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RATIONAL DECISION MAKING - the process

Karen Klisch, PhD

From:

Bazerman, M. (2006). Judgment in managerial decision

making (6th ed.). New York, NY: John Wiley & Sons.

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System Thinking

  • System 1
  • This thinking process involves our intuitive system.
  • System 2
  • This thinking process taps into our reasoning ability.

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System 1

  • Most decisions in life use this system
  • It is:
  • Fast
  • Automatic
  • Effortless
  • Implicit
  • Emotional

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System 1

  • This thinking process comes into play when people are busy, rushed and have a lot on their minds.

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System 1

  • System 1 thinking is very useful for many decisions.
  • Relatively simple decisions that do not require much reasoning are perfect for this System.
  • Ordering paperclips when they run out would be a good example.

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System 1

  • Managers are frequently rushed.
  • Managerial life is often a bit frantic.
  • Managers often rely on System 1 thinking even when they should not.

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System 2

  • This type of thinking should be utilized when making important decisions.
  • It is:
  • Slower
  • Conscious
  • Effortful
  • Explicit
  • Logical
  • Well reasoned

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System 2

  • This thinking process takes purposeful effort. One must consciously think --- “I need to take my time and reason this out”.
  • It takes patience and control.

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System 2

  • This thinking process works best with difficult, complex important decisions.
  • Planning to enter new markets or revising the company mission would be good examples.

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Systems 1 & 2

  • Most people commonly use System 1 thinking.
  • This puts one at risk of decision errors.
  • It allows our biases to creep into our decision outcomes.
  • We rely on heuristics and this may result in a big mistake.
  • People have to stop and consider carefully what they are doing when using System 2 thinking.
  • This is not the reflex behavior when confronted with a decision.
  • Using this System can help avoid poor and/or biased decisions.

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Rationality

Logical decision making process that is logically expected to lead to the optimal result.

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“BOUNDED” RATIONALITY

  • Attempt at making rational decisions BUT:
  • Lacks important information
  • Lacks clear definition of the problem
  • Lacks relevant criteria
  • Lacks time
  • Has cost constraints
  • Has limited usable memory or limited intelligence

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Hence
“BOUNDED RATIONALITY”

  • One must recognize that most decisions have some degree of boundedness even when one claims to be making a rational decision.

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SATISFICING

  • Result of bounded rationality is satisficing –
  • It involves forgoing the best solution for one that is acceptable or reasonable.

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SATISFICING

  • The individual searches until an acceptable (not maximal) level of performance is found.
  • ALL possibilities are NOT examined.

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Result of Satisficing

  • Because all possible decisions and their outcomes have not been considered – the best decision may not be made.

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END

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