Managerial Decision Making: Bounded Rationality Case Study Report

This report delves into the realm of managerial decision-making, commencing with an exploration of the principles of bounded and procedural rationality, concepts introduced by Herbert Simon. It examines how cognitive limitations and biases affect decision processes, contrasting them with the ideals of perfect rationality. The report then analyzes various case studies, including Southwest Airlines, to illustrate bounded rationality in practice. It also explores biased rationality, game theory, and their impact on decision-making. The report highlights how heuristics, such as representativeness, anchoring, and availability, can lead to errors. The report also discusses the application of game theory in decision making, its assumptions, and its limitations. This analysis provides a comprehensive understanding of the complexities of managerial decision-making in real-world scenarios.

Running head: MANAGERIAL DECISION MAKING
Managerial Decision Making
Student’s Name
University name
Authoer’s Name

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Table of Contents
Part 1..........................................................................................................................................3
Essay..........................................................................................................................................3
Principle of Bounded and Procedural Rationality..................................................................3
Behavioural Concept of Rational Choice (Biased Rationality)..............................................4
Part 2..........................................................................................................................................8
Case Study Analysis...................................................................................................................8
Case Study 1: Case study of the South-western Airlines (Bounded rationality)....................8
Case study 2: Theory of biased rationality.............................................................................9
Case Study 3: Game Theory: The case study of laboratory diagnosis of the employee sales
training program in Saudi Arabia.........................................................................................11
Reference list............................................................................................................................13

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Part 1
Essay
Principle of Bounded and Procedural Rationality
It has been observed that in the Models of Man by Simon (1957), the conception of
“Bounded Rationality” was first dealt with, for the 1st time. Several year later the author also
introduced a concept known as “Procedural rationality”. Although the conception of
“Procedural rationality” was not described in detail in the first book “Models of Man”, the
concept was implicitly present. The significance of this theory is not in the important
concepts expressed through this theory, rather, by means of this theory, Simon puts forward
some elements he conceptualises in high criticism of various aspects of “mainstream
economics” something that never happened completely before later part of the 1950s prior to
the materialisation of the verses like satisfice or bounded rationality or administrative man.
Pertaining to psychology, Simon was leaned more on the electoral process more than the
consequence itself and referred to this disposition as procedural rationality. In 1957, Simon’s
chief motive was to shift the limelight towards the shortcomings of the conventional
economic theory rather than stressing upon conceptualising a new model. Hence the basic
focus of the analysis would be on the discussion of the negative expositions of the pre-
existing theory that were done by Simon. The stepping stones of the evolution of his
proposed theory were laid in his critical attitude towards the linguistic as well as conceptual
tools (Simon, 1997). On one side there is the classical approach of Herbert Simon, whereby
he utilised the instrumentality of rationalism and clinged on to a biased rationalistic approach.
Simon also showed support towards the conception that in any organisation the primary
objective is to maximise along the lines of efficiency, patronised by the neoclassical theory in
terms of maximisation of profit or maximum cost of cost. However, on other side, Simon

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showed acceptance towards the fact that human action haven not always been rational and
that rationality is itself delved into several limitations (Cristofaro, 2017). According to Joseph
Mahoney, the most distinct and relevant ideas presented by Simon under this proposition is
the difference between fact and value based decisions. Only decisions that are factual, might
be falsified (Tong, 2017). Value based decisions can be evaluated on qualitative terms but
never determined as right or wrong. In fact Simon’s definition of being “rational” is totally
analogous to being “efficient” in another sense. Hence, it can easily be stated that according
to Simon’s conception of Bounded rationality, organisational rationality and economic
efficiency are stringently similar (Delannoi & Dowlen, 2016).
Simon’s empirical means required a direction to rationality on the basis of falsifiable as well
as countable conception of efficiency patronised by the means end schema. As an outcome,
the instrumental perception of rationality is found rejecting any different value propositions
owing to the dearth in scientific status. As an initial approach the concerned conception,
Simon defines that rationality is being an attribute of behaviours. Then he spotted some
limitations of this kind of classical rationalism, which became evident as an outcome of his
empirical requirements. The form of substantive rationality that Simon uses in 1957, is
actually an implied and subtle form of procedural rationality because of its scientific status
being lofty. In his attempt to describe substantive rationalism as akin to global rationality, he
somehow connects the term with the traits of classical as well as neo classical economics
(Jones, 2017). Once after considering the limitations in rationality and after successful
coinage of the conceptualisation of bounded rationality, in his later article in 1976, he brought
out a new conception of procedural rationality in order to address the various concepts arising
to the mingling of psychology during the performance of rational activity calling the alliance
of the two as the results of appropriate deliberation.
Behavioural Concept of Rational Choice (Biased Rationality)

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Authors of various empirical content have given consent to Simon’s proposition that
economic agents cannot perform with clinically rational perfection. However Simon have
focused on analysing the process of the cognitive systems for linking the theory of bounded
rationality to the process of decision making. According to (Lee, Keil & Wong (2018), in the
domain of economics, the following of Bayes theorem by in making their probability
judgements could be misleading. Hence decision analysis is of grave importance as a tool for
improving the accuracy of the decisions making of individuals. It is also debatable how much
people follow the Bayes theorem while making the probability judgements. According to the
views of (Palmer et al. 2014), it is evident that people while dealing with actions and/or
outcomes look up for irrelevant characteristics to the level that might influence decision
making. An evidence can be provided. A bit of information can affect the choice of
alternatives. This phenomenon particularly known as framing effect violates some major
postulates of perfect rationality. In this regard, decision making under risk might also be
evaluated. The perfect rationality concept that is considered as the ideal parameter pertains to
the Expected Utility Theory. The assumptions of this theory postulates that the value assigned
to understated state of wealth remains invariable with the primary condition of wealth of the
decision maker. However, according to (Ralph & Monu (2015), decision makers always
consider losses and/or gains they would get, alongside taking in to consideration their current
state of wealth. The model patronises a value function which favours deviating risks in cases
of gain and undertaking risks in case of losses.
The approach of people in dealing with numbers while making predictions as well as making
supposition based on probability is dealt with, in this article by Simon. Biased rationality
describes the deviations in behaviour just like bounded rationality. People cannot make
correct choices by doing numerical predictions and manipulating probabilities. Hence they
cope up with this the complex task of decision making by pertaining to the use of heuristics

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(Scott et al. 2015). At times the use of heuristics helps in making right choices. However in
most of the times, critical as well as systemic errors are committed by people and their
decisions become biased. Three primary heuristics have been identified, namely
representativeness, anchoring as well as availability (Thompson, 2017). These heuristics
define the pattern of probability or frequency people pertain to while making choices. The
errors caused by following these are not randomised as accepted by theory of perfect
rationalism, rather there is a subtle pattern followed in committing of these errors. Simon’s
propositions are again justified in the concept of biased rationalism (Woodside, de Villiers &
Marshall, 2016).
Game Theory and Economic Behaviour
Qualitative models for game calculations (in games like poker, bridge and so on) based on
mathematics seemed to be impossible initially. This is because the games required the players
to make independent choices at every move, especially when each move was required to be
made in congruence with the other moves made by other players. The game theory was ay
first proposed by J Neumann, thereby making introduction to the conception of strategy
making. In this context, the minimax theorem was utilised by him. According to the
statement of the theorem, a strategy helps the player to earn maximum payoff, considering
that all opponents in the game are aimed at minimising the payoff earned by that respective
player.
This Game theory clearly drawn from mathematical logic is also capable of describing in
mathematical terms, how the strategies that helps people to take decisions in games also helps
ins other context of decision making. However in order to imply this theory in analytical
decision making, two basic assumptions have to be kept in mind (Seaborn & Fels, 2015).
First of all, people’s preferences remain affixed under all circumstances and secondly, people

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are knowledgeable of all the alternative options open to them. Thirdly, it is to be assumed that
under any circumstance people would be efficient enough to calculate what would be of best
interest to them and lastly it is a constant fact that men would always wish to maximise their
gain or their interest. However, as per Takahashi (2015), there have been some complications
in using the theory in the context of real scenarios. Herbert Simons in the Models of man
have also revealed deliberate criticisms of the theory in influencing the real decision making
process (Simon, 1972). Simon have proposed that the theory works actively and promptly in
cases of relative negligence of the others involved in the decision making process and in
cases where few chances of permutation and combination is possible. According to the Views
of Simon (1957), the game theory is too much simplified and works in the case of simplified
approximations only. Laboratory protocols of problem solving have to be supplemented by
real field studies by professionals, for instance physician involved in making diagnosis, or
chess grandmasters’ hypotheses. Investment decisions that requires an in depth analysis of
the pros and cons of the market should also be able to implement the Game theory. However
in such cases, where there are a lot of choices and further deviations possible, Game theory
fails to successfully maximise the interest of the applicant. Simon have reflected on the
impact of the use of the Game Theory in case of critical incidents of uncertainty, like a war
(Stanovich, 2017). Life changing decisions in a war can influence the course of last events.
Strategic decisions are supposed to be such that often have to work under sub optimal targets.
However the Game Theory is all planned to fulfil the interest of the immediate move of the
gamer in a situation that is based on assumed probability.

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Part 2
Case Study Analysis
Case Study 1: Case study of the South-western Airlines (Bounded rationality)
South-western Airlines had been founded in 1971 as a low fare air travel agency that would
offer to its customers short haul low fare service. Like any other airline company, major cost
drivers of the company are the resources like jet fuel (price) and high labour charge (wages).
At present the organisation have flourished and owns more than 500 Boeing air-farers and
operates in 66 countries (Cameron, 2017). In this context, the CEO of the organisation took
the decision of enabling the facility of online ticket booking for the customers of South
Western airlines. However, after making this decision, the CEO realised that they have
contract with too many call centre agents. Now the main issue before the company is
downsizing. Lack of information about the condition of the company, let the CEO to take the
biased decision of setting up online ticket booking portals.
The Decision maker in this case had done calculations for maximising the value of his
attempts to meet the organisational goals. There were however some cognitive constraints for
the decision maker because of which his rationality has been bounded. Bounded rationality
itself reflects the inability of individuals to follow the model of perfect rationality. However,
perfect rationality has some major inherent weaknesses. One of those is that the decision
maker needs to be aware of all the possible alternatives. However, pertaining to the real
world scenario, in most of the cases (like this one) the choice of alternative (here: resources)
available with the decision maker is huge in count. In the end the decision making individuals
might not have the mant5al capability to be stored all necessary data that needs to be
considered for making a decision. Hence in absence of the requisite data, the mental
calculations made by them are also faulty. This is an acute case of bounded rationality. The

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CEO tended to draw simplified models in his mind by considering the important features of
the most current problems and may be forgot to consider the complexity associated with the
processes (Weiss, Friesen & Weiss, 2017). The business, as it was evolving reflected a
turbulent atmosphere where rational decision making becomes all the more difficult.
Online booking facilities, successfully ameliorate the requirements of the interventions of the
call centres. Hence, extra HR in this situation is an unnecessary cost incurred by the
company. At present the organisation has just introduced the facility of online booking.
However the success of the company does not depend on such promotional expansion of
market. Hence it is necessary that the CEO withdraws the facility from market with
immediate effect and focuses on reducing and/or cancelling contract with or relocating the
service domains of a certain number of call centres. Hence, the company be able to minimise
the cost impact of this change management in the organisation.
Case study 2: Theory of biased rationality
In April 2008, a fire broke out due to the misutilization of a IH fire cooker by a
woman. She was not there in the kitchen when the incident took place. Her attempts to fight
the fire went in vain, as she suffered from major injuries. Upon experiment, it was found that
a pot was used with 600 ml of oil, which actually prevented the fire from breaking out.
Investigations revealed that utilization of caved centre with commercial pot resulted
combustion within 6 minutes (Murata, Nakamura & Karwowski, 2015).
Cognitive biases
Optimistic biasness consists of the tendency to overestimate the consequences based
on the likeliness of its occurrence. This estimation helps the personnel in averting
encountering inconvenient events. One of the major drives behind this is the imagination,

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which provides good and positive feelings. Exaggeration at lower levels reduces the intensity
of the risks, which the sufferers might suffer.
Normalcy biases
This represents the tendency to regard minor abnormalities as normal. This method
reflects the tendency of refraining from projecting excessive reactions to the incidents of such
intensity (Vreja, 2015). This method makes the thoughts, decisions and judgments
impoverished. In this case, disobedience towards the warning possesses dire consequences
leading to the undertaking of wrong decisions.
Linking between the case study and biased rationality
Biased rationality can be related with the error of judgment, which leads to the
selected to inappropriate decisions. The main reason for this error is the biases in the learning
process, which stalls the development of the decision-making process. If the woman was
conscious towards the work, which she was doing, she could have prevented the fire from
breaking out. Absence of consciousness indicates inadequacy in the cognitive learning, which
leads to incorrect calculations (Hahn & Harris, 2014).
According to Aristotle, man is a rational animal. However, contradictions can be
proposed towards the perception “animal”. This is because animals lack the power of
thinking and is only expected to apply the instincts in obeying the instructions of the master.
However, in this case, the woman is not directed by anyone and she is just fulfilling one of
the basic duties of cooking. This needs rationality in terms of preventing the unwanted
incidents. Behavior is also an important component in this aspect, which reflects the approach
towards the decision-making process (Bardone & Secchi, 2017). Taking preventive measures
would have been a planned action regarding prevention of the fire from breaking out. Calling

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the fire brigade would have been a reasoned action reflecting the intellectual and judgmental
decisions.
Recommendation
Cognitive learning is the best way for improving the decision-making process.
However, evaluation would be an innovative means for testing the feasibility of the applied
skills. Taking into consideration all of the circumstances would assist the individuals in
exposing rational approach. Maintaining consistency in evaluation would upgrade the
standard and quality of decision-making.
Case Study 3: Game Theory: The case study of laboratory diagnosis of the employee
sales training program in Saudi Arabia
The employees of the Sales Agency in Saudi Arabia were taught several instrumental key
skills like as traditional sales policies, laboratory diagnostics and also negotiating contracts.
However, all of the employees were taught the principles in artificial contexts. They were
given very less real life training. The agency focused on strengthening the theoretical
knowledge of the sales employees. The strategizing policy of the game theory can be
discussed in this regard. The game theory makes a supposition for every move of the player
taking into account the possible interventions from the opponents in order to minimise the
payoff. Accordingly the employees have learned how to tackles obstacles in their sales
endeavours. However, Simon in his Models of Man have certified the Game Theory for its
lack of analogy with the teal life contexts. One of the pre assumptions of the game theory is
that the player (the salesperson in this case) should stick to a single or a set of preferences all
the time. However, if this happens, how might a salesperson offer a customer according to his
or her choice or budget? Secondly, the theory also assumes beforehand that the player should
be knowledgeable of all the alternatives open to them. In this case, how is it possi9ble to

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know the alternative before getting to know what argument the customer is going to make?
Thirdly, according to the Game Theory, a salesperson should be able to calculate what holds
the best interest for his deal to be of maximum benefit to the company. However the
employees are new and unexperienced. They might not have sound understanding of the
principle and policies yet. Under this circumstance, the game theory would not work at all
(Cader, 2014).
Lastly, the player, according to game theory should be determined to perform a deal that
gives him or her the maximum benefit. In this context, the business goal seems to have
apparently fulfilled if an employee is alsways inclined at making the most profitable deals.
However, little negotiation leads to market penetration in most cases. The theory considers a
simplified version of all the possible pro9blemns that might arise in any case. However the
real life problems are quite difficult than arranged practical sessions. Hence the employees
lacked the confidence to perform in front of real customers. In this context it is of utmost
importance that the employees attend some real life practical sessions that would successfully
teach them the tactics of talking and dealing with real life customers’ issues and enquiries.
This would help the company to create more proficient task force. However, implication of
game theory in organisational contexts where the real life situations can be diverse and
complex is pointless.

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