Rational choice theory

Examples of Rational choice theory in the following topics:

• Problems with the Rational Decision-Making Model

  • Critics of the rational model argue that it makes unrealistic assumptions in order to simplify possible choices and predictions.
  • Critics of rational choice theory—or the rational model of decision-making—claim that this model makes unrealistic and over-simplified assumptions.
  • The more complex a decision, the greater the limits are to making completely rational choices.
  • Prospect theory reflects the empirical finding that, contrary to rational choice theory, people fear losses more than they value gains, so they weigh the probabilities of negative outcomes more heavily than their actual potential cost.
  • The theory of bounded rationality holds that an individual's rationality is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

• Cognitive Biases

  • They and their colleagues demonstrated several replicable ways in which human judgments and decisions differ from rational choice theory.
  • In this situation, they believe that their confidence in their decision is founded on a rational and logical assessment of the facts when it is not.

• Rational Decision Making

  • Rational decision making is a multi-step process for making choices between alternatives.
  • The word "rational" in this context does not mean sane or clear-headed as it does in the colloquial sense.
  • The rational model of decision making assumes that people will make choices that maximize benefits and minimize any costs.
  • The idea of rational choice is easy to see in economic theory.
  • An individual has full and perfect information on which to base a choice.

• Non-Rational Decision Making

  • People frequently employ alternative, non-rational techniques in their decision making processes.
  • The rational model of decision making holds that people have complete information and can objectively evaluate alternatives to select the optimal choice.
  • To account for these limitations, alternative models of decision making offer different views of how people make choices.
  • They instead apply their rationality only after they greatly simplify the choices available.
  • Thus, fear of a negative outcome might prohibit a choice whose benefits far outweigh the chances of something going wrong.

• Evidence-Based Decision Making

  • The practice of evidence-based decision making in management (often abbreviated as EBMgt) evolved from medicine and emphasizes a rational, objective, and empirical approach to addressing business issues.
  • Managers can have more confidence in their choices when they can point to data that supports the likelihood of that choice leading to desired results.
  • Scientific theories are the result of analysis applied to data, records, insights, and experiments.
  • Evidence is gathered, is analyzed, and from there a theory is developed.

• Expectancy Theory

  • Expectancy theory is about the mental processes involved in making choices.
  • In organizational behavior, expectancy theory embraces Victor Vroom's definition of motivation.
  • Processing is done before an individual makes the final choice.
  • In 1964, Vroom defined motivation as a process controlled by the individual that governed choices among alternative forms of voluntary activities.
  • Vroom introduces three variables within his expectancy theory: valence (V), expectancy (E), and instrumentality (I).

• Classical Versus Behavioral Perspectives

  • Another leader in the classical perspective of management, Max Weber, created the bureaucracy theory of management, which focuses on the theme of rationalization, rules, and expertise for an organization as a whole.
  • Additional theories in the behavioral perspective include Douglas McGregor's Theory X and Theory Y, which have to do with the perceptions managers have about their employees and how employees react to those perceptions.
  • In Theory X, managers assume employees are inherently lazy and, therefore, micromanage.
  • In Theory Y, managers are more laissez-faire and allow employees more freedom in their work.
  • McGregor's theory of management is an example of how behavior-management theory looks more into the "human" factors of management and encourages managers to understand how psychological characteristics can improve or hinder employee performance.

• Bureaucratic Organizations: Weber

  • As Weber understood it, particularly during the Industrial Revolution of the late nineteenth century, society was being driven by the passage of rational ideas into culture, which, in turn, transformed society into an increasingly bureaucratic entity.
  • Weber's theories on bureaucracy included topics such as specialization of the work force, the merit system, standardized principles, and structure and hierarchy in the workplace.
  • Weber's studies of bureaucracy contributed to classical management theory by suggesting that clear guidelines and authority need to be set in order encourage an effective workplace.
  • Weber did not see any alternative to bureaucracy and predicted that this would lead to an "iron cage," or a situation in which people would not be able to avoid bureaucracy, and society would thus become increasingly more rational.
  • Weber viewed this as a bleak outcome that would affect individuals' happiness as they would be forced to function in a highly rational society with rigid rules and norms without the possibility to change it.

• Methods of Excercising Influence

  • In analyzing persuasion and influence, the theories of persuasion and the methods of persuasion are useful tools in a managerial context.
  • While there are a wide variety of theories and methods attributed to persuasion, some of the ones most central to business include functional theories, the Elaboration Likelihood Model (ELM), conditioning, cognitive dissonance, attribution theory, inoculation theory and social judgement theory.
  • We will a select few of these theories for further clarification:
  • Functional Theories - These theories revolve around assumptions about how people may react towards influence or persuasion in respect to their own attitudes.
  • Reason - Through appealing to logic and premise/conclusion clauses, the persuader can effectively prove their stance to be superior scientifically or rationally.

• Determine a Course

  • Once decision alternatives have been identified and analyzed, the decision maker is ready to make a choice.
  • One of the best-known theories about bias in decision making is Kahneman and Tversky's prospect theory.
  • Prospect theory also suggests that people consider how others would benefit or be hurt by the outcome of their decision.
  • This graph represents Kahneman and Tversky's theory.
  • Evaluate the importance of bias and prospect theory in effectively ensuring decision makers arrive at the ideal option