Value and Fallacy of Rational Choice Theory - Essay Example

The Value and Fallacy of Rational Choice Theory in Managerial Decision Making Introduction It is valid to argue that decision making is one of the most vital of all group and individual endeavors within an organization. Customarily, theorists and academics have viewed decision making as the intricate mechanism by which the processes of problem identification, formulation of objectives, and solution development, are created and assessed, and an alternative is adopted, applied, and then monitored and updated (Parmigiani & Inoue 2009). This form of rational approach to decision making states that the decision maker knows that a problem exists, that a decision should be made, that there are available alternatives, and that there are existing measure for decision making. Specifically, rational choice theory also claims that the decision maker knows all the potential alternatives and that s/he makes a decision after evaluating them all (Heath 2001). Decision-making process in organizations can be distinguished as automatic— regular decisions made in accordance to established guiding principles—or non-programmed—choices necessitating new and innovative solutions (White 2006). Furthermore, decisions vary with regard to the level of risk present, ranging from those wherein the results of a decision are fairly definite to those wherein results are considerably indefinite. Indefinite circumstances are communicates as probability statements derived from either subjective or objective facts (Heath 2001). Rational choice theory portrays decision makers as systematically rummaging around appropriate and relevant information to make the best possible decision. This essay will discuss the premises of rational choice theory, its implications on managerial decision making, and the validity of the argument that ‘individuals are rational and normally act as maximizing entrepreneurs’. Premises of Rational Choice Theory Rationality is revered in the Western world. A rational choice is one that arises in structured procedures and maximizes a value, regardless if it is marketability, controllability, reliability, efficiency, integrity, or any of numerous other values (Goodin 1998). Observance of any value requires upholding one alternative over another. According to rational choice theory there are major steps to making a rational decision (Allingham 2002). The endeavor is as crucial as the ultimate decision, due to the fact that each step affords an opportunity to re-evaluate the minimized and maximized values (Allingham 2002). The first step is problem definition. This entails identifying key variables under consideration and analyzing the situation to characterize the fundamental problem and to determine the constraints of the situation (Heath 2001). This initial step is crucial because it lessens the likelihood of solving the irrelevant problem (Heath 2001). The second step is identifying the objective to be realized. If a decision maker does not know where s/he is heading to, s/he will never know when s/he arrived there. Because of this, it is important that an objective is decisively asserted (Rios 1994). The third step is identifying all potential solutions to the problem. Every alternative that will solve the problem and attain the objective are given due consideration (Rios 1994). The fourth step is assessing all possible alternatives to verify which one most favorably satisfies the demands of the situation (White 2006). Organizations could apply rational choice theory to predict its consumers’ behavior (Zey 1998). An organization that serves a population or community whose people have constant income, for instance, can rationally forecast stable revenue because a consumer with a constant income discerns, with some confidence, his/her future earnings and spends more readily than an individual with an inconsistent income. Implication of Rational Choice Theory on Managerial Decision Making Rational decision making capitalizes on the most essential values while recognizing that opportunity costs are unavoidable (Resnik 1987). In case a deactivation of analysis were to occur, it is necessary for the manager to identify which values are most vital, make sure that they are exploited without excessively reducing other favorable values, and proceed with the decision (Coleman & Fararo 1992). The guts to actualize decisions are as much a component of the rational choice mechanism (Heath 2001) as is the systematic step of evaluating alternatives. Rational choice theory in managerial decision making views organizations or individual consumers as the fundamental decision making entities (Parmigiani & Inoue 2009). In a rational choice theory problem, the decisions of one ‘entity’ are worked out for the whole demographic the individual embodies. Once the entities in a rational choice theory problem are identified, their aims are established to verify the most probable outcome (Rios 1994). For instance, a customer of a consumer purchasing shop has to discover how much s/he should spend to make the most of his needs and wants; the manager should determine a price that incurs the most return, either through volume or pricing. In reality, unfounded results can develop from rational choices (Resnik 1987). Senior executives and managers may earn well raised remunerations compared to their job obligations, but this merely operates as encouragement for rank-and-file employees to work harder in order for them to attain a well compensated, desirable position (Dowding & King 1995). However, although rational choice theory has been quite useful in the area of managerial decision making, it has been criticized as fallacious. The misleading notion of ideal perspectives of rational choice is the premise upon which they are rooted in. They claim that preferences are predetermined, applicable to the issues, coherent, and accurate, when in reality none of these situations are assured (White 2006). Moreover, theoretical perspectives maintain that decision makers will invest time and effort to systematically assess all aspects of the problem (White 2006). The unavoidable reality is that human beings fall short of ideal rationality, due to the fact that it is not possible to gain knowledge of everything there is to be aware of. Furthermore, individual preferences and biases hamper objective assessment of all variables (Heath 2001). Nobel Prize winner Herbert Simon states in his theory ‘bounded rationality’ that evidence indicating that the rational choice theory does not manifest concrete decision making processes is overwhelming (Parmigiani & Inoue 2009). In fact, he assumes that decision making theory founded entirely on individual preference ordering and utility levels, without consideration to the setting of the decision, is as functional as a ‘one-bladed scissors’ (Parmigiani & Inoue 2009, 82). Similarly, Amos Tversky and Daniel Kahneman (1986 as cited in White 2006) claim that central principles of rational choice theory are breached habitually by decision makers. They maintain that decision making relies on the nature of the presentation, on the perspective of choice, and the language of display, so that the approach towards the decision making process is essentially partial and informal (White 2006). For instance, there is considerable disparity in how price is determined (Zey 1998). It is more trouble-free for a consumer to miss out on a discount than to agree to a surcharge, for the same price disparity is seen as a gain in the first scenario and as a loss in the second case. Credit card companies exploit this incongruity by claiming that any price disparity between card purchases and cash should be called a cash discount instead of a credit surcharge (Zey 1998). Only when CEOs or managers are aware that the stakes are too immense do they spend energy and time on more methodical analyses. Studies reveal that as the advantages of making an accurate decision heightens decision makers spend more time to figure out a way out and are more certain of their solutions (Heath 2001). The confidence of a decision maker in the precision of his/her decision seems to be connected to the fact that more relevant problems make capably more costly, intricate, and accurate strategies worth implementing (Rios 1994). Individuals act in a rational way only if the predicted result of their actions provides them a value at least as major as that from any alternative feasible for them in the situation (Coleman & Fararo 1992). The fact is that frequent or permanent decisions, when they are easily discernible and costs in changing are absent, facilitate uncomplicated, stable adjustment to what others are performing (White 2006). Hence, progressive decision making is favored more commonly than the classic approach to rational choice (White 2006). Consecutive estimates to a best possible solution are made, contrary to perfect rationality wherein an inclusive assessment of problem is carried out and the one best possible alternative is chosen permanently (Parmigiani & Inoue 2009). Decisions in the workplace usually fall short in satisfying the criteria of rational choice theory (Heath 2001). Managers work in partnership rather than independently examine each emerging challenge. They obtain information through word of mouth (Zey 1998). Since values and beliefs are transmittable from one individual to another, most ideas acquire their reliability not from rational analysis and actual experience, but from their recognition by trustworthy sources in the community or the larger society. Conclusions Although reason enlightens us that individuals do not act in a perfectly rational way, we cannot appreciate or understand the behavior of an individual unless we can view it either as based on reason or as a reasonable departure from rational action, such as a reasonable mistake, a reasonable emotional response, or an explicable but atypical reaction. Irrationality is justified as an expected outcome of the intricacy that faces us. Managerial decision making and communication lies on the implicit assumption that each individual trusts the rationality of other people. If not, the entire process of decision making will be worthless. The practical importance of a clear perspective of rational behavior on the issue of organizational decision making rests in the fact that it offers a set of principles for elaborating why individuals diverge from this idea of rationality. In truth, the rational choice theory provides its own analysis. References Allingham, M., 2002. Choice Theory: A Very Short Introduction. Oxford, England: Oxford University Press. Coleman, J.S. & Fararo, T.J., 1992. “Rational choice theory: advocacy and critique.” Sage Publications. Dowding, K. & King, D., 1995. Preferences, Institutions and Rational Choice. Oxford: Clarendon Press. Heath, J., 2001. Communicative Action and Rational Choice. Massachusetts: The MIT Press. Goodin, R.E., 1998. The Theory of Institutional Design. Australia: Cambridge University Press. Parmigiani, G. & Inoue, L., 2009. Decision Theory: Principles and Approaches. Michigan: John Wiley & Sons. Resnik, M.D., 1987. Choices: An Introduction to Decision Theory. Minneapolis: University of Minnesota Press. Rios, S., 1994. Decision Theory and Decision Analysis: Trends and Challenges. Massachusetts: Springer. White, D., 2006. Decision Theory. New York: Aldine Transaction. Zey, M., 1998. Rational choice theory and organizational theory: a critique. Sage Publications. Read More