Bounded Rationality and Decision Making Process - Assignment Example

Observation Review (Name) (Course) (Institution) (Instructor’s name) (Date) 1. Summarize of observation of a decision While working for an airline company during my attachment, the airline decided to retrench some of its staff. The decision to retrench was influenced by the fact that, the company was using so much money on remunerations and was getting very little in return as profits. To maximize profits, the decision to retrench was reached by the Chief Executive Officer of the company. In addition, the company also decided that, it would reduce the number of destinations as well as frequencies to some destinations that were seen as less viable. After executing this plan, the company for sure was able to save up to $1 billion dollars in revenue annually, which was previously used to cater for salaries. This saw the company’s performance at the stock market improve and the company was also able to improve employees’ salaries and working conditions. Nevertheless, after 2-3 years of the downsizing period, the airline industry saw an increase in competition with foreign airliners venturing the market. The airlines were able to tap new markets in terms of destinations as well as increase frequencies in various destinations, formally operated by the company in question. As a result, the company started losing market to its competitors which affected the company’s revenues. This led the company to a crisis, as it was not able to sustain its operations. The employees started asking for their benefits as majority of them left to work for the competitor airlines, which offered better terms. Consequently, shareholders were worried and investors shied away from buying stocks, which resulted from a drastic fall in value in the stock market. At the moment, the company is falling and it needs more than a miracle to get it back to its feet. 2. Use the theory of bounded rationality to explain the decision making process in this situation. Leaders are responsible for making noble decisions in an organization in order to save the company from sinking situations, or in improving the performance of the organization. However, the criteria that decisions are made is not always rational as people would expect. There is always the issue of ‘bounded rationality’, which is the greatest influence in decision making in any situation. Bounded rationality as defined by Gigerenzer & Selten (2002) is the notion that, in the decision making process, individual’s rationality is bound to cognitive limitations of their minds, the information they have, and the finite amount of time available to them to make a decision. In another perspective, bounded rationality suggests that, since decision makers lack resources and the ability to reach to comprehensive solution, they use their rationality only after amicably simplifying the available choices. In this case, the decision maker seeks satisfaction through settling down to a satisfactory solution as opposed to an optimal solution. In the current case of the airline company, the Chief Executive Officer acted rationally in response to the issues that were facing the organization. Nevertheless, he settled on a satisfactory solution which was influenced by bound rationality. The CEO did not have time to consider the long term outcome of his decisions to downsizing. Unlike in Rational Choice Theory, that perceives human beings as average rational, capable of acting towards their preferences, bound rationality contrast this notion as there is always a limitation to resources necessary for making rational decisions. The CEO, as the ultimate answer to the issues facing the company acted swiftly to improve the company’s revenues. His decision was influenced by time, limited by his cognitive limitations of his minds, and also by inadequate information. For instance, as demonstrated by Wayne (2009), during a crisis, resources are often limited while employees are required to do more with less. Thoughtfully, there are optimal limits to downsizing and outsourcing, which seem to be the order of the day for many organizations. Some CEOs may opt to hire external expertise to boost results in the first few months or so. The first decision is usually to outsource and downsize on a needs basis. Money is saved and the company appears to be doing well with everything looking brilliant in short term. Nevertheless, in the long run, deadlines may get missed as resources are subcontracted to complete projects. Consequently, customers get dissatisfied and leave for competitors. If the CEO had the ability to put into considerations all these factors before reaching to a conclusion, definitely he could not have made the same decision. He could have been able to reach to a feasible decision called “rationality optimization” (Wayne, 2009). In addition, the CEO can only be described as heuristic. Having enough experience in the industry or in management level, he possibly applied experience based approach to solve the problem. In heuristic approach, a person makes a decision to rapidly come to a solution that is perceived to be near the best possible solution or ‘optimal solution’. This is the basis of bound rationality (Wayne, 2009). In the essence of making a particular decision, the CEO believed that it was the best decision to make at the time. For sure, it was in context of the first few years, but in the long run, it caused more harm than good to the company. Bound rationality in most instances is meant to satisfy a situation at hand, not focusing on the long term consequences of the same decision. In Bound rationality, the broader picture is overlooked for short term benefit. The heuristic response is that, an estimation of a good decision is made. The bigger picture, vision and goals are mislaid and the organization finally loses ground. As a leader or a manager, it is always good to make decisions not to suit a situation, but to deal with the problem in a comprehensive manner. The CEO acted swiftly “Just in Time” as many managers call it (Wayne, 2009). They make decisions consciously without adequate information and resources. This form of decision making is what is termed as bounded rationality and is responsible for many crises in companies. In our case, bounded rationality is clearly responsible for the current situation of the company. 3. Explain what decision you would have made in this situation. Use the theory of bounded rationality to reflect on your reasons for making that decision. If I were the CEO of the airline company in question, I would have embarked on serious training programs for the employees to achieve better results. Bounded rationalists just like rational decision makers are goal oriented; the only difference is that, in bounded rationality considerations of limitations of the decision maker are made (Jones, 1999). The main goal of the company being to boost revenues and at the same time realizing customer satisfaction, I would have acted in this manner knowing that having well trained workforce would help realize these goals. This decision would have been in the context of bounded rationality. First, the company is already in a crises and investing in training and education would require resources. Being in a crises means that the company is in a tight position financially, and training would just make the situation probably worse in the meantime. This according to the theory of bounded rationality is a constraint in decision making process. Consequently, there will be very little time available to address this issue. As a CEO it is imperative to make quick decisions to save the situation. However, making swift decisions may be costly in the long run. Hence, this decision may not have been the most optimal decision. Ideally, it is the decision that I would feel was satisfactory at the time. It is a decision that is close to the optimal decision, just like the decision taken by the airline CEO in the case herein. This is in accordance to bounded rationality theory which perceives decision making process as influenced by cognitive limitations of the human mind (Gigerenzer & Selten, 2002). To seek a quick solution to a problem at hand without considering a rational decision making process. Nevertheless, training the staff may not have been the best decision, as it is not the modus operandi of many companies during crises, but would have been useful not only in the short term, but in the long run. Training employees would have enhanced service delivery as well as motivate them to work diligently. This would have helped the company realize high revenues as a result of customer satisfaction, and would be able to increase the frequencies of its destinations. In the long run, the company would be able to survive stiff competition. In conclusion, bounded rationality is a common approach in decision making in organizations. Managers are goal oriented and result oriented. They also do things in time to solve an issue. In the process of making decision, they are restricted by time, resource factors as well as cognitive limitation of their minds. This concept as explained by Simon (1991) makes decisions to be made for satisfactory purposes. They are not done rationally to achieve optimal decisions. References Gigerenzer, G. & Selten, R. (2002). Bounded Rationality. Cambridge: MIT Press. Jones, B.D. (1999). Bounded rationality. Annual Review of Political Science, 2: 297–321. Simon, H. (1991). Bounded Rationality and Organizational Learning. Organization Science 2, (1): 125–134. Wayne J. T. (2009). Leadership: Bounded Rationality, Mentor Leadership Training, accessed on 13 September 2012 from http://www.peermentor.net/pdfs/Bounded_Rationality.pdf Read More