Managerial Decision-Making Based on Data? Bounded Rationality.
Based on: Linda M. Pittenger, Aaron M. Glassman, Stacey Mumbower, Daisha M. Merritt
& Denise Bollenback (2022): Bounded Rationality: Managerial Decision-Making and Data, Journal of Computer Information Systems, DOI: 10.1080/08874417.2022.2111380
Introduction
There are limits to human perception, even if we do not realize that. Herbert Simon (Economist and Nobelist) coined the concept of Bounded Rationality. It was the response to idealistic economic theories that failed in relation to decision making practices, which were mostly based on intuition. He listed the human mind cognition limitation, computational limited capabilities, time pressure, and problem complexity as the factors that make rationality bounded. Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal [Wikipedia]. This concept presents rationality as optimization, where decision-makers face the fully rational process of finding an optimal choice based on the information available.
Simon suggests that decision makers balance adequacy of the decision and its perfection. Perfection is not optimal because it absorbs high investment costs, while not guaranteeing a higher return. Simon presumed that irrational decisions were not supported with data available that time nor information gathered by observation. They were based on intuition, guesswork, emotion, and high power of decision maker. Now, with the growth of data usage the most organizations expect that decision makers will be supported by data analysis and evidence of facts from industry and the environment. Today’s managers also expect to make quick and optimal decisions because they are equipped with easily accessible data and capabilities to process it. They believe that big data and machine learning technology can make decisions more rational.
Decision is a commitment to the course of action intended to serve
the interests and values of people. Humans are limited
by their awareness that makes them blind to essential information. In psychology, decision-making is regarded as the cognitive process resulting in the selection of a belief or a course of action among several feasible alternatives. It could be either rational or irrational. The decision-making process is a reasoning process based on assumptions of values, preferences, and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action. [Wikipedia]
Research about decision-making is also published under the label problem solving, particularly in European psychological research.[2]
Bounded rationality occurs where human’s limitation starts to play a dominant role in certain situations. It creates the difference between the economic and psychological aspects of the facts and data analysis. Decisions are usually taken with the run where computational demand exceeds people’s capacity for thinking. Thus, limited rationality, knowledge incompleteness, complexity for prediction and time pressure produce mistaken decision. In most cases decision makers are not able to anticipate the consequences of their choices because they do not seek optimal solutions, but they run with the first satisfactory option.
Simon and others propose the process for selecting the most reasonable option.
Sometimes the decision-making process involves distinctive information sources that are augmented but translated into knowledge, to take appropriate action. Kahneman (another Nobelist) argues that dynamics of organizations may impact intuition-based decision-making. Klein defines intuition as applying our past experiences in the current decision-making process. Humans usually see more clearly the information that supports their actual opinions but often fail to recognize information that contradicts. Our mind is not able to seek optimal solutions in changing environments. But in today’s chaotic and complex environments, managers must develop. Lacking these capabilities can expose organizations to multiple risks. A manager who has a lot of data to be used and a shortfall in cognitive capabilities, cognitive bias, or cognitive overload cannot address the firm’s challenges in proper ways.
