Such an ideal model of decision making also presumes that the decision maker is aware of all possible alternatives and that he or she decides subsequent to examining them all. A modern approach recognizes that decisions are made in an automatic, instinctive fashion. Specifically, image theory claims that people will take on a course of action that best fits their individual principles, current goals, and plans for the future.
The decisions made in organizations can be distinguished as programmed -- routine decisions made according to preexisting guidelines -- or non-programmed -- decisions requiring novel and ingenious solutions. Decisions also are different with respect to the amount of risk involved, ranging from those in which the decision outcomes are moderately certain to those in which outcomes are extremely uncertain. Uncertain situations are expressed as statements of prospect based on either objective or subjective information.
For the rational decision maker, the question is "What is the best answer" Rational decision analysis provides a precise method for choosing among alternatives based on their estimated values. The rational model requires the overt specification of the probabilities associated with choices and chances, as well as quantified payoffs for outcomes. For instance, consider the stock option decision tree given in figure 1.1.
Here, an investor is considering buying an option on a stock with a current price of $100. The option itself has a price OP. There is a 50% chance that the stock's price will raise to $110, and a 50% chance that the price will fall to $95:
- Current Stock Price = $100
- Option Price = OP
- With P = .5, S = $110
- With P=.5, S = $95
The investor has two alternatives: Do not purchase the option (choice I), or purchase the option (choice II). Given the above assumptions concerning probabilities and payoffs, rational decision theory gives an exact method for ranking the alternatives. We calculate the expected value of an alternative as the product of its possibility and its payoff value. For the stock option case, we arrive at the following expected values.
EV (I) = P (A) * V (A)
= 1.0 * 0
EV (II) = P (B) * V (B) + P(C) * V(C) - OP
= .5 * 10 + .5 * 0 - OP
= 5 - OP
The rational choice is to purchase the option if Option Price, OP, $5.We note that this approach formalizes just one aspect of the decision task, that is, choosing among the alternatives. The pattern does not provide exact methods for identifying problems or alternatives, nor for estimating those alternatives. The rationalization that results from this process is always the same: The choice has the highest estimated value. The rational decision maker does not abandon the trouble even if all outcomes have negative expected values. In that case, the decision maker selects for the "best worst" case. The model does not address the matter of generating additional alternatives. Still, rational