Page 73 - DMGT402_MANAGEMENT_PRACTICES_AND_ORGANIZATIONAL_BEHAVIOUR

Management Practices and Organisational Behaviour

Notes 1. Rational Economic Model: Rationality refers to a logical, step-by-step approach to decision-
making, with a thorough analysis of alternatives and their consequences. The term
"rationality" implies a consistent and value-maximizing choice with certain limits. It means
that the decision-maker, as an economic being, tries to select the best alternative for
achieving the optimum solution to a problem. According to this model, the decision-
maker is assumed to make decisions that would maximize his or her advantage by searching
and evaluating all possible alternatives.
The rational model of decision-making comes from classic economic theory and contends
that the decision-maker is completely rational in his or her approach. The rational model
has the following important assumptions:
(a) The outcome will be completely rational.
(b) The decision-maker has a consistent system of preferences, which is used to choose
the best alternative.
(c) The decision-maker is aware of all the possible alternatives.
(d) The decision-maker can calculate the probability of success for each alternative.

In the rational model, the decision-maker strives to optimize, that is, to select the best
possible alternative. However, many factors intervene with being perfectly rational. These
factors are:
(a) It is impossible to state the problem accurately.
(b) The decision-maker is not fully aware of the problems.

(c) It is too simplistic to assume that the decision-maker has perfect knowledge regarding
all alternatives, the probabilities of their occurrence, and their consequences.

(d) Limited time and resources.
The rational model is thus an ideal that managers strive for in making decisions. It captures
the way a decision should be made but does not reflect the reality of managerial
decision-making.
2. Bounded Rationality and Satisficing Model: Recognizing the deficiencies of the rational
model, Herbert Simon suggested that there are limits upon how rational a
decision-maker can actually be. His decision theory, the bounded rationality model, earned
him a Nobel Prize in 1978. The essence of the bounded rationality and satisficing model is
that, when faced with complex problems decision-makers respond by reducing the
problems to a level at which they can be readily understood. This is because the information
processing capability of human beings makes it impossible to assimilate and understand
all the information necessary to optimize. Since the capacity of the human mind for
formulating and solving simplex problems is far too small to meet all the requirements
for full rationality, individuals operate within the confines of bounded rationality.

Simon's model – also referred to as the "Administrative Man" theory – rests on the idea
that there are constraints that force a decision-maker to be less than completely rational.
The bounded rationality model has four assumptions:
(a) Managers select the first alternative that is satisfactory.
(b) Managers recognize that their conception of the world is simple.

(c) Managers are comfortable making decisions without determining all the alternatives.
(d) Managers make decisions by rules of thumb or heuristics.

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