Bounded Rationality in Decision-Making - Case Study Example

Observation Review Student’s Name Institution Affiliation Part 1 When ‘Jude Palace’ restaurant started its operations, it offered only fast foods such as French fries, burgers, pizzas, pasties, pies, wafers, pancakes, cooked meats, and chicken nuggets. After a few weeks, the restaurant management became aware of a number of customers who checked out their menus and then left without placing any order. The management sought to know their reasons and discovered that they left because there were no healthy food options offered in the restaurant. The management realized that whereas some customers were happy with the low prices and unique tastes of the fast foods, others were concerned with its healthiness. As a result, the management responded to the growing consumer concerns regarding the unhealthy aspects (high in calories and fat) of the fast food and made a decision to replace 90% of the fast foods they sold with healthier menu items. This decision was implemented thirty days after the establishment of the restaurant. The management aimed to re-optimize their menu and to modernize the customer experience by offering healthy foods as the customers were becoming more conscious about the calorie and fat content of the foods they consumed. It was a tactical decision to deal with some customer complaints and to increase the customer base. This decision caused the restaurant to lose some of the customers that it had previously captured. The management failed to realize that every consumer had different tastes and preferences and hence not all consumers were conscious about consuming healthy foods – the restaurant did not cater for all the customers’ needs. The outcome of this decision was that the organization was able to capture the customer base that preferred healthier foods; however, the larger customer segment that preferred fast foods was lost. This led to the loss of revenues for the company, which even led to the closure of some of its branches. Part 2 The theory of bounded rationality asserts that the decision makers normally wish to achieve goals and use their mind and possible to that end; they are intendedly rational- adaptive and goal-oriented, however due to human emotional and cognitive architecture they at times fail, occasionally in important decisions (Nielsen, 2010). Consequently, there is a mismatch between the choices of the decision maker and the decision-making environment (Gigerenzer & Selen, 2002). ‘Jude Palace’ responded to changes in tastes and preferences of its customer base- the management saved cognitive effort and time by accepting the first alternative that met the minimum threshold. The restaurant management limited its options to a manageable set and selected the first acceptable alternative without conducting an exhaustive search for alternatives. They relied on customers’ responses to make the rush decision to offer healthy foods and did not conduct a wide search before making its decision; they focused their search on only the customers that visited their restaurant, and they accepted the first recommendations that these customers offered, hence failing to choose the best option and maximizing on potential outcomes. Simon Hebert in advancing the bounded rationality theory noted that people finite or limited mental capacities, together with external influences over which they have little or no control, prevents them from making entirely rational decisions (Kahneman, 2003). This was the case in ‘Jude Palace’ decision to replace fast foods with healthier foods. In making the decision to replace most of the fast foods with healthier foods, the managers could have recognized that the information given by the customers may have been limited in reaching such a major decision. The main idea of bounded rationality is that data available may or may not be completely reliable or accurate, however that regardless of the quality of information at hand, a decision has to be made using resources which are currently accessible to the decision maker (Kahneman, 2003; Gigerenzer & Selen, 2002). The management in this case, was a satisficer as they sought a satisfactory solution instead of an optimal one. The theory of bounded rationality generally acknowledges that decisions are reached with three particular restrains applying; the information available to the decision maker is mostly only partial and is at times even unreliable. This implies that decisions are made without knowing other possible alternatives or courses of action. This was the case in the decision reached by the restaurant management, as the information was partial and there were other alternative courses of action, which could have prevented the loss of a customer segment. Along with limitations of data available, the limits of the management mind to reason and process the information that was at hand also played a role in reaching the decision to replace fast foods with healthier foods. Thirdly, the limited amount of time also had an impact on the management decision-making process outcome. The decision to replace fast foods with healthier foods in the restaurant menu was negatively affected by the limited intelligence that the management was able to gather regarding the most likely reaction of the consumers to the new food products. Opinion and research on bounded rationality has shown that humans use problem solving strategies which are reasonably rapid, reasonable accurate and that fit the type and quantity of the information available (Nielsen, 2010). In this case, the management did the best with what they had while making the decision. Because of bounded rationality, they did not have the time to wait for the best possible solutions and instead searched for satisficing decisions or those that sufficed in offering a minimum standard of satisfaction. The management stopped their search for possible alternatives when they found a satisficing one. Accepting the first reasonable alternative obscured the need to implement a decision, which truly solved the problem and met the decision criteria. The management thus failed in applying a purely rational problem optimization technique because of lack of adequate information, time constrains, and cognitive limitations, and opted to a heuristic approach to solving the problem using the best guess to reach the best decision possible, which did not approach an optimal decision. Optimal decisions are the most rational decisions under perfect circumstances. Such circumstances include perfect information (Nielsen, 2010). The management of ‘Jude Palace’ restaurant did not did not make an optimal decision. Part 3 In this situation, the optimal decision would have been to expand the restaurant menu to cater for consumers who preferred fast foods and those who preferred healthy foods. The theory of bounded rationality postulates that when making a decision, individuals conduct a selective exploration through an extensive space of options. The search selectivity is achieved through applying heuristics or the rules of thumb to establish the decision, which should be taken, and the one that should be disregarded. The exploration stops when a reasonable solution is discovered, almost long before every option is examined. The management found a satisfactory solution before conducting an exhaustive search for all the alternatives. This led them to reach a decision which was not optimal and which led to the loss of a segment of customers who preferred fast foods. In this case, the best decision would have been reached by considering all the possible solutions to the problem: for instance, establishing separate restaurants that offered healthy foods using the same brand name, expanding the menu to cater for all the customer segments, replacing the unhealthy foods with healthier ones. The next step would have entailed weighing the pros and cons of each of these decisions to ensure that the optimal or best possible decision is reached. The best solution would have been expanding the menu as this would have saved the cost of expansion and cater for the different food preferences for the different segments. Customer responsiveness is one of the sources of competitive advantage in the restaurant sector (Hills & Gareth, 2013). Establishing healthier food restaurants under the same brand name would have added unnecessary costs for the company whereas replacing unhealthy foods led to the loss of some customers, as evidenced by the consequences of the decision taken by the restaurant. According to the theory of bounded rationality, people and organization fail to reach optimal decision because they fail to exhaust all the possible solutions to a problem. They accept the first alternative, which meets the minimum threshold. By exploring the pros and cons of all the solutions, the optimal or best decision in this case- expanding the menu- would maximize the potential outcomes of the restaurant. This would have truly solved the problem. Amid the health trend and pressure for the restaurant to offer healthy alternatives, the management of the restaurant would have made the various decisions to offer healthier foods by focusing on vegetables and fresh fruits with a new line of premium salads. The restaurant customer responsiveness would be demonstrated by its shift towards healthier meals as well as its decision to offer higher quality drinks such as cappuccinos and lattes while at the same time maintaining the fast foods it previously offered. The restaurant would have also reduced sodium content in all the foods would be reduced by 10%, with the exceptions of desserts and soda. The management would have also cut back on saturated fats, sugars, calories and adjusted the portion sizes. The outcome of this decision would have been an increased customer base and revenues. References Hills, C., & Gareth, J. (2013). Strategic Management: An Integrated Approach. 10ed.Mason, OH: South-Western, Cengage Learning. Gigerenzer, G., & Selten, R. (2002). Bounded Rationality. Cambridge: MIT Press.  Kahneman, D. (2003). Maps of bounded rationality: psychology for behavioral economics. The American Economic Review, 93 (5), 1449–75. Nielsen, H. (2010). Bounded Rationality in decision-making: how cognitive shortcuts and professional values may interfere with market-based regulation. Manchester University Press. Read More