Managerial Decision Making: Simon's Rationality and Biases Essay

This essay delves into the multifaceted realm of managerial decision making, drawing heavily on Herbert Simon's influential ideas. It meticulously examines Simon's concept of bounded rationality, highlighting how cognitive limitations and environmental factors shape managerial choices. The essay then dissects the roles of heuristics and biases, demonstrating how these mental shortcuts, while often efficient, can lead to systematic errors in judgment. Furthermore, it explores the implications of overconfidence in managerial contexts, analyzing how it can influence risk assessment and strategic decisions. The concept of satisficing, as an alternative to maximizing, is also discussed, providing a nuanced understanding of how managers balance optimal outcomes with practical constraints. Through a critical analysis of these concepts, the essay offers insights into the complexities of managerial decision making and provides a framework for improving decision-making processes.

Running head: MANAGERIAL DECISION
MANAGERIAL DECISION
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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Understanding Herbert Simon’s Idea of Rationality in Decision making.............................2
Concept of Heuristics and Bias..............................................................................................3
Implication of Overconfidence in Decision making..............................................................5
Concept of Sacrificing in Managerial Decision Making........................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
Integration of psychological understandings into management study has a long history
and has recently attained momentum over the past decade. Herbert Simon consistently strived
to construct a theory of human behavioural pattern. As per Simon (1957), the distance
between rationality and behaviour has been connected by the idea of decision. A choice is a
selection of one amongst the several behavioural alternatives to be executed. Every
behavioural pattern involves a choice of selection of such kind whether be conscious or
unaware. A decision is understood as a method through which such a selection is primarily
executed. According to Huppatz (2015), rationality is understood as a criterion used in
decision which is theoretically based on the presupposition claiming that the agents are
envisioned to be rational. In other words, the agents value rationality as a standard of choice.
In such an understanding, rationality is considered as an explaining principle. As managers
serve decisive role in influencing major organizational results, it is highly essential to
comprehend the way managers’ heuristics and biases, along with over confidence and
coordination influence their judgements and outcomes in organizations. The essay will
discuss Simon’s quote in reference to a critical evaluation of three discrete concepts related to
Biases and Heuristics, Overconfidence and coordination in a managerial decision making.
Critical Analysis
Understanding Herbert Simon’s Idea of Rationality in Decision making
Simon’s legacy in ways of exploring decision making is threefold. Firstly, human
judgements must not be expected as a priori to pursue rational, statistical and additional
authorized models (Huppatz, 2015). On the other hand, human decisions must be understood

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in empirical manner. Secondly, three factors have been considered in decision making
namely type of tasks, attributes of the environment along with the exceptional factors of the
cognitive system which makes the decision. However, the latter involves the former
knowledge or competence of the decision-maker. Lastly, only in conjunction with the range
of empirical data it has been noted that authorized computational models of decision-making
procedures must be developed and their assumptions must be compared with human
behavioural patterns (Opp, 2019).
Organizations are known as the least natural and highly logical contrived units of
human relations. In contrast, the theoretical understanding of organization whose members
are absolutely rational and have the capacity of direct adaptation has been considered as void
theory. To Simon’s understanding, due to the restricted understanding and skills of
individuals, organizations are effective mechanisms for the attainment of human objectives.
According to Gigerenzer (2016), organizational theory has been fundamentally associated
with the identification and observation of limits to the obtainment of goals which
consequently restricts the resilience and adaptability of the goal determinant individuals and
groups of individuals. It is imperative to note that managerial decisions at this juncture tend
to be constricted by own psychological temperament and also by acquaintances and
information gathered from the surroundings. The principle of bounded rationality is
positioned at the foundation of organization theory with an aim of treating human behaviour
in difficult decision making situations (Taylor, 2017).
Concept of Heuristics and Bias
Cristofaro (2017) by drawing relevance to Simon’s idea of bounded rationality has
conjectured that individuals cannot competently make numerical predictions and evaluating
probabilities. Furthermore, it has been noted that individuals while making any decisions can
deal with complexity of these tasks by means of heuristics. However, relying on heuristics to

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solve an issue usually functions efficiently when managers find an irrational alternative
solution. Meanwhile, these heuristics tend to be effective, but at times individuals make
critical and regular errors or biases. For these reason the research program is referred to as
heuristics and biases approach. Otuteye and Siddiquee (2015) have noted that heuristics
techniques are not identified as formal problem solving approach and can be used separation
or in combination of trial and error. For example, if a manager aiming to initiate
organizational change fails to bring any resolution with a thumb rule, he must use experience
in order to try different solution. If that fails, manager might decide to invite diverse solutions
in solving the issue. Nevertheless, the advantage of heuristics relates to the fact that they can
quickly bring resolution to a problem, but might typically be consequential in an immediate
one. Additionally, heuristics are susceptible to bias and inviting errors. Thus, heuristics in
managerial decisions must be employed with utmost consideration and as a trigger for official
problem solving in order to develop improved and continual solution (Taylor, 2017).
There are situations wherein the concept of heuristics provides strong foundation for
decision-making with examples which individuals can organize in their minds. However,
applying heuristics have propensity of leading to biases as an event which evokes sentiments
and thoughts which is easily attainable in memory in comparison to a situation which is
challenging to conceive in nature. On the other hand, individuals often make judgements
from reduced or shifted samples, even though these samples are not representative of the
overall population based on representativeness heuristics (Otuteye & Siddiquee, 2015). For
example, a manager claimed quality and skills of new joiners in the company have recently
reduced. Such a judgement has been made based on representativeness heuristics. It is
important to note that this manager used to assess new joiners orally in the past (Gigerenzer,
2016). However, the number of recruitment of staffs has increased recently and he
consequently changed the evaluation system. Furthermore, the manager restricted his sample

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and evaluated orally only the inexperienced students. Hence, the manager here has grounded
his assessment of new joiners on reduced as well as shifted sample of the entire newly
recruited employees.
Implication of Overconfidence in Decision making
Overconfidence is a common behavioural bias in individuals and its implication to the
conduct of human affairs which is challenging to exaggerate. Managers in overconfidence
show higher tendency in involving in acquisitions for two discrete reasons. Firstly, it has been
noted that optimistic managers are probable to misjudge the probable collaborations derived
from mergers and acquisitions. As a result, these managers will incline towards conducting
mergers and acquisitions (Riaz & Iqbal, 2015). On the other hand, managers with over
precision may consider acquisitions to be less risky and implement reduced discount rate in
order to understand results of acquisitions. Moreover, they might consider acquisition
prospects to have adequately high projects to undertake. Thus, Robinson and Marino (2015)
have assumed that managers applying concepts of overconfidence show higher likelihood of
engaging in critical decision making (Benoît & Dubra, 2011). While, over precise managers
have higher likelihood to attain objectives in sectors whereby the acquiring agencies have not
operated before due to assessed which is more personal and struggle in these situations.
On the other hand, importance of managers’ human capital is related to the
achievement of the organization thus augmenting the under-diversification concern. Riaz and
Iqbal (2015) have noted that managers and other executives have restricted competence in a
way to address the issue. For example, stock awards tend to be restricted which can only be
shifted subsequent to the contribute vests. On the contrary, Benoît and Dubra (2011) have
argued that overconfident executives tend to overestimate the imminent performance of the
organization and are consequently more prepared to embrace opportunities, supposing to
yield from imminent stock price obligation. Van Der Linden and Freeman (2017) have shared

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similar views claiming that number of corporate finance problems can be assumed as a result
of rational managers using financier biases. For example, if managers at times overestimate
and sometimes underestimate the value of organization, a logical manager must be taken into
consideration that leverage the value to current shareholders whereby they should focus on
equity issues to take place during situations of affirmative sentiments. In contemporary
organizational structure, connections, information and communication have surpassed new
boundaries. For these reasons, it has become extremely challenging for managers to
comprehend employee performance, thus embracing calibration and employing it on frequent
basis. Most importantly, calibration tools have been making it flexible for managers to assess
and draw comparison to the performance and capacity of employees (Benoît & Dubra, 2011).
Concept of Sacrificing in Managerial Decision Making
Halpern and Stern (2018) have made distinct findings regrading concept of satisficing
in managerial decision making. Satisficers show higher propensity of experiencing complex
levels of satisfaction, contentment, and confidence subsequent of making a decision, while
maximizing individuals show greater likelihood of experiencing regret. Even satisficing as
formerly formulated by Simon has been conceived as a compromise with utility
maximisation. This compromise lets individuals to leave and be contended with less as it the
best decision at that moment. On the contrary, an increasing understanding has been observed
claiming that satisficing shows great paybacks. According to Gigerenzer (2016), the info-gap
theory offers quantitative framework for comprehending reasons which lead satisficing
concept in decision making to be over maximising. The fundamental idea of the theory relies
to the fact that there ought to be an exchange between strength and excellence.

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Conclusion
Hence to conclude, Biases and Heuristics, Overconfidence and sacrificing are the
concept which has most effectively synthesized Simon's view about rational behavioural
patterns. Organizational theory has been fundamentally associated with the sympathy and
statement of restrictions to the attainment of goals which consequently confines the resilience
and adaptability of the goal determinant individuals and groups of individuals. Furthermore,
it has been noted that managers with over precision may consider acquisitions to be less
uncertain and implement reduced discount rate in order to understand results of acquisitions.
Moreover, applying heuristics have propensity of leading to biases as an event which evokes
sentiments and thoughts which is easily attainable in memory in comparison to a situation
which is challenging to conceive in nature. Simon has proposed regarding procedural
rationality particularly in the form of satisficing and heuristics process.

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References
Benoît, J. P., & Dubra, J. (2011). Apparent overconfidence. Econometrica, 79(5), 1591-1625.
Cristofaro, M. (2017). Herbert Simon’s bounded rationality. Journal of Management History.
Gigerenzer, G. (2016). Towards a rational theory of heuristics. In minds, models and
milieux (pp. 34-59). Palgrave Macmillan, London.
Halpern, J. J., & Stern, R. C. (Eds.). (2018). Debating rationality: Nonrational aspects of
organizational decision making. Cornell University Press.
Huppatz, D. J. (2015). Revisiting Herbert Simon's “science of design”. Design Issues, 31(2),
29-40.
Opp, K. D. (2019). The rationality of political protest: A comparative analysis of rational
choice theory. Routledge.
Otuteye, E., & Siddiquee, M. (2015). Overcoming cognitive biases: A heuristic for making
value investing decisions. Journal of Behavioral Finance, 16(2), 140-149.
Riaz, T., & Iqbal, H. (2015). Impact of Overconfidence, Illusion of control, Self Control and
Optimism Bias on Investors Decision Making; Evidence from Developing
Markets. Research Journal of Finance and Accounting, 6(11), 110-116.
Robinson, A. T., & Marino, L. D. (2015). Overconfidence and risk perceptions: Do they
really matter for venture creation decisions?. International Entrepreneurship and
Management Journal, 11(1), 149-168.
Simon, H. A. (1957). Models of man; social and rational.
Taylor, B. J. (2017). Heuristics in professional judgement: A psycho-social rationality
model. British Journal of Social Work, 47(4), 1043-1060.
Van Der Linden, B., & Freeman, R. E. (2017). Profit and other values: Thick evaluation in
decision making. Business Ethics Quarterly, 27(3), 353-379.