Bounded Rationality in Decision Making

This assignment delves into the concept of bounded rationality, a framework that recognizes the limitations of human cognitive abilities in making perfectly rational decisions. It explores how factors like information processing, heuristics, and biases influence decision-making outcomes. The analysis draws upon relevant theories and models from psychology, economics, and organizational behavior to understand the complexities of decision-making under constraints.

Running head: MANAGERIAL DECISION-MAKING 1
Managerial decision-making
Name
Institution
Date of Submission

MANAGERIAL DECISION-MAKING 2
Introduction
Decision-making is a crucial process of every manager and top management of an
organization. The decisions that a company undertake determine the success or failure of that
company. Decision-making process, however, is not an easy process and it involves a lot of
uncertainty and risks (Sharma et al., 2014). As a manager, you need to make affirmative
decisions regarding various issues affecting the business operations. Herbert A. Simon, in his
book titled, “Administrative Behavior,” tried to explain how an organization can be understood
based on its decision-making processes. His key point that was so clear was the importance of
decision-making in business operations, and therefore, he termed decision-making process as the
heart of any administration (Simon, 2013). Nevertheless, in understanding how an organization
works, it is crucial to put into consideration various factors and variables that affect the decision-
making process. As such, psychology and economic theory come into play. Human behavior as
well organizational behavior determines the operations of a company (Forgas & George, 2001).
As such, while trying to understand, how decisions are made by the managerial team, it is
essential to realize how human behavior influences the decision-making process. Various
concepts have been documented that shed light on different decision-making tendencies and how
we can overcome cognitive biases. This paper, therefore, discusses Simon’s quote from the
Rationality and Administrative Decision Making-section, to System 1&2 thinking, Bounded
rationality, Judgement Heuristics, and Judgement and decision-making process. It will further,
use case study scenarios to show the application of these concepts in decision-making process.

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Part 1
Simon’s theory
Herbert A. Simon has contributed significantly to the economic organization through his
explanations of decision-making processes. Simon’s work particularly in his book, the
‘Administrative Behavior” is very comprehensive and at the same time complex. If not keen, one
can miss the point he was trying to pass across. Simon’s theory is based on a rational, classical,
and ideal model concerning human decision-making process (Simonsen, 1994). The rational
model proposed by Simon does not exist in real life. Therefore, it has received criticism from
various scholars. Simon knew this and he encouraged people not to criticize the model but to
look at the larger picture. The problem most people encountered was to understand how
organizations make decisions and thereby, be able to design organizations with total rationality.
Rationality, however, is a variable that determines how organization make judgements,
develop values and goals, gather information, and make decisions. In Simon’s quote, he
expounded on the issue of applying rationality behavior in problem-solving (Sternberg &
Frensch, 2014). He stated that the human’s mental capacity is tiny in tackling complex problems
as compared to the weight that the problems carry. And the solution could only be found on
objective rationality. Human rationality gives the administrative theory meaning, and if there
were no practical limits to human rationality, then, Simon’s theory would lose meaning. These
limits, however, are not static and they vary depending on organization’s environment where
decisions take place. The primary task of the administration of any organization is to create an
environment that is very close to rationality (Scott & Davis, 2015) hence allowing individuals to
make their decisions.

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Making rational decisions involves making a choice and deciding to do a task with the
aim of achieving a particular goal. Limitation of the human brain to handle complex matters as
explained by Simon can be attributed to the environment that surrounds an individual. The
surroundings entrap and catch them in the ambiance of stress, thereby limiting their thinking
capacity. Normally, when a child is born, the mind is very fresh, and as John Locke, the
philosopher calls it, a tabula rasa, meaning it’s a blank sheet (Eriksen & Nielsen, 2017), with no
contamination. As the child grows and attains maturity, level of understanding jets in and can
distinguish right from wrong and make their own decisions. During this stage, there is the
formation of complex concepts and theories and application of rationality behavior. Simon also
gave his ideas on an economic man and administrative man. For an economic man, he represents
the objective rationality (Brette et al., 2017). It comes with limitations, however, such as values,
habits, unconscious skills, reflexes, and purpose conceptions. Surprisingly, these factors make a
person to lose track of the goals of the organization due to the openness of his mind and freedom
to choose.
By employing a rational mind, various alternatives are provided from which an individual
can choose. However, in actual behavior, it’s only a few options that come to mind. Though
Simon in his quote indicated that man is limited by his brain capacity to handle problems, he
further gave the difference between an economic and administrative man. An economic man
tackles the real world head-on with all its complexity as compared to an administrative man who
selects the most crucial and significant problems (Takahashi, 2015). Contrary to his belief, the
human mind is so diverse that they can be able to tackle any problem provided they decide to do
so. An administrative man is keen in seeking and finding a satisfactory solution to a problem by

MANAGERIAL DECISION-MAKING 5
finding the best alternative. This is what is required for decision-making process as it is always
oriented to finding and choosing the best satisfying alternative.
Concept 1: Bounded Rationality
Bounded rationality was a concept that was introduced by Herbert A. Simon. He is
referred to as the father of the concept and organizational/ economic theory. The concept
explains that during the decision-making process by an individual, the tractability of the problem
is limited by his/her rationality (Todd & Gigerenzer, 2003), cognitive capabilities, and time
available. The concept traces back to Simeon’s theory and quote, where he stated of the inability
of a man’s mind to solve complex problems. Cognitive limitations which are closely connected
to the brain affects the decision-making process significantly. The individuals, therefore, act as
satisfiers, that is the administrative man as compared to the economic man. He aims, therefore, at
finding a solution that is satisfactory as compared to finding an optimal one. The minds of
humans as to find a complementary means of covering their limitations. Structures of the
environment such as structural regularity, therefore, helps the human minds compensate for the
limited resources. Despite the fact that the concept is so much known, its applicability in real
business organizations is very minimal. The concept is rarely used for substantive purposes and
therefore, it serves a rhetoric function (Polič, 2009). Compared to Simeon’s theory, its treated so
thinly and has been described as the concept that has been cited broadly but obtained little use.
Heuristics, however, are known to enhance the process of decision-making.
Concept 2: Judgement and decision-making process
Decision-making process requires sober judgment. The effective and efficient process is
vital to the success of an organization. In every situation that careful judgment has to be passed

MANAGERIAL DECISION-MAKING 6
by various individuals, the final decision is usually influenced to a certain extent by biases
(Bazerman & Moore, 2008). Overcoming such biases is essential in making better managerial
decisions. In achieving the best result in the process of decision-making, three approaches have
been postulated. The quantitative approach which is connected to Simon’s theory where an
individual observes the problem and defines the scope and consequently formulates the
hypothesis. The hypothesis is tested, sensitivity analysis conducted, and possible solution of the
problem estimated. In this approach, it’s like they are describing the administrative man of
Simeon’s theory. The second is the decision-centered approach which is based on the bounded
rationality concept (Kaplan, 2013). It finds a satisfactory solution to a problem. It assumes that
the business environment contains various variables and it’s not ideal. The final approach
involves a group of managers in decision-making process hence known as managerial roles
approach.
Concept 3: System 1 & 2 Thinking
Thinking is very vital in the decision-making process. Thinking originates from the mind.
Therefore, if your mind is not fresh or it’s contaminated, you cannot think clearly and therefore,
there will be biases in the views given during the process of making decisions. Thinking can be
explained using two approaches. First, the intuitive approach (Simon, 1987), whereby an
individual thinks very fast and secondly, the analytical or slow treatment, whereby an individual
thinks slowly. According to Simeon, careful thinking is crucial in the decision-making process.
However, despite the high chances, it does not mean such an individual will introduce lots of
biases in the process. Nor, does it mean a slow thinker gives unbiased views (Bechara et al.,
2000). The concept is connected with Simon’s theory since cognitive capabilities is a common
aspect of these theories.

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Significance of the different concepts in decision-making
These concepts play a significant role in the decision-making process. Bounded
rationality, for instance, allows one to compute the optimal decision after defining the problem,
identifying decision criterion, weighting the criteria, generating alternatives, and rating the
alternatives on the selected criterion. By doing so, one can make the best decision based on the
best alternative chosen. (KRoehrich et al., 2014).
The concept of judgment and decision-making process gives one insight on how
judgment can influence the process of making decisions. Through this concept, also it explains
interventions that can improve one’s judgment to enable one to make effective decisions (Stingl
& Geraldi, 2017). People have divergent judgment, and this explains why people give different
views when deciding on tasks to undertake. It’s also true why there are differences in
organization decision-making process. Therefore, through coaching and training as well as an
understanding of this concept, it helps sharpen people’s decision-making capabilities and their
judgment.
Stanovich and West (2000), gave a detailed distinction concerning System 1 and System
2 about to cognitive functioning. System 1 is the intuitive system that is very fast, implicit,
automatic, and effortless. On the other hand, System 2 is a slower reasoning, effortful, logical,
explicit, and conscious. People, therefore, tend to use System 1 as compared to System 2 and
they end up making costly errors. Understanding the concept helps an individual to apply various
strategies that ensure they shift from System 1 to System 2, hence avoid decision-making biases.

MANAGERIAL DECISION-MAKING 8
For instance, replacing the intuition with better and formal analytic processes as well taking an
outsider’s perspective which in turn leads to an efficient decision-making process.
Part 2
Concept 1: Bounded Rationality Case scenario (EL Farol problem)
Understanding how bounded rationality concept works, it is important to analyze a case
scenario, where there is a real application of the theory. Therefore, this section will discuss the
Neural-Evolutionary Learning process in a Bounded Rationality Scenario. Decision-making
process is vital in every organization, and the bounded rationality concept plays a significant role
in influencing the decisions made. The case scenario of the neural-evolutionary framework
focuses on the market models simulations to enhance the process of making decisions (De
Araújo et al., 2004) Every individual and agent involved in such a scenario, make use of the
neural network’s population to make an affirmative decision. In this case, the concept of
bounded rationality was put into text in determining agents capable of applying the bounded
rationality concept in the El Farol bar case study. The agents were given a chance to choose
amongst the available internal set of fixed strategies to give their views on what they think would
happen the following week to the attendance in the bar. Interestingly, some agents could only
give the strategies that they selected while others were able to come up with new strategies. Such
individuals who were creative and gave new ideas could be described to go beyond the concept
of bounded rationality.
Biases in the scenario and how to overcome

MANAGERIAL DECISION-MAKING 9
The bounded rationality concept states that an individual is guided by his/her cognitive
mind, time frame, and rationality in making decisions. To ascertain the working of bonded
rationality all factors in the case scenario should be constant. However, the cognitive aspect
differs and that’s why the agents could give different views (Frederick, 2005). Mutation of some
parameters usually affects the outcome of the decision-making process.
Therefore, to overcome biases in the scenario, it is recommended to adopt the dynamic learning
model as compared to static learning. In the dynamic model, the individuals are given freedom to
learn new techniques that they can apply in the creation of new ideas and in sharpening their
minds. Static model, on the other hand, gives the individual fixed choices to select from and
thereby limiting their capabilities.
Improving decision-making process
Bounded rationality is widely used nowadays in economic scenarios for reasoning
modeling. In cases where the bounded rationality is employed, the behavior of the agents differs
significantly with situations where agents are rational. Implementation of the dynamic approach
in economic situations allows the use of tractable and traditional techniques in behavior analysis.
The decision-making process is also improved since the agents can have a different capability to
make decisions.
Concept 2: Judgement and decision-making process (Case scenario)
Judgment making is very vital in the process of decision-making. The case scenario of
this concept will focus on Managerial Judgement and Strategic Investment in decision-making.
Investment is crucial to the growth and survival of an organization. There are three main themes

MANAGERIAL DECISION-MAKING 10
concerning managerial judgment. These include the heuristics, consensus, and framing (Harris et
al., 2009). The concept is linked to organizational behavior and cognitive psychology.
Biases and means of overcoming
The heuristics usually influences the judgment of individuals in making decisions as well
as the psychological aspect. During the period of uncertainty, the human judgment could be
biased substantially due to psychological influences (Riabacke, 2006). Framing, which is the
second theme of the concept, is a form of a cognitive bias that is experienced during the
decision-making process. It explains why decision makers in an organization differ greatly in
their views when presented with the same basic information. When the same concept is framed
differently, it usually reveals the cognitive bias to a greater extent, and people start giving very
different opinions. The consensus, which is the third theme is concerned with the group
dynamics and how managers and other decision-makers influence others. The managers have the
power to influence others, and this could be a positive influence in leading them to make good
decisions.
Influence on decision-making process
The case study focused on determining how judgment can affect the decisions in an
organization. It was noted that, in any organization and for better strategic investment decisions
(SIDS), sober judgment is critical. SIDs remains to be the most important decisions that
managers can make. These decisions are majorly influenced by critical judgment and analyzing
the situation correctly to achieve the desired results. Otherwise, poor quality decisions typically
result to be disastrous to the organization and may also lead to its collapse. The scenario gives
the stages of the SID process that are core in the decision-making process. It begins with the

MANAGERIAL DECISION-MAKING 11
identification of the project problems and opportunities, formulating strategic options, generating
data and shaping the way forward. It goes further in persuading the top management to make
decisions which are in line with the organization goals. Strategic decision-making encompasses
the cognitive processes and formal analytical models that play a key role in decision-making
process.
Concept 3: System 1 & 2 Thinking (Case scenario)
In the application of System 1 & 2 in a real-world case, we shall look at the study case of
how system dynamics and system thinking affects the decision-making process in an
organization. In system dynamics, it tries to understand the world better by analyzing the
alternative policies, dynamic behavior simulation, choice of policies and their implementation.
System thinking usually does not have the discipline of creating an explicit model as well as its
simulation. Therefore, it relies on the use of unreliable intuition in the evaluation of complex
structures and system problems (Forrester, 1994). System dynamics use, and implementation is
overgrowing over the recent years due to its applicability in real world. The process involves the
description of the system, simulation of the model, designing of alternative policies, education
and debate and lastly implementation of the policy changes. During a celebration at Harvard
Business School for a major anniversary, System 1 and System 2 thinking was put into test.
People were put into groups of 50 each, and they were to observe and analyze the program of a
certain system dynamic model. Usually, people can either use system 1 or 2 while giving their
views. For this group of people, it was not an exemption, and there were different opinions
presented.
Biases

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When faced with a task, an individual respond either by using System 1 or 2. In system 1,
we respond quickly without thinking of the consequences. The reason why many people get
answers wrong or make the wrong decision has been attributed to some extent to the fact that
they use System 1. Although, System 1 use can be employed in situations where we are
ambushed or faced with a situation that needs immediate answers. System 2 on the other hand,
takes time to analyze the situation (Evans, 2003). In the case of system dynamics, biases were
observed amongst the groups. It’s interesting that the groups could give different views when
they were all given an advance information about the system. One group correctly gave the right
description, relevant policies as well as recommendations while the other gave inconsistent
information.
Significance to the decision-making process
The manner in which we analyze tasks before making a decision is important in
determining the outcome. Those two groups could be described as one using System 1 while the
other System 2. Using System 2 guarantee more success as compared to System 1. Therefore,
System 2 is usually described as rational, and it helps individuals to make better decisions since
they take their time to analyze the situation fast.
Conclusion
Decision-making plays a vital role in the management of organizations in the modern
world. It’s through decision making that the actions of both the organization and managerial
team can be accounted. Making a decision means there are alternatives and hence you choose
from one. Simon theory and other concepts such as the bounded rationality, judgment heuristics,

MANAGERIAL DECISION-MAKING 13
and System 1 & 2, all give their views on the decision-making process. These theories have their
biases and its critical for an organization and individuals to critically analyze them before
applying them to real-life situations.
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