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Welcome to our second week of lectures. This is the theory lecture of the week.

In this lecture, I will present a general introduction and discussion of decision making in organizations. In the lecture, I will relate various rational system views of organizations that tend to focus on administrative units or leaders of organizations. A simple example of organizational decisions can be found in the image in the slide deck showing a decision tree right next to me. The choice here is whether to upload a picture of not onto my Coursera course. A variety of criteria applied help us decide. Fortunately, this particular image of a decision tree was taken off Creative Commons and freely viewed, So, we're okay. Nevertheless, this gives you an initial sense of what we mean by decision making and the kind of process and the decision trees that, People make within organizations. This week. we read some work by James G. March concerning decision making. Jim is faculty member here at Stanford who has spent several decades studying actual decision making behavior in organizations. In the work you read, he classifies types of organizational decision making that helps situate are readings further. Particularly he describes rational and natural classes of organizational depictions of decision making that someone like Richard Scott described last week. Jim March describes two general classes of organizational decision making or logics of decision making as he calls them. The first one is the logic of consequence or rational choice theory, as others may call it. The second one, It's the logic appropriateness, What Allison, Graham Allison might call models, others might call cultural models and sense making of organizational models and so forth. The core distinction between these logic's is that one is concerned with choices and instrumental efforts and the other one is concerned with rule following and interpretive activity. Both are intentional forms of behavior. The former entails means-end rational action, and the latter entails value rationality or duty-driven behavior.

As such, the latter is more like Kant's categorical imperative. Value rationality contends that regardless of the cost, or without attention to them, we often make decisions. The rational actor model is essentially a model that follows the logic of consequence. The general theory is based on four aspects. If you know these four aspects, you can apply them readily in your papers. For the rational actor approach, the first aspect is knowing your alternatives. What are the options here in front of you? Second, it's important to know the consequences of these alternatives. What happens if I take an option. Third, you have ordered preferences, or rank goals and objectives in terms of greater or lesser value, The fourth aspect of a rational decision process, with a logic of consequence, concerns using a decision rule or a choice process, Also known as an inference pattern in Graham Ellison. Here, the choice process is a rule by which an alternative is selected on the basis of its consequence for preferences or goals. Two decision rules are commonly discussed and reflect different notions of a rational actor. The first is an ideally rational person, traditionally called economic man by its critics. This individual is typified by clarity, and knowing, and consistency of preferences and objectives. They're an ideal form of a rational actor. The second is a boundedly rational person and it's typified by ambiguity, and uncertainty. In knowing, incomplete information, And inconsistency in preferences or objectives. So here, we have individuals who are more like the real persons we all know. So it's a little closer to a description of actual decision making than the idealized form. Let's start with a very simple example of rational choice in action, just to see the difference. Soon it's going to the rainy season in California, We call this winter, and it dips down to 60 degrees and it rains quite a bit. because we're so tough we always worry

about whether to bring an umbrella or not. Let's say on a particular day there's a 40%. Chance of rain and we have to decide between bringing an umbrella or not bringing an umbrella. Now, let's say, we see certain costs and benefits each scenario and the scenarios are pretty simple. Not bringing an umbrella and it does not rain. Yeah, I don't have to carry it. Not bringing an umbrella and it does rain, I get all wet. That's kind of a downer. Bringing an umbrella and it does not rain and then I have to carry that around all day. There's a cost to it. And then, bringing an umbrella and it does rain, I was prepared. So, let's use some values from ten to negative ten to depict this. Let's say that not bringing an umbrella and no rain is six out of ten. You know, I was, I was lucky not to have to carry it all day. I don't bring an umbrella and it rains, right? Well, then I get wet, and I find that terribly disconcerting, right? A negative ten. on the other hand, I do bring an umbrella. And let's say there is no rain, and I have to carry it around, That's kind of a discomfort to have to walk around with that so a negative five. And then I, I bring an umbrella and it rains and I'm kind of pleased with myself for being so well prepared. I give myself a plus eight. So, Below this kind of in the, the chart you see, kind of a decision tree where the chances of rain versus no rain is 40 to 60 and the options, right? And we want to calculate the expected utility of each kind of scenario and here all we have to do is multiply not bringing an umbrella plus six with the chance of no rain to get that second value of 3.6. So you have six 0.6 = 3.6. That's the expected utility of bringing umbrella if it doesn't rain, or not bringing umbrella if it doesn't rain. But if I don't bring an umbrella and it rains, it's -ten 0.4 which is -0.4. And if I add those two together, I get the net expected utility of not bringing an

umbrella, which is -0.4. Now, if I go through the same kind of operation in the below branch bringing umbrella, I find a net expected utility of point six. And if I compare the two, it's clear that bringing umbrella, given my preferences or my kind of cost-rewards as well for each outcome, that it's better to bring the umbrella than not, because I really don't want to be wet on the day that I don't bring it. Now, let's do this for a more interesting case. Dating. Many of you are single and perhaps looking for someone, right? So, say you're wondering whether to ask someone out. Imagine that person now. What do you think the chances are that they'll say yes? Ten%? 25%? So here are your options, you don't ask them and they'd say no. That's good, right you're not embarrassed. You don't ask them and they would've said yes, so you miss out on someone quite interesting and wonderful. That's kind of a downer. You do ask them and they say no, that's kind of mortifying, right? And that may be terrible. And then there's the last, which is we do ask them and they yes. How would you value each of these options from a ten to a -ten?? Are you a high interest, low cost person? Or a low interest, low cost person? Meaning you ask people all the time and you don't have much to lose. And then the high cost person sees it as risky. No matter what hap, happens. No, I've always found it kind of mortifying to be rejected.. So I'll go with high cost. And so in this table you see here. Not asking someone out and them saying no, eh good I've saved myself the trouble it's a plus two. Not asking them out and they would have said yes, that's kind of a downer that would have been a negative eight, right, pretty bad but not terrible.But then asking them out and them saying no is just awful, I feel miserable over that so a negative ten, and then me asking them out and them saying yes is a + ten.

That's just couldn't be better right, best of all worlds right there. So if we go through the decision tree again. And we try to predict the net utility, of each option of asking someone out or not. We find that if we go through the math again like before, you take don't, Ask out, and getting a yeas at negative eight, times the probability of 0.10 occurance that they say yes, is negative 0.8 expected utility. And then the opposite of don't asking them out and they reject you its a positive utility of 1.8, so we have a net expected utility of not asking people out of one, and then if we actually ask people out. Given the risks, and the probability that they will say no, and that we would be mortified, we have a net expected utility of negative, Eight. And so that's pretty severe, so of course we just avoid the whole effort altogether. So that gives you two examples of very simple decision trees that people make. In terms of kind of common decisions. But you can extend this to organizations and their are kinds of decisions as well. And the kinds of options. Particularly like, if we do this then someone else has a probability of reacting in a certain way. Right? Much like the Cuban missile crisis example would show if we could attribute certain numbers to it. Now clearly there is a ton of ambiguity here. Weather reports aren't that accurate, plus I really have little good evidence to go on to decide if someone might be receptive to being asked out or not. Thus far, the rational actor model is an idealized model, that assumes Herculean abilities of decision makers. In reality, most of us are boundly rational. We, we aren't clear on our preferences, our goals we have vague notions of information. We only have probabilities of vague probabilities or ranges of probability. In terms of what we think others will do.. So. This leads us to the next question about

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