Bounded rationality and the steps of rational decision making

Rational decision making

A decision is rational when it is chosen by logically comparing alternatives on relevant facts, so that it can be justified and is free of personal bias. The classical model assumes complete rationality: the decision maker has clear goals, knows all alternatives and their consequences, and chooses the one that maximises results: the economic man.

The concept of bounded rationality

Herbert Simon pointed out that in real life rationality is bounded, or limited. Decision makers:

• do not have complete information about alternatives and their consequences;
• face limits of time, money and attention;
• have limited ability to process complex information;
• work under uncertainty, conflicting goals and organisational politics;
• are influenced by personal values, habits and biases.

Because of these limits, they do not search for the best possible alternative. They simplify the problem, consider a few alternatives one after another, and choose the first one that meets their minimum acceptable standards. Simon called this satisficing and described the decision maker as an administrative man. Bounded rationality explains why managers rely on rules of thumb, past experience, routines and incremental decisions.

Example. A company hiring a sales manager cannot interview every possible candidate in the country; it sets criteria, experience, territory knowledge, salary range, and appoints the first well-suited candidate from a shortlist.

Steps involved in a rational decision-making process

1. Identify and define the problem. Recognise the gap between the current and the desired state, and distinguish the real problem from its symptoms.
2. Set objectives and decision criteria. Decide what the decision must achieve and how alternatives will be judged (cost, time, quality, risk), and weigh the criteria.
3. Collect relevant information. Gather facts about the problem, its causes and the constraints.
4. Develop alternatives. Generate a range of possible solutions, using experience and creative techniques.
5. Evaluate the alternatives. Assess each against the criteria, benefits, costs, risks and feasibility, using quantitative tools where possible.
6. Select the best alternative. Choose the alternative that best meets the objectives.
7. Implement the decision. Communicate it, allocate resources, assign responsibility and win acceptance.
8. Monitor and evaluate the results. Compare outcomes with objectives and take corrective action if needed.

Conclusion

The rational process gives decisions a logical structure, while bounded rationality reminds managers that in practice they must work within limits of information, time and capacity. Good managers follow the rational steps as far as possible and widen the bounds through information systems, analysis and consultation. Group decision techniques, decision-support software and expert advice extend the information a single manager can handle, while clear priorities reduce the number of factors to be weighed at once.