Decision Making

Rational Decision Making

In modern Western societies, the most common understanding of decision making is that it is rational—self-interested, purposeful, and efficient. During rational decision making, individuals will survey alternatives, evaluate consequences from each alternative, and finally do what they believe has the best consequences for themselves. The keys to a decision are the quality of information about alternatives and individual preferences. Modern economics is built on this understanding of how individuals make decisions.

Rational decision making becomes efficient when information is maximized and preferences are satisfied using the minimum of resources. In modern societies, rational decision making can occur in markets or firms. Both assume that individuals will act rationally, maximizing self-interest, but each works most efficiently under different conditions. Markets are most efficient when both buyers and sellers exist, when products or services are discrete so that the exchange can be one time, when information about a product or service (such as its technology or means of evaluation) is broadly understood, and when there are enforced penalties for cheating.

Lacking these conditions, consensual exchange cannot occur, and rational individuals will try to cheat others to maximize their gain. In these cases, a hierarchical organization is more efficient. Max Weber described how modern factories and bureaucracies became dramatically more efficient through growing technical expertise, and more importantly, a new division of labor, which divided work, specialized expertise, and coordinated individuals in a rule-based hierarchy. Bureaucracies decomposed complex technologies into manageable pieces, then allowed individuals to specialize and master a defined skill set. Using a clear hierarchy in which each position is controlled and supervised according to a stable and non-arbitrary system of rules, each individual's work and expertise could be coordinated to achieve organizational goals, ranging from winning wars to making dresses.

Satisficing and Bounded Rationality

In the 1940s, organization theorists began to challenge two assumptions necessary for rational decision making to occur, both of which were made obvious in cases where markets failed and hierarchies were necessary. First, information is never perfect, and individuals always make decisions based on imperfect information. Second, individuals do not evaluate all possible alternatives before making a choice. This behavior is directly related to the costs of gathering information because information becomes progressively more difficult and costly to gather. Instead of choosing the best alternative possible, individuals actually choose the first satisfactory alternative they find. Herbert Simon labeled this process satisficing, and concluded that human decision making could at best exhibit bounded rationality. Although objective rationality leads to only one possible rational conclusion, satisficing can lead to many rational conclusions, depending upon the information available and imagination of the decisionmaker.

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