Bounded Rationality (Herbert Simon) Flashcards
What is the meaning of bounded rationality?
Individuals do not make perfectly rational decisions because of both cognitive limits (the difficulty in obtaining and processing all the information needed) and social limits (personal and social ties among individuals).
What are four Perspectives on how managers make decisions?
- Rationality describes a series of steps that decision makers should consider if their goal is to maximize the quality of their outcomes.
- Bounded Rationality: Decisions are made based on the knowledge already present which results in outcomes that are satisfactory or considered “good enough”.
- Intuitive: It refers to arriving at decisions without conscious reasoning
- Creative: Creativity is the generation of new, imaginative ideas.
What is Evidence Based Management System?
- Evidence-based management is that management decisions should be based on a combination of critical thinking and the best available evidence. And by ‘evidence’, we mean information, facts or data supporting (or contradicting) a claim, assumption or hypothesis.
- Evidence may come from scientific research, but internal business information and even professional experience can count as ‘evidence’. In principle, then, all managers base their decisions on ‘evidence’.
A small business owner is considering expanding her product line but is overwhelmed by the amount of information available about potential products and markets. Explain how bounded rationality might affect her decision-making process. What strategies could she employ to make a more informed choice?
Bounded rationality might affect the business owner’s decision-making process by causing information overload and leading to suboptimal choices. Strategies she could employ to make a more informed choice include setting clear decision criteria, prioritizing the most relevant information, and seeking advice from trusted advisors.
A manager is consistently making overconfident decisions, leading to costly mistakes for the organization. Discuss how overconfidence bias relates to bounded rationality. Provide examples of how this bias can hinder effective decision-making.
Overconfidence bias relates to bounded rationality because it represents an overestimation of one’s own abilities or the accuracy of one’s beliefs. It can hinder decision-making by leading individuals to take excessive risks or make poor judgments.
Which of the following best describes the concept of “satisficing” in the context of bounded rationality?
a) Seeking the best possible solution
b) Settling for the first available option
c) Accepting a solution that meets minimum criteria
d) Ignoring available information
(c)
Which of the following is an example of a decision heuristic commonly used under bounded rationality?
a) Analyzing all available information exhaustively
b) Maximizing utility in every decision
c) Using a rule of thumb to simplify choices
d) Ignoring cognitive biases
(c)
A company’s leadership is divided over whether to implement a new performance management system. Some executives believe it will lead to improved employee productivity, while others are skeptical. How can evidence-based management principles help in resolving this debate?
Evidence-based management principles can help in resolving the debate by encouraging a systematic and data-driven approach. The organization can collect and analyze data on employee performance before and after implementing the system, allowing them to make an informed decision based on evidence.
What is a key characteristic of evidence-based management?
a) Relying solely on intuition and gut feelings
b) Making decisions based on data and research
c) Ignoring feedback from employees
d) Avoiding any experimentation in management practices
(b)
Which of the following is an example of a decision support tool that can assist in overcoming bounded rationality?
a) Flipping a coin to make decisions
b) Conducting thorough market research
c) Always following the advice of experts
d) Relying on intuition and gut feeling
(b)
A government is considering implementing a tax policy to encourage healthier eating habits among its citizens. How might insights from behavioral economics, including bounded rationality, be applied to design this policy effectively?
Insights from behavioral economics can be applied to design the policy effectively by considering factors like the default choice (e.g., making healthy options the default), using nudges (e.g., displaying healthier foods more prominently), and simplifying choices to overcome cognitive barriers.
How do emotions often influence decision-making under bounded rationality?
a) Emotions have no impact on decision-making.
b) Emotions can lead to more rational choices.
c) Emotions may lead to impulsive or biased decisions.
d) Emotions improve analytical thinking.
(c)
In the context of bounded rationality, what is information overload?
a) Having too much information to process effectively
b) Having limited information to make decisions
c) Always seeking more information before deciding
d) Prioritizing quantity of information over quality
(a)
A financial analyst must recommend investment strategies for a client during a period of economic uncertainty. Discuss how bounded rationality may impact the analyst’s ability to make optimal investment decisions in this situation.
Bounded rationality may impact the financial analyst’s ability to make optimal investment decisions by limiting the ability to process all available information and leading to reliance on simplified decision rules or heuristics. The analyst might focus on readily available data or be influenced by cognitive biases.
