decision making
- Key People:
- Daniel Kahneman
decision making, process and logic through which individuals arrive at a decision. Different models of decision making lead to dramatically different analyses and predictions. Decision-making theories range from objective rational decision making, which assumes that individuals will make the same decisions given the same information and preferences, to the more subjective logic of appropriateness, which assumes that specific institutional and organizational contexts matter in the decisions that individuals make.
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. The German sociologist Max Weber described how factories and bureaucracies became dramatically more efficient through growing technical expertise and, more importantly, a new division of labour, 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 nonarbitrary 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 behaviour 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. The American social scientist 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 the imagination of the decision maker.
Simon argued that otherwise irrational individuals can behave rationally in the right context, particularly within a formal organization. Organizations can structure, or bound, individuals’ decisions by manipulating the premises on which decisions are made. Organizations can filter or emphasize information, bringing facts to an individual’s attention and identifying certain facts as important and legitimate. Individuals in hierarchies can take most of what happens around them for granted, concentrating only on a few key decisions. Hierarchies are efficient because they ensure that the correct information gets to the correct decision makers and that the correct person is making the decisions. At the same time, hierarchical organizations can socialize individuals to refrain from cheating by creating value decision premises that underlie decision makers’ judgments on what is right or good to do. These values, beliefs, or norms can come from family, from school, or from within the organization, but the organization can structure environments so that the most desirable value will be most salient at the time of decision.
Hierarchical organizations can structure factual and value decision premises so that the range of action becomes so narrow that only one alternative remains: the rational choice. Structuring decision premises can be done by directly managing information, selectively recruiting members, training members, and creating closed promotion patterns.
Organizations become rational in pursuing their missions through what Simon called ends-means chains. Leaders set the organizational mission, find a set of means for achieving the mission, take each of those means as a subgoal, and then find means for the subgoals and so on, until goals exist for every member of the organization. Leaders thus create a hierarchy of goals, in which each organizational level’s goals are an end relative to the levels below it and a means relative to the levels above it. Each individual’s work thus becomes a small part of accomplishing the organization’s mission.
Intra-organizational political decision making
Turning Simon’s bounded rationality on its head, other theorists argued that organizations are not purposeful cohesive actors but rather groups of competing coalitions made up of individuals with disparate interests. Individuals do not represent organizational interests; organizations represent individuals’ interests. Seen from this perspective, it is erroneous to ascribe a mission to an organization. Instead, organizations have goals set by a temporarily dominant coalition, which itself has no permanent goals and whose membership is subject to change. Members of the dominant coalition make decisions by bargaining, negotiating, and making side payments. Organizational decision making is the product of the game rather than a rational, goal-oriented process. Individual decision making is rational in the narrow sense that individuals pursue individual, self-interested goals, though this cannot always be accomplished directly. Individuals must pick their fights and use their influence carefully.
To understand and possibly predict what organizations will do, it is necessary to uncover and analyze the membership of the dominant coalition. The formal organizational chart is not a reliable map of organizational power. Instead, analysts must discover authority. Individuals gain authority by being able to resolve uncertainty. Individuals that can unravel technical problems, attract resources, or manage internal conflict demonstrate their usefulness to the rest of the organization and gain power. Working in concert with others who can perform similarly valuable functions, they become part of the dominant coalition. The size and composition of the dominant coalition depend on the types of environmental, technical, or coordinating uncertainty that must be resolved for the organization to survive. More technically complex, larger organizations in rapidly changing environments will tend to have larger dominant coalitions.