Rational Choice Theory: Implications for Managerial Decision Making - Literature review Example

Running head: RATIONAL CHOICE THEORY Rational Choice Theory: Implications for Managerial Decision Making Rational choice theory assumes that individuals are rational and normally act as maximizing entrepreneurs. Theorists “…have [long] tried to build theories around the idea that all action is fundamentally rational in character and that people [in this case, managers] calculate the likely costs and benefits of any action before deciding what to do’ (Scott, 2000: para. 1). However, in researching the impact of the theory on managerial decision making we find exceptions which suggest that this assumption may be just that, and that rational thinking may have less to do with managerial decisions than was formerly thought. The fact that people act rationally, while a suitable theory in many management applications, is not and should not be solely applied when it comes to the discussion of how management decisions are made. As in other disciplines that utilize the theory, decisions on a management level also include factors behind actions that may contain elements both rational and non-rational. Social theorists including Max Weber (1920) constructed a ‘typology of action’ in which rational action coexists with other forms (Scott, 2000: para. 2). And while Weber in the past dealt in the realm of sociological applications, the same concepts can be and are currently being applied to cause and effect when it comes to the basics of assessing managerial decisions. There are, indeed, modern cross-overs in applications ‘from the disciplines of political science, sociology, and psychology’ (Simon, 1978: 343) to the realm of economics and business management. Milton Friedman agrees. When it comes to the strictly rational, the strictly real, the notion that decisions come from a purely rational place has been disputed by experts. ‘Complete “realism” is clearly unattainable, and the question whether a theory is realistic “enough” can be settled only be [by] seeing whether it yields predictions...good enough for the purpose in hand or that are better than predictions from alternative theories’ (Friedman, 1953:41). Since management decisions are clearly economic as “agents of maximizing entrepreneurs,” there must be a place for alternative theories. This idea is supported by Simon, who while saying classical [rational] theory has its place, it is naturally replaced ‘by a model of bounded rationality [the notion that in decision making, 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 decisions]....when we examine situations involving decision making under uncertainty and imperfect competition’(Simon, 1978: 349). Regarding management decisions and the application of rational choice, a spot on issue to discuss is the role of managerial decision making in business conflict situations, for instance. Depending upon the person making the decision, it is clear that the theory might or might not apply based upon the ability of the decision maker to be rational, and to behave in a rational, intelligent and well-informed manner. ‘The central task with respect to organizational conflict, then, is that of managing this [communication] process...[which] requires a full and sophisticated grasp of major elements in the conflict’ ( Baron, 1990: 1). The success of these negotiations then is dependent upon the manager’s adeptness at communication, which may or may not be his or her forte. Instead of employing clear communication to resolve the issues, the manager may resort in frustration to less, shall we say, quasi-rational means of resolving the problem. Yet, in fairness, if communication fails, it may be inaccurate to say any surreptitious means chosen are not rational. In this case the best argument would be the requirement that the manager have a ‘full and sophisticated grasp of major elements in the conflict’, a more likely barrier to rational behaviour. While managers may ‘attempt’ to make optimal decisions, ‘clearly, there are numerous impediments preventing them from actually doing so’ (Rode, 1997: 1). Citing what he terms ‘suboptimal decisions’ based on non-rational thinking, Rode suggests that ‘managers actually don’t care about making suboptimal decisions or managers aren’t aware they make suboptimal decisions. It is reasonable to believe that the second possibility is, in fact, the situation’ (Rode, 1997: 1). He takes the managers side in the issue, writing that decisions would undoubtedly be more rational [although not completely given other intervening factors already mentioned] if the following were the case: The problem is not with the managers. If managers knew of the mistakes they are likely to make, and knew how to avoid making them, they would indeed make “locally optimal” decisions. But information is not enough. The problem...is one of sufficient information but inadequate clarification. Any rational person cannot be expected to rely on something which remains a mystery. Thus, it is important for managers to know not only what is optimal in a given decision context, but also what the expected. (Rode, 1997: 2) Indeed this point is accurate in terms of human behavior both from the personal standpoint and from the standpoint of the organizational structure and behavior itself. To assume that the manager will make a rational choice for the optimal good of the company is contingent then upon his or her ability to get good and accurate information that is not tainted with what might be the non-rational intent of the organization. However we must not completely discount the suggestion that despite good information, and the manager’s individual ability to absorb and apply it, the manager for whatever personal biases or reasons may not choose to or care enough to do the right thing or even what is beneficial to the organization. While classical theory allows us to judge human behavior from afar, it is not sufficient. For in sticking to it we are predicting and accepting the nature of the environment where the decision takes place ‘combined with assumptions of perfect rationality’ (Simon, 1978: 347). By giving up the idea of complete optimization, however, and by accepting a ‘richer set of properties of the real world’ (Simon, 1978: 347) , a realistic model for rational choice can be obtained that makes more sense and provides better business solutions via management decisions. So then it is not technically the notion of rational choice in decisions that is challenged, but how we essentially perceived what or what is not rational given a variety of circumstances. If, as in classical theory, human decision makers will only be as rational as the limited computational capabilities and the incomplete information provided allows them to be, ‘then there will be a close relation between normative and descriptive decision theory...concerned primarily with procedural rather than substantive rationality’ (Simon, 1978: 351). In short, inputting information and statistics into a computer and expecting rational outcomes can never be achieved. All we can hope for is a decision somewhat rational and beneficial to the organization. Control over the manager and his or her biases or lack of intellectual ability falls outside the realm of consideration. Finally...a word about the pathologies of rational choice theory itself is in order to clarify its use in management decision making as a guideline for acceptable behavior on the part of the manager. While not disputing its relevance the former picture paints an ‘iffy’ picture of its application in management decision making. While attempts have been made to elaborate on and thus make the theory a more effective analytical tool, the basic premise remains true to its 1950s roots. “...successful application of rational choice models have been few and far between (Green and Shapiro, 1994: Preface ix). It is this fact that primarily places its use and basic premise that rational decisions will always be made by managers to optimally benefit the organization into question: that question being, What is rational in relationship to all of the factors discussed? Rational choice theory from this perspective and as applied to management decisions can not be proven an effective foolproof analytical tool. Bibliography Baron, R.A. (1990) Theory and Research in Conflict Management. M. Rahim (ed.) New York: Praeger. Friedman, M. (1956) Essays in Positive Economics. Chicago: University of Chicago Press Green, D.P. and Shapiro, I. (1994) Pathologies of Rational Choice Theory. New Haven CT: Yale University Press. Rode, D. (1997) Managerial Decision Making: Normative and Descriptive Interactions [Online] available at: http://www.google.com/#hl=en&expIds=17259,17291,17311,22881,25639,25756,25854,26209,26218,26339,26637,26788,27100,27102,27284,27357&sugexp=ldymls&xhr=t&q=Rational+choice+theory+managerial+decision+making&cp=44&qe=UmF0aW9uYWwgY2hvaWNlIHRoZW9yeSBtYW5hZ2VyaWFsIGRlY2lzaW9uIG1ha2luZw&qesig=L-SONRIN1cy2oVyqlGkZQ&pkc=AFgZ2tmywEIHxqzSu7UJtTixxbg6swMIyWXKItdEOwPYncqwnlc0ngtzuG-Y5fhrO7z435iUK5kAqYO9Dz-FX7VWR3YCJPihGQ&pf=p&sclient=psy&rlz=1R2RNTN_enUS337&aq=f&aqi=&aql=&oq=Rational+choice+theory+managerial+decision+m&gs_rfai=&pbx=1&fp=110378f8f03be8cc (Accessed October 24, 2010). Scott, J. (2000) ‘Rational Choice Theory’ in Understanding Contemporary Society:Theories of The Present, G Browning, A Halchi and F. Webster (eds). London: Sage Publications. [Online] available at: http://privatewww.essex.ac.uk/~scottj/socscot7.htm (Accessed October 25, 2010). Simon, H.A. (1978) ‘Rational Decision-Making in Business Organizations’. [Online] available at: http://www.google.com/#sclient=psy&hl=en&rlz=1R2RNTN_enUS337&q=managerial+decision+making+and+rational+choice&aq=f&aqi=&aql=&oq=manageri, l+decision+making+and+rational+choice&gs_rfai=&pbx=1&fp=110378f8f03be8cc (Accessed October 25, 2010). Read More