Management 4 - Chapter 18 B. Define and explain how bounded...

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Chapter 18 B. Define and explain how bounded rationality influences decision making. Herbert Simon won a Nobel Prize for his theory of bounded rationality, which maintains that people are restricted in the information they possess to make decisions, engage in limited search for solutions, and settle for less than optimal solutions. In other words, there are limits or bounds on rationality. Bounded rationality is based on these assumptions: 1. Managers select the first alternative that is minimally acceptable, which is called satisficing. 2. Both the available information and the definition of the situation are incomplete and inadequate to some degree. 3. Managers are comfortable making decisions without first determining all the alternatives. 4. Managers use judgment shortcuts to make decisions, which are called heuristics. Managers satisfice (i.e., accept a decision that is “good enough”) because the costs of maximizing are too great. Maximizing would be analogous to searching the Internet to find the very best Web site to help you write an assigned report; satisficing is searching the Web only until you find a site that provides enough information to allow you to produce an acceptable report. Another constraint on the decision-making process is bounded discretion, which limits decision alternatives to those that fall within the bounds of current moral and ethical standards. Optimal solutions are not always best because they may involve unethical behavior. For example, when Beech-Nut sold adulterated apple juice for babies, it optimized its profit in the short term. However, this decision was viewed as unethical, and the company was penalized. 5 Heuristics are rules of thumb based on past experience that managers use to simplify decision making. For example, when a stock drops a set number of points, some investors automatically sell rather than analyze a wide array of factors that influence the stock. People also tend to compare one decision against another in an incremental approach rather than carry out a comprehensive consideration of all possible decisions. C. Describe 2 models of decision making.
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This note was uploaded on 10/17/2009 for the course ALL 0001 taught by Professor All during the Spring '09 term at University of Central Oklahoma.

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Management 4 - Chapter 18 B. Define and explain how bounded...

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