse. Rehabilitation centers do not have the ultimate solution to stop one from substance abuse. They play a facilitating role by reminding one of the unbounded limits of his mind. If one can set the mind to abstain from a substance with supporting encouragement, then he can do it. The self-help philosophy is to some extent unrealistic. The fact that one should not believe in the limits presented by predisposing factors is unreal. For instance, the fact that one is not good in academics and is better in applied areas cannot be changed. This is because there is a lot of influence from the genetic composition that determines how one fares in academics and other areas of life. As such, the self help philosophy can only be applied in some areas but no all of them as proponents tend to argue. Personality Existing personal empowerment literature gives a lot of weight to the relationship between personality and career development, path and outcome. This is in the belief that personality is indicative of a person’s behavior. You share similarities with others but you are really a unique individual with a unique personality and behavior patterns. “These patterns define your distinct personality traits which influence your job search behavior, your job choices, your work behavior, and your happiness on the job.”24 Rosenberg says that there are four levels that help one place his personality: source of energy, how one gathers information, how one makes decisions and how one relates to the outer world. There are two broad categories of personalities categorized by the source of power; extroverts and introverts. Extroverts are energized by being around others and talking. Introverts like keeping to themselves and are energized by reading and deep reflections. An extrovert has higher chances of career success in a people interactive environment such as the service industry while extroverts would be better in careers such as accounting and auditing where much reading and writing is required rather than talking. Information gathering techniques also bear two subcategories: sensing and intuition. Sensing relies on facts and details in a practical realistic situation while intuition relies on theory and experience. These aspects should determine career choice and progress. These two aspects are not contradictory in nature but complementary. As such, it becomes somehow impossible to prioritize them as their usefulness is determined by varying environments and situations. Decision making also two sub categories namely; thinking and feeling. Thinking uses logic and analyzing methods while feeling is a bit compassionate and personalizes situations. Logical thinkers and analyzers are best suited by the manufacturing industry, where most business processes are fixed and industry information is predictable. Compassionate thinkers on the other hand should be kept away from making complex decisions as their emotional weakness can lead to disastrous decisions. For instance, they avoid firing employees when organizations are operating at loss.25 The relationship with the outer world is paramount. This determines how a manager relates with other stakeholders such as suppliers. There are two perspectives; judging and perceiving. Judging like to follow procedure and protocol and hence relatively rigid. Perceiving personalities like to experiment with various ideas that suit existing situations. Therefore, a person’s personality determines how well he performs at a particular job position depending on the requirements and the responsibilities set for him. The more he matches up with the nature of the job, the higher the chances of good performance and acceleration to the top level. Personality alone cannot guarantee a certain career course. A shown above, the interaction between personality and existing situations determine the success rate. An individual’s personality is classified according to how one reacts and responds to a certain situation. For instance, an extrovert can only be classified as on only and only if he shows motivation and determination in thinking loudly and consulting with other people about an issues rather than preferring to conduct a silent research on the issue. Luck “Luck is neither a simple nor singular concept. There are definitional and conditional issues involved in defining and explaining luck” 26 there are two types of luck moral luck and epistemic luck. However, luck is also a matter of perception given that people view luck either as good or bad. Again, one ma’s luck may be another man’s misfortune.27 A majority of existing literature on luck tend to have a gender bias linking females with luck wand males with ability. This may have a far reaching consequence on the perception of luck across the gender divide. Men tend may believe in the non existence of luck while women, as made to believe by existing literature attribute every thing to luck. As such, how do one differentiate luck from ability? Looking at the case of Don McAlpine, the famous Australian film maker, one cannot ignore the role of luck in one’s career. In an interview with Raffaele Caputo, he says With regard to my career luck has had to do with it− no two ways about it… I basically got to shoot my first big American film, The Tempest (1982) because of an odd circumstance: ‘Breaker’ Morant (1980), The Getting of Wisdom (1977) and My Brilliant Career (1979), three films I’d shot, all cane to be released in New York over a one-month period. A New York film critic eventually looked at these films and discovered I was the connecting links, and these were films that quite an impact on American audiences. Paul Mazursky was looking for a DOP at the time and a woman in his office said to him, ‘Have you seen the films this Australian guy has shot and that people are talking about?’…. the outcome is that Paul and I did four films together. That’s the sort of luck I’m talking about, and the kind of break people need to get in this industry28 (p 14) Therefore, it is apparent that luck is relative and heavily relies on the perception of the individual and others. While such odd occurrences like in the case of McAlpine that seems to shape ones career may take place, one may choose to refer to them as coincidence fate or else luck. This implies that completion of learning and my course may coincide with an occurrence that may serve to boost my career. Unfortunately this may happen at the cost of another. For instance, an advertisement of a job posting on the newspapers that fits my academic credentials may appear soon after graduation. To an applicant like me, this is pure luck but I would never be concerned about what preceded the position falling vacant such as death. Another perspective in luck is job mobility. Many young workers view the ability to locate a job position soon after being sacked or moving as luck. However, this is highly attributable to HR strategies and employment habits of many organizations other than luck.29 Nevertheless, what young employees may be define a s luck might not necessarily be luck and adds little to career development as they opt to move from one job to another. “Similarly, some firms may value job stability more than others and try to structure wage incentives accordingly. Since firms with low turnover rates offer better career opportunities and have greater incentives to invest into their work force in the form of high-quality training, these firms are likely to attract the most able workers”30 Q14 Henry Mintzberg’s advice to the MBA students is at times considered controversial. Education is the most important prize in the global, two years of learning can make your life broom forever; moreover, it doesn’t matter who you are, just with a little experience in management, you can well-suite as a manager. He’s is much optimistic with education saying by two years, you are ready to become a manager and make decisions while sitting in the office. However, a professional manager is not made in a classroom, he must learn through experience. He/she ought to learn craft and art: craft learning is through experience, whereas art is from the classroom. This means that a student have to learn both theory and practical in order for him/her to become a successful manager. Also, before you make a judgment to others, you have to look deeply before you make you own decision, not following debate from others. You also need to appreciate others situations, and expose yourself to other people’s experience. Besides, even though you have an experience, there are others who came before you and you shouldn’t judge them with shallow knowledge. Organizations are complex phenomena; it is not easy to manage them, since they require a tactics in order to manage them, which can only be gained in perspective. It’s hard for illiterate people to understand them even if you explain to them. Conversely, when you enter into business, it is very important to government and social sector: they can put someone in hot water. Also, one should not engage in business for fame or money, the effort may end up bearing no fruit especially considering amount of time used in learning and training. One should choose an industry of choice and stick with it, always do the best that one can. One should also not get influenced by others, life is experience and it is necessity to go through it. Lastly but not the least, Mentzberg urges students to be dedicated leaders who always do their best. Q 15. Ever since I Joined UTS, I realized that I had encountered a totally different learning environment with special people. From the welcoming smiles from other students who had never seen me encouraged me a lot. This I later came to learn that was one of the university’s core values that encourage the community to interact among themselves and other stakeholders. This made a lasting effecting impression on may mind for I knew I had a family to relate with in the new challenging environment. This makes a very conducive environment for learning that has played a great role in shaping my career in the short time that I have been studying here. As a graduate, I hope to earn a position in a top position in one of the many organizations in Australia or abroad. In that position, I will meet and interact with new people and presumably meet with my school mates or UTS alumni working there. With the friendly and welcoming nature that I encountered at UTS, I would expect the same from the work environment. On the other hand I will be willing to extend warm welcome to new recruits. This makes new employees comfortable and enables them to deliver their best and acclimatize to the new environment. The faster they adapt to the new environment, the better it is for their acclimatization and the company. In my learning, I have also learnt that the reception that new recruits are given determines how long they can stay at the same job position. As shown earlier in the paper, moving from one job position to the other exposes young employees to exploitation and denies them career development opportunities. The friendliness at UTS may not be the situation in real life organizations. The friendliness extended by students in the common knowledge that ‘we are blessed to be making a career together in the same campus’ may not be the bond in the work place. As such, this might have created a distorted view of the world and the workplace where I would be expected to be treated as a new friend always. All in all I am very grateful for having studied at UTS. The experience has been life changing and very beneficial to my career. I have learnt how to relate and interact with other people from various backgrounds and orientation. It has helped me develop an open mind, think outside the box and most importantly build a career that will push me through the outside world and hopeful contribute towards making the world a better place both at a personal and professional level. References Albarracin, D., Johnson, B. & Zanna, B. (2005). The handbook of attitudes, (London, Routledge) Chaffee, (1998) The thinker's way: 8 steps to a richer life, (London, Little Brown Foss, N. (2006) Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources, (London, Oxford University Press) Gonzalez, C., Dana, J., Koshino, H. & JustM. (2005). The framing effect and risky decisions: Examining cognitive functions with fMRI, Journal of Economic Psychology Vol. 26, No. 1 p. 1–20 Haffer, J. & Gresham, D. (2008). Luck’s role in business success: why it’s too important to leave to chance, Journal of Behavioral and Applied Management, Vol 9. 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