Decision Making Models in Organizations

Hira Madni

Misbah Usman

Moiz Bhatti

Mariam Haider Zaidi

Zoha Akmal

Decision making models can present an enormous challenge for research. What is Rationality?

What is Bounded Rationality? What is Intuition? When should people employ these decision

making models? Why should they even trust these models? These questions set the agenda for this

literature review, which (a) is divided into 3 parts: Rational Decision-Making, Bounded Rationality

and Intuition, (b) each part comments on how these models have been viewed across time in

decision making literature, (c) stresses the need to further specify different sub-types of intuition

and bounded rationality. However, the major challenge facing decision making models research is

the need for conceptual and theoretical work in some models (e.g. intuition) to define the nature

and scope of different intuitive phenomenon. Other than that, more experiments with rational

behavior need to be carried out. Most of these experiments should develop in the field of marketing

especially consumer behavior. Other than that, experimental studies of business behavior as of

public economics behavior are also needed.

Part I - Rational Decision Making
The decision-making process has been used in several fields like psychology, sociology,

economics and so on by decision makers in order to abide by moral values or to be better at

planning out strategies in different scenarios but this is possible by coming up with a rational

framework which means to provide strong evidence or reason behind a decision being logical

enough or either having a moral obligation/thinking that proves the decision of being rational.

Rational decision making also involves ethics i.e. ethics (Lumer, November 2010)

Moral Justification

- Motivationally Effective Justification

With philosophical justifications and arguments, it is concluded that systems which are good must

contain morals that fulfill two very general and acceptable conditions which are motivational

strength and efficacy. Morals that affect motivationally more or less means that if the information

is valid and accessible and provides knowledge, those who have a firm belief in morals would have

a crystal-clear justification and would practically adopt theories of these morals. And if they have

faith about the very same morals requiring some sort of action that means they are very much

motivated to fulfill this essential.

For things to be practically relevant, a moral justification requires motivational effectiveness.

Justification of morals that is not motivationally effective indicates that it is not utilized in practice

and hence also ignored by ethicists. It has no practical implications, although it may be

theoretically impressive. Moreover, it is quite perplexing why an argument brought to the table for
morals should be a reason or justification without the implied reconsideration to some motivation

and inclination required by motivational effectiveness. (Lumer, November 2010)

- Stability and Excess Information

Stability considering information basically means that the main factor or rationale on which

motivational effectiveness depends is stability and the information would remain is the respective

person obtains new or true information. It guarantees some sort of rationality considering

knowledge or epistemic rationality in choosing moral principles, meaning that the choice contains

information which is relevant; the choice is not due to conviction and is not naïve. This suggests

that the established reasons and resulting principles are highly developed in terms of intellect.

Lastly, durability of the adopted morals is further ensured by stability considering further

information. (Lumer, November 2010)

Relation of Ethics and Cooperation

The most reasonable and valid and theoretical decision-making approach to justifying morals

explains that understanding rationality by either theoretical decision making, or game theory

provides justified enough morals. Although utilization of game theory in a direct manner may often

lead morally bad decisions, after the introduction of a few circumstances which were believed by

ethicists to be solved in real life, cooperative ethics are justified by the supportive actions of game

theory. It is said that such ethics have the paradigm case of prisoner’s dilemma where rationality

maximization does not require to cooperate and therefore end up with a Pareto suboptimal outcome

which is basically resource allocation that cannot be reallocated in order to make a preference or

individual criterion better and not worse.

The solutions suggested to this include (1) Cooperative game theory: both players can agree to

cooperate given the possible chances of enforced contracts, else they will be punished by enforcing

institution in case of desertion. However, this situation is complex and leads to a similar outcome

as that of prisoner’s dilemma by assuming institutions that enforce contracts and is unable to

explain their existence.

Another solution involves repetition assumption of the prisoner’s dilemma where it is not a good

strategy to escape. (Lumer, November 2010)

Importance of Decision Theory in the Political Economy Service

The misconception of assuming is a converse delusion and should only be continued if it is relevant

to policy questions. In today’s world this fallacy is not very famous and not accepted at least for

the natural sciences. There has been quite extensive inquiry in three centuries into the laws of

nature. Most of these inquiries are there to understand complexity that contains a hidden order.

Inquiry has led to idle truths with the passage of time and those have been of great help for practical

human affairs. (A. Simon, Sep 1979)

Realism Explained Through Rational Decision Making

Complete realism is impossible. Whether a theory is realistic enough, this question can only be

answered by seeing if it yields good predictions, good enough for the purpose reserved or better

than predictions from possible theories (A. Simon, Sep 1979)

Reflective thinking at precollege level

This article talks about the rational decision making in education. The significance focused upon

is the brain development, acknowledgements of morals and the societal studies which all happen

at an early age which is why it is very important to invest in the decision making of curriculum

and go beyond the traditional measures because of how it shapes the overall institutions of the

society that works between the identification of a social issue to working out an action accordingly.

Identification of irrational societal issues in the education system

This was a process of realizing the basic flaws in the system which was done ironically by those

who are part of the system. This started with the registration followed by the basic interpretation

defining the problem establishing the priorities in those problems’ social inquiry then the

correction of those problems by brain storming and suggestions through groups. This was to

develop a rational thinking model within each individual who processes it individually and as a

part of their group in facing challenges.

(Woolever, 2019)

Rational decision making in the daily life

Beyond scholarly articles

The article, goals to overcome the contradiction between scholars' repeated criticism of rational

realism and the persistence of rationality in daily organizational life. We critically reviewed the

study of organizational decision-making to show that their place in reason inhibits theorizing the

way and reason organizations make rational decisions. To illustrate the eternal return of rationality,
we conceptualize rational decision-making as an executive practice, that is, a series of decision-

making activities that transform rational choice theory into social reality. We propose a framework

that describes the practice of rational decision making. The framework document clarifies three

mechanisms that make rationality happen within the organization: rationality of regularity, rational

engineering design, and rationalization of commercialization. These mechanisms highlight the link

between rational choice theory and the daily practice of national reporting decisions in

organizations. This framework shows how the differences between rational choice theory and

organizational life lead to in-depth research on how scholars, managers, and consultants work

together to make rational decisions. It provides a new perspective on the impact of rational choice

theory on organizational decision-making and may explain the usual emergence of rationality in

organizations (Cabantous, June 2011).

How human intellect links rational decision making

Articles talk about the idea of rationalism and its different aspects in the behaviors of the diverse

elements of modern-day organizations. Furthermore, the article goes on to explain the importance

of human intellect and reason. The origin of the definition of reason is the fact that we look to

explore answers and to feed our in-bred curious nature. We look at 3 different approaches of

reason, the first one being the generalized set of principles for all types of people, the second is

simply how we understand men and the last one is totally different approach from the rest; it

focuses on how the sacrifice of individual intellect is the key to understanding a problem.

(Chuchman, 1962)
Part II- Bounded Rationality
Definition

Bounded Rationality is defined as a phenomenon in which managers reach the limits of processing

and interpreting information during the decision-making process of a complex task or in other

words in can also be defined as any deviation from the Rational Choice Theory. As explained by

Simon, in order to arrive at decision, managers should participate in cognitively demanding

activities which is done by assimilating a range of information, assessing it and then examining

selective information from that. (Simon, 1979)

Main Concepts of Bounded Rationality Theory by Simon:

According to Simon, there are two concepts of bounded rationality: Search and satisficing.

Search is basically how widely and thoroughly a decision maker looks for information to help in

decision making. This process of searching, stops and a decision is reached when the individual

reaches the desired criteria that he has in mind as to what constitutes an appropriate solution. The

cognitive process of decision making is simplified by the use of implicitly held heuristics which

help managers filter out vast information by focusing on relevant cues to come to conclusions

under uncertainty. (Simon, 1979); (Chaiken, 1980) (Hammond, 1998) (Kahneman, 2003) (Simon

M. &. 2003). (Hilary, 2006)

The process of halting the search process and concluding without further considering a wider range

of information is known as satisficing. Studies conducted on managerial decision-making show

that manager’s evaluations are based on the reference points they have in their minds. Hence, they

act on deciding as soon as their acceptability threshold of the information criteria is met.
(Brousseau, 2006) (Kahneman D. &., 1982)

Application of the concepts of bounded rationality.

We can apply the concepts of ‘search’ and ‘satisficing’ in practical life by following the example

of how managers show a bounded rationality bias when they cognitively assign values to a variety

of real options in their project level judgements. To test this idea, project-level data in the field

was collected from eighty-eight IT managers in eighty-eight organizations. The results of this study

show that managers are more likely to associate real options with project value for projects with

low NPV (Net Project Value). If the project has a high NPV and other measurable benefits which

are greater than the costs of the search process, managers stop the search for additional information

that might help in deciding. However, if a project has low NPV, there is a high propensity to

consider real options and continue with the search process until they have the information meeting

their satisficing criteria.

Different interpretations of bounded rationality

Earlier we talked about how any deviation from Rational Choice Theory is defined as bounded

rationality. Since deviations can be caused in a number of ways, therefore different interpretations

exist of bounded rationality theories. Herbert Simon was the first person to use the term “bounded

rationality” in 1955 and give a definition to it. Later, subsequent writers pursued their own

interpretations of the assumed theory which are described below.

Firstly, evidence shows that the utility functions that economists perform need relatively small

adjustments. It involves data that shows that expectations are influenced by shifts in results

compared to a certain point of reference. That is, their appetite for benefits outweighs the fear of
losses. Furthermore, evidence that people pursue "other-regarding" goals such as fairness,

reciprocal altruism and revenge may not require a complete revision of the mainstream model. The

next collection of observations focuses on unknown prejudices in the decision and calls for a more

aggressive update of the standard model. Which show that people sometimes deduce too much

from too little data and misread facts. Lastly, the most extreme criticism includes support for

recognizing that it is difficult for people to determine their own interests. Framing effects,

preferential reversals, and related phenomena are also confirmed. There is proof of issues with

self-control and an emphasis on short-run pleasure that is incompatible with long-run preferences.

Contrasting different situations and their relevance to bounded rationality

In order to judge whether an observed behavior is rational or not, one should look at the situation

in which it takes place. Following are the four types of situations and their relevance to bounded

rationality modelling.

1. Situations where algorithms are used to make decisions such as inventory management

don’t need bounded rationality modelling unless the models employed rely more on

theoretical/logical evidence rather than concrete evidence. Bounded rationality can then be of use

here.

2. Situations where task specific procedures are well suited which are usually of limited

complexity. In these situations, agents must find qualitatively suitable moves for the required tasks.

An economic example could be auction markets.

3. In situations where agents have difficulty finding solutions to challenges arising from a

task, because the specifics of interactions between two variables escape the bounds of their
intuition, task-general procedures such as heuristics are helpful. The decisions maker can use

heuristics like availability, which is similarity with a recallable case) and representativeness

(similarity with a benchmark) both serving as reference points to help with decision making.

4. Lastly, there are situations in which heuristics are of little help since in these situations’

individuals are lost and rarely find adequate responses to the challenges they face. Laboratory

experiments show that agents do not at all master these situations (Kampmann, 1998)

Strong rationality models are more appropriate in describing the behavior of agents in type 1

situation, given that the model is acceptable. On the other hand, in situations 2 and 3, bounded

rationality modelling is most appropriate as heuristics can help the agents come up with a solution.

In situation 4, neither type of modeling is possible as these are close to chaotic cases and agents

might refer to random time series in order to describe the behavior. Thus, bounded rationality can

also be defined as the design of reasoning procedures when making decisions in either simple or

chaotic situations.

The Casuistic Structure of Bounded Rational Strategies:

A procedure for a one-individual choice issue or a game is a capacity which allots a choice to each

situation which may emerge. In this free definition the word "situation" must be comprehended as

including all the applicable data on the past.

What can be said about the structure of systems utilized by boundedly rational agents? The

experimental proof proposes that methodology is casuistic in the accompanying sense: An

arrangement of case differentiations dependent on basic criteria figures out which basic choice

standards are utilized.

The surprisingly successful model of pricing decisions of a department head presented in the book

by Cyert and March [1963] is casuistic. (Seltan, 1990)

Bounded rationality does not exclude a complex structure of behavior based on the distinction of

a great number of cases by simple criteria. However, the application of such strategies always is

general, and all the computations are straightforward arithmetical.

Strategy Method

Strategy method gives useful insights about the structure of the bounded rationality. In the

application of this method a group of participants first obtains the opportunity to become

sufficiently experienced in playing a specific experimental game. The participants then write

strategies for this game. The strategies are computer programs. They are matched with each other

in computer tournaments. Our experiences with this method show that the typical strategy is

casuistic (Seltan, 1990).

Boundedly Rational Strategy Construction

The first step towards in boundedly rational decision-making analysis is the superficial analysis.

The superficial analysis is qualitative rather than quantitative. And the word superficial analysis

refers to the use of easily accessible information.

Superficial Analysis

These considerations lead to a distinction of three phases of the game, an initial phase, a main

phase and an end phase. The superficial analysis does not yet have to specify exactly when one

phase ends and another begins. A first vague qualitative strategic plan emerges: establish

cooperation in the initial phase, maintain cooperation in the main phase and act non-cooperatively

in the end phase.

Now the major question is about the compromise. The compromise must be fair which means that

it must be possible for the person making the compromise yet acceptable for the other. And here

is the point where superficial analysis merges into goal formation. In this we use equal profits,

equal division etc. which is called ideal point.

A third stage of policy formation follows. It is presently important to decide a manner by which

the objective of collaboration at the perfect point can be accomplished. First, a choice must be

made about the length of the underlying stage and the end stage. Assume that it is chosen that

every one of the two stages are three periods in length. Probably this choice is the consequence of

decisions dependent on routine learning. (Tiwan & Wang, Feb 2007)

Part III- Intuition

Ove the year’s intuition has been conceptualized as a sixth sense, a paranormal power, a gut feeling,

and an innate personality trait. Several constructs have been used interchangeably with intuition.

This review attempts to explore the various definitions of intuition, and how intuition has been

viewed across time in decision making literature.

Defining intuition

Intuition is often viewed in a variety of ways, sometimes with connotations of mystery and

paranormal power. The root of the term ‘intuition’ may be traced to the Latin word ‘intueor’ or

‘intueri’ meaning to contemplate or look within.

The term intuition is defined as “knowing something instinctively; a state of being aware of or

knowing something without having to discover or perceive it…” (Encarta, 1999). Intuition is seen

as an innate capacity; something not directly accessible or visible. It is the process which gives

rise to a judgment or action. Thus, intuition seems to be an end process accommodating whatever

can’t be explained by other means. The literature reflects the lack of obvious conceptual framework

for the term intuition. Some of the alternative descriptors are “judgment, insight, and gut feelings”

(Dean, 1974); “hunch” (Barnard, 1968); “extrasensory perception” (Leavitt, 1975); “non-

rational”; “recognition”, and “edge” (Tichy, 1997). Such non-specific definitions suggest that

different authors and researchers could be describing different processes or even measuring

different phenomenon. Conversely, experts could be referring to the same phenomenon with

different labels.

How Intuition Has Been Viewed Across Time in Decision Making Literature.

Intuition is not a new concept but has been associated mostly with philosophy in the past. Voices

such as that of Chester Bernard in the 1930s and more recently Herbert Simon (1957, 1987) and

henry Mintzberg (1976, 1989) were among those who pioneered at penetrating the realm of

management.
The initial debates surrounding intuition were held mostly on theoretical level, contending whether

intuition is a useful construct used in organizations. First ever large-scale study conducted became

available in the 1980s (AGOR, 1984, 1986). It was stimulated by the need to modify the

management models to echo newly arisen dynamic conditions in organizations. These empirical

studies largely focused on the question what intuition is, whether managers use it, and under which

conditions (e.g., Parikh, Neubauer, & Lank, 1994)

In the past, much of the research on intuitive decision making provided a conceptual framework

rather than theoretical, and little qualitative or quantitative research had been carried out in the

field to support generalizations. (For a review, see Agor, W. H. 1989. Intuition in organizations:

Leading and managing productively. Newbury Park: Sage)

However, the floodgate of intuition research opened in the late 1990s, and is still on the rise,

contributing towards a more solid theoretical framework.

Intuitive decision making has long been regarded as involving a form of information processing

that differs from rational, or analytical, processes. Distinctions between "rational" and

"nonrational" human thought can be traced as far back as Aristotle. Barnard distinguishes between

"logical" and "nonlogical" modes of thinking, attributing intuition to the latter. (Pratt, 2007)

More recent developments in management point towards the emergence of a dual processing

approach, arguing for two distinct types of information processing systems in human beings. One

information processing system encompasses the automatic and comparatively effortless processing

and learning of information (Stanovich, 2000.). This system has also been referred to as
“experiential” (Barnard, 1968), “automatic” (Bargh, 1996; Bargh & Chatrand, 1999),

“associative” (Sloman, 1996. ), and “system 1” (Kahneman, 2003; Stanovich & West, 2000).

The second system allows individuals to attentively learn information, to develop ideas, and to

engage in analyses. This system has been referred to by various names, including “intentional”

(Bargh & Chartrand, 1999), “deliberate” (Hogarth, 2001), “rule based” (Sloman, 1996), and

“system 2” ( (Kahneman D. , Maps of bounded rationality: Psychology for behavioral economics,

2003).

Based on the conceptual foundation provided by dual processing theories, researchers view the

process of intuition as the "nonconscious" information processing system (Tichy, 1997).

Psychologists have adopted this dual processing approach keeping in mind that not all

nonconscious operations are core components of intuition itself. It is important to differentiate and

rule out any ambiguity mainly for a reason that the nonconscious component in dual processing

theory involves a larger group of phenomena than are central to intuition and cannot be alienated

and studied in isolation. For example, research on the nonconscious system has often focused on

learning processes. However, intuitive processes pertain less to learning and more to how learned

information is accessed and used. Learning is viewed as an input to intuition effectiveness, but do

as a learning process per se.

Concluding Comments

In this literature review we identified different areas of research where, we believe, attention to
the models of decision making in organizations would be constructive.
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