Relation to Fool's Gold by Gillian Tett - Essay Example

RATIONALITY AND POWER IN RELATION TO “FOOL’S GOLD” BY GILLIAN TETT By 19th, September, Rationality and Power The recent industrial and technological growth has brought into effect various opportunities and equal challenges in the management and financial sector. Some of these challenges relate to global market expansion, limited resources, the need for high quality products, increased market competition, and establishment of an organization culture. These challenges result to the need for strategic decision making by the management in small sized, multi-national companies, and medium sized organizations. As such, there have been numerous studies on strategic thinking that focus on making strategic decisions. The management approach to strategic thinking confirms that the process of making strategic decisions involves thinking and planning. In this context, thinking involves innovations and creativity while planning refers to the establishment and formalization of methodologies and procedures relating to decision making. Strategic decision-making helps in solving risks and uncertainties, learning how to avoid common mistakes, exercising judgment, defining alternatives, breaking down decision problems, and acquisition of knowledge on how to analyze challenges in an organization (University of Virginia Darden School of Business, 2012). However, making a strategic decision requires huge resources, commitment, and knowledge on future impact. Hence, subject to the risks and uncertainties involved, making such decisions is a management challenge. For example, in the book “Fool’s gold” by Gillian Tett, the financial institutions were under serious financial risks resulting to difficulties in making strategic decisions. Indeed, although JP Morgan knew Exxon was credit worthy, they were reluctant to give him the loan there was a risk of using high capital reserve s for low profits. Nevertheless, JP Morgan helped the regulators to reach a strategic decision of reducing the capital reserve since Exxon had no risk of default from this loan (Gillian Tett, 2010). Actually, as seen herein it was not easy to make this decision. For organizations to achieve effective strategic decisions, they must understand the tools available for analyzing problems examine and learn how to apply methods for structuring and modeling strategic decisions, and possess strong capabilities to overcome the strategic challenges (Simen Revold, 2012). As such, JP Morgan understood the tools an applied them in making a strategic decision. There are various models that structure and model decision problems in a management context. Some of these models may refer to the organizational model that relate to behavioral and quantitative analysis. They may also refer to the political model that is equally behavioral, or the rational model, which relates to quantitative disciplines. Strategic decision-making is very relevant in the financial sector where the management must make financial decisions for the organization to remain afloat. These decisions relate with the story in the book, “Fool’s gold” by Gillian Tett (2010). The book manifests how a small group of bankers at JP Morgan took time to invent the tools and credit derivatives seeking to make the banking sector more efficient, benefit the economy and the banking system. On the contrary, other firms manipulated the tools and credit derivatives leading to financial risks that eventually propagated the financial downturn. The book narrates the strategic decisions that formed the foundation of the financial crisis. At the same time, the book explains the financial risks that numerous financial institutions took at the time. The book puts major concern on the input of the credit derivatives in the financial crisis. Most significantly, the limited resources, increased population, social factors, inflation, and environmental factors mandate the management to remain rational in making strategic decisions. Indeed, rationality of the strategic decision-making process determines the quality of the decision made. Hence, there is absolute need to use rationality in making strategic decisions that relate to financial matters. As such, this paper seeks to establish the importance of rationality of the strategic decision-making process in relation to the book “Fool’s gold” by Gillian Tett (2010). In doing this, the essay will draw contributions from concepts such as Cohen, March and Olsen’s ‘garbage can model’ of decision making, bounded rationality, satisficing and Lindbom’s idea of “muddling through”. The essay will use different models to stipulate the need and impact of rationality in relation to the power of making strategic decisions. Ideally, the essay will discuss strategic decision making as well as the statement, “Rationality and power often go hand in hand; to think of organizations and their surrounding environment as being political systems, changes the way in which we think about strategic decision making.” The fundamental idea in strategy is making concrete decisions under risks and uncertainties in an organization setup by the management (Kathleen M. Eisenhardt, and Mark J. Zbaracki, 1992). Indeed, from the book “Fool’s gold” by Gillian Tett there was huge financial risks and uncertainties in extending a loan to Exxon. Although, Exxon was credit worth, there was the risk of using large capital reserves to extend a loan to Exxon that would guarantee only low profits. Nevertheless, JP Morgan made a concrete decision of holding the loan on its books as European Bank for Reconstruction and Development to insure it. By doing this, JP Morgan solved the problem under high financial risks. From this decision, there was a reduction of the capital reserves and a protection from loan default thus serving all parties to their satisfaction (Gillian Tett, 2010). In fact, managers bear the responsibility of making satisfactory decisions that effectively solves the problems at hand. It should be in the right of mind for all mangers to understand the significance of strategic decisions they make on the overall performance of the company. Furthermore, even the failure to make any or the right decision attracts costly consequences for the organization and its personnel (Cezar Vasilescu, n.y). The need to be rational thereby manifests itself in strategic decision-making. Rationality in management refers to the efficient utilization of resources for purposes of finding solutions to risks and uncertainties revolving a problem in an organization (Mueller George et al, 2000). Rationality applies in strategic decision making to benefit stable and dynamic environments. However, observing rationality is a complex case because it is not a routine assignment. Indeed, classical decision-making involves defining the problem, collecting data, reviewing the data, initiating a response to the problem, adopting the necessary behavioral changes, and assessing the new strategy (Ireland & Miller, 2004). Assuredly, various classes of rationality include social rationality, contemporary rationality, and adaptive rationality. Specifically, adaptive rationality in making strategic decisions entails a sense of reasoning that links social rationality and technical rationality. Indeed, adaptive rationality forms the basis for management and planning. It involves political technical and moral imagination (Richard S. Bolan, 1999). Nevertheless, in most cases, the managers in power combine rationality and intuition to make effective strategic decisions. Ideally, the managers follow rational models as verification to earlier intuitions. However, although rationality holds a vantage position in decision-making, it is arguably true that rationality and enough allocation of resources cannot amount to effective strategic decision making. Managers on power can advocate for rationality by establishing an organizational culture that propagates rational norms and values in an organization. In addition, the management can promote rationality by initiating a formal chain of command and standards mode of operation. Moreover, the management should delegate work, offer training, and regulate access to information in the organization. As such, most managers base their strategic decision-making on rationality. For a smooth rational decision-making, managers involve about six distinct behaviors. The first behavior involves the starting of the rational decision making process followed by an effort to identify the major goals. Then we have the behavior of seeking to achieve those goals. The managers then bear the behavior of choosing the suitable methods of accomplishing the goals followed by subsequent actions that lead to achieving those goals. Lastly, the managers incorporates all proposals and decisions on the entire strategic decision making process. As such, rational decision-making incorporates the acquisition of relevant knowledge and information via research, evaluations, and using analytical thinking. Subject to the wide range of factors that rationality puts into consideration, rational decision-making is undoubtedly effective and the best in strategic decision-making (Sadler-Smith & Shefy, 2004). Ideally, there are various theories and concepts that seek to explain the aspect of rationality I strategic decision making. Such concepts include Cohen, March and Olsen’s ‘garbage can model’ of decision-making, bounded rationality, satisficing, and Lindbom’s idea of “muddling through.” In strategic decision-making, the managers have bounded rationality. In decision-making, it is true that power wins battles of choice, and that chance matters. The effect of power in making decisions and having its way clearly manifests in the book “Fool’s gold” by Gillian Tett. According to the book, powerful J.P. Morgan bankers formulated a financial plan in form of credit derivatives to suit their own interests. Indeed, P. Morgan CEO Jamie Dimon, Treasury Secretary Timothy Geithner, Tett, and the "Morgan Mafia intentionally came up with a new financial decision that brought a new turn in banking (Gillian Tett, 2010). Until the time it went out of control, the powerhouse managed affect the banking world as well as promoting the Morgan to the top of the banking trade. This resulted to a huge banking boost that seemingly solved all the banking problems. Additionally, the leaders Dimon and the J.P. Morgan were able to win their banks’ battle out of carnage as the situation went out of control. Moreover, the book tells us of how other leaders in the rating agencies and regulators were in a position to detect the risks and win the battle of the meltdown (Gillian Tett, 2010). As such, the reliance on power to succeed in making strategic decision comes out clearly in this book. Actually, the Garbage Can model, seeks to establish anomalies in decision-making processes where there are no defined preferences, participation, and technology in the process. In this model, problems, managers, and even solution are not certain hence the dependence on the available choices (Kathleen M. Eisenhardt, and Mark J. Zbaracki, 1992). This trend of uncoupling problems from available choices reflects an act of "rummaging around" inside a garbage can. Hence, in this case decisions are not rational since choices to solving problems rely on a mix of solutions, problems, and decision makers. Therefore, the Garbage Can theory manifests an irrational process of making choices and addressing problems (Guy Peters, 2002). Another concept is the bounded rationality. This concept dictates that managers responsible of making strategic decisions always intend to make rational decisions. Most assuredly, most behavior in politics is adaptive and has a rational intention. As such, they are seemingly adaptive. Indeed, all rational human beings seek to achieve logic, make reasonable choices, and understand what is happening around them. Indeed, from the book “Fool’s gold” by Gillian Tett it is quite clear that the Morgan had good intentions to change the banking sector for good. However, subject to the scope of the banking industry, they did not understand all that was happening around them, hence bounded rationality. As such, they succeed until when incompetent players came into the system and led to the credit derivatives spanning out of control. At the same time, subject to emotions and human cognitive they lose touch in their intention of making rational decisions even in the most stable of environments. Additionally, the complexity of the world and its size do not give us a leeway to understand everything. Furthermore, bounded rationality states that the world has difficult challenges that compel analytical thinking that increases the human cognitive load as we seek adaptive methods. Time is also a limit that hinders us from being adaptive. Subject to these hindrances, we can only make strategic decisions that do not reflect insightfulness thus limiting rationality to the confines of time and cognitive capability (Gerd Gigerenzer, and Reinhard Selten, 2002). Nevertheless, this does not imply people and their politics are irrational. In fact, all decision models presume humans to be intentionally rational though people may fail to make the best choices. For example, I may choose to buy an iPad based on public advertisements and pressure from colleagues. Nevertheless, upon reaching the mobile store, I turn down the offer of buying the gadget despite receiving a good offer. As such, the two concepts prove that despite the clear intention of making rational decisions, other factors like cognitive ability, time limits, large scope of the assignment, emotions, lack of defined preferences, participation, and technology leads us to making irrational decisions. Hence, it is quite true that rationality alone does not amount to effective strategic decisions but combines with power to bring out good results. Indeed, in the absence of power, it may be very difficult to initiate and implement a rational strategic decision. Works Cited Bolan, R 1999, "Rationality revisited: An alternative perspective on reason in management and planning", Journal of Management History (Archive), 5 (2), 68 – 86. Eisenhardt, K. and Zbaracki, M 1992, “Strategic Decision Making,” Strategic Management Journal, Vol. 13, 17-37. George, M., Mark, M & Vincent, B 2000, “Strategic decision making and performance: Decision processes and environmental effects,” Academy of Management Proceedings, 1, 1-6. Gigerenzer, G, and Selten, R 2002, Bounded Rationality: The Adaptive Toolbox, MIT Press, Michigan. Ireland, R. D. & Miller, C. C 2004, “Decision-making and firm success,” Academy of Management Executive, 18(4), 8-12. Peters, G 2002, A Garbage Can Perspective, viewed 19, September 2012, Revold, S 2012, Strategic Decision Making, viewed 19, September 2012, < http://www2.lse.ac.uk/study/summerSchools/executiveSummerSchool/courses/strategicdecisionmaking.aspx> Sadler-Smith, E. & Shefy, E 2004, “The intuitive executive: Understanding and applying gut feel in decision-making,” Academy of Management Executive, 18(4), 76-91. Tett, G 2010, Fools Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe, Free Press, New York. University of Virginia Darden School of Business 2012, Strategic Decision Making, viewed 19, September 2012, Vasilescu, C n.y, Effective Strategic Decision Making, viewed 19, September 2012, < http://journal.dresmara.ro/issues/volume2_issue1/12_vasilescu.pdf> Read More