Managing under Uncertainty and Use of Bounded Rationality and Heuristics in Decision Making Process - Essay Example

Managing Under Uncertainity – Observation Review Name Class Unit Decision summary During my internship, I observed a decision being made by the company manager. The firm manager made a decision to lay off the work force in three departments which were; technical, sales and marketing. This is a decision that was aimed at helping the firm save salary costs for approximately 1000 of the staff. The manager wanted the decision to be taken within the following month, so that formal dismissal procedures could be used. The manager explained that the firm was experiencing tough economic times and stiff competition. There were also claims that the departments affected were having more employees that the available tasks which was costing a lot to the company. According to the management, the downsizing would help the firm save a lot of revenue. The company had also been criticized by the shareholders due to their high costs of operation which had reduced the profits. The decision was thus supposed to act as a sign that the firm was working on managing and reducing their operations costs. According to the manager, the firm operating costs could not be maintained and a fast decision was needed. After the downsizing was done, the firm ran into problems. The company started losing business due to reduction in sales people, the departure of the technical staff lead to the firm having technical issues. Another area that suffered was the research and development sector. There were few new products due to fewer members. The company had lost a lot of staff who were high performers leading to problems. The overall effect was a loss to the firm as the decision turned out to be wrong. The company continued to struggle with reduced output and high costs. The many anticipated benefits of employee downsizing did not materialize. Use of bounded rationality and heuristics in decision making process in this situation Decision making is a process which is guided by aspiration levels. When making a decision, there are always alternatives and one have to undertake a search process until a satisfactory alternative is found. The level of aspiration in decision making is not fixed, but keep changing according to the situation. In making a decision such as downsizing in a firm, the manager cognitive capabilities are limited. Rational decision making is not possible since it is hard to know all solutions to the problems within a limited time (Yeung & Soman 323). Human beings cannot make rational decisions due to environmental constraints. The decision that human beings make are affected by other deliberations such as emotions. The manager could thus not have come up with a rational decision (West, Toplak & Stanovich 935). The manager utilized non-optimizing procedures in coming up with the decision. The pressure to solve the problem of high operating costs within a limited time faced the manager. There were complaints from the stakeholder which could have pressurized the manager into coming with the decision fast. This implies that the time to make decision was scarce and the manager had to make the best use of the available time. The problem was also new to the manager, the firm had not undertaken downsizing measures before and this was the first time. This may have made the manager to have undergone two processes (Conlisk 692). One of the processes is looking for the alternative while the second process is looking for methods for choosing alternatives. Making a decision is affected by heuristics. Due to time constraints and limited information, the rationality of human beings is affected. The time for processing the information becomes limited and one is forced to use short cuts. These shortcuts in decision making are known as heuristics. The fact that the manager had limited time exposed him to heuristics (West, Toplak & Stanovich 935). The decision made can result to success or failure for an organisation. Rational decision making is always hard to make despite being recommended. This is due to the environmental and cognitive constraints which lead to the decision makers to utilize heuristics so as to arrive to the decision fast (Maqsood, Finegan &Walker 296). These shortcuts proofs that the decision making is always bounded by these factors. In this case, the manager had several alternatives to choose from when coming up with the final decision. Despite having alternatives, time available was scarce. Despite having appropriate and enough information, it becomes hard to make a rational decision. The cognitive ability of the decision maker is affected by both internal and external factors (Gigerenzer 72). The manager must have been limited in his ability to choose for the solution. This led him to make the first solution that could satisfy the company need and failed to search for the optimal solution. It is important to understand that human rationality is affected by the social, institutions and the ecological constraints. For the manager, factors such as time, cost and the ability to process information must have affected the final decision made. The decision that was made was wrong. This can be attributed to the fact that despite having limited time, the manager could not utilize heuristics effectively (Conlisk 690). The lack of understanding of the heuristics could have contributed to the decision made. It is important to understand that heuristics are used when making decision under uncertainty (Schooler & Hertwig 620). When utilized appropriately, heuristics can help one to come up with the right decision when in uncertain environment (Yeung & Soman 320). The manager could have avoided the problems brought about by wrong use of heuristics through use of logical and rational thinking (Hardman 22). For example, though downsizing has been utilized in several firms, it has not always been successful. There is a need to look for other alternatives which could have led to better results. The analyses of the manager’s decision making prove that the way in which we make decision determine the success or failure in an organisation. The fact that decision making is hard to be rational proves that undertaking heuristics are important for the decision makers (Yeung & Soman 320). The human being limitations will always affect the decision being made and thus the outcome. For the manager, bounded rationality and heuristics played a part in the decision making process. Reflection on my decision making If I was in the manager’s situation, I would not have taken the decision to downsize. Downsizing in a firm should always be used as the last resort rather than the first. When one undertakes downsizing action without taking time to evaluate available alternatives, the long term costs proves to be high. In most cases, it is important to note that the labor costs from the employees are not the source of the organisation problems. Firms undertake downsizing strategy thinking that it will lead to economic benefits but in most cases, it has been proved wrong. Having the information about failures associated with downsizing, I would be able to evaluate the alternatives and come with the best cost cutting mechanism. I would have looked into other sources of inefficiencies in the firm and act to them first. I would have made decision to make sure that the firm was able to utilize the energy effectively and enhance efficiency in all departments. The firm had been incurring high energy costs while some of the departments lacked efficiency due to poor staff motivation. The decision that I would have made would have been affected by bounded rationality (Gigerenzer 70). There was limited time since the stakeholders were pressuring the firm. This means that the decision would not have been made with sufficient information. One way in which I would have achieved a fast decision in such a situation, is through heuristics. Heuristics acts as shortcuts when one is bounded due to internal and external factors (Todd & Gigerenzer 161). The time constraints, limited information and biases are bound to affect my decision making process. This implies that I may be forced to utilize the first alternative that can satisfy instead of looking for the optimal solution (Kahneman1460). In most cases, the decisions made are not the optimal solutions, but are arrived through bounded rationality. The fact that one has to undertake the decision making process in an environment with influences, makes it hard to be rational. A good understanding of the heuristics would have enabled me to come with an appropriate decision (Maqsood, Finegan &Walker 297). Ensuring efficiency in the firm requires time, so that adequate auditing is done. This should be done before coming up with the decision (Klaes & Esther 34). There are also various methods in which employees can be motivated to boost their efficiency in production. Thus, the decision requires a lot of time to process. Despite the need for time, the pressure from stakeholders requires fast action. Knowledge in heuristics when utilizing bounded rationality is important (Maqsood, Finegan &Walker 297).. Heuristics in this case will help in coming up with an optimal solution despite the constraints. This is a strategy that helps in ignoring part of the available information with an aim of coming up with a fast decision. My decision would thus be based on the limited information available, limited time and complexity of the information available. This means that my final decision is going to be affected by bounded rationality. It is important to note that, rational decision making cannot be applied in this situation due to the constraints that exists. References Conlisk, John. “Why bounded rationality?” J. Econ. Lit., 30(4) (1996): 669-700. Gigerenzer, Gerd. ‘Fast and Frugal Heuristics: The Tools of Bounded Rationality’. Handbook of Judgment and Decision Making .Eds. D. Koehler and N. Harvey .Oxford: Blackwell, 2004.62-88. Gigerenzer, Gerd. Rationality for Mortals: How People Cope with Uncertainty. Oxford University Press, Oxford, 2008. Hardman, David. Judgment and Decision Making. Blackwell, Oxford, 2009. Kahneman, Daniel. ‘Maps of Bounded Rationality: Psychology for Behavioral Economics’.American Economic Review, 93.5 (2003):1449-75. Klaes, Matthias & Esther-Mirjam Sent.‘A Conceptual History of the Emergence of Bounded Rationality’. History of Political Economy, 37.1 (2005): 27-59. 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