Making Decisions: Rationality, Bounded Rationality and Intuition

Making Decisions: Rationality, Bounded Rationality and Intuition

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Making Decisions: Rationality, Bounded Rationality and Intuition

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The first criterion for making a decision is that it must be rational. Several assumptions are made to define what a rational decision really is. First, the decision itself would have to maximize value and be consistent within natural constraining limits. This means that the choice made must maximize the organization’s profitability. Tying in with this is the natural assumption that the manager making the decision is pursuing the organization’s values and profitability, not his or her own interest.

One assumption of rationality as it relates to the decision maker is that he or she is fully objective and logical. When making the decision, a clearly stated goal must always be kept in mind. This goes hand in hand with starting with a problem statement.

Bounded rationality means that managers make decisions based on the decisionmaking process that is bounded, or limited, by an individual’s ability to gain information and make decisions. Managers know that their decision-making skills are based on their own competency, intelligence, and, last but not least, their rationality. They are also expected to follow the decision-making process model.

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However, certain aspects of this model are not realistic with respect to true-life managerial decisions, which are made with respect to bounded reality. This comes into play, for example, when decision makers cannot find all of the necessary information to analyze a problem and all of its possible alternatives. Therefore, they find themselves satisficing, a term used by management scholar and author Peter Drucker, or accepting a solution that is just “good enough” rather than maximizing. Consider this example: A chef for a major hotel chain has to prepare a banquet for 50 people. On the menu is half a chicken for every guest, which means that the chef needs 25 whole chickens for this banquet. He purchases the chickens at a market 25 miles away, where he has made the same purchase before for $60. Because he has made purchases from this market before, he knows the quality of the food they sell. What the chef does not know was that there is a free-range chicken farm only 10 miles away that would have sold him the 25 chickens for the same price. Instead of researching his alternatives, the chef satisficed himself with the first option that came to mind and settled on it, assuming it was probably not the best but “good enough.” This behavior is rationally bounded because the best solution to be found was bounded by the chef’s ability to research all alternatives instead of settling on the first acceptable one that came to mind.

Most decisions that managers make are not based on perfect rationality because of various factors, such as time constraints on researching all possible solutions or lack of resources to do the research. Therefore, decisions are typically based on bounded rationality. In other words, managers make decisions based on alternatives that are just satisfactory. At the same time, though, the decision maker will be strongly influenced by an organization’s culture, power considerations, internal politics, and an escalation of commitment. An escalation of commitment happens when the commitment to a prior decision is increased despite evidence to the contrary. For example, consider the decline of the Planet Hollywood restaurant chain. At the launch of the chain, the team of marketing professionals deemed it economically sensible to set a high price on burgers and other food items. The restaurant set out to be a novelty establishment, although the target customers were middle-class citizens. Although it was evident that the decision to have high-priced products in a middle-class establishment was doomed for failure from the beginning, the decision makers stuck with it. The inevitable took place, and Planet Hollywood went belly up and was forced to close locations all around the world. The negative consumer reaction was predictable, but the decision makers escalated their commitment to the set prices even though it was a bad decision. Rather than search for new alternatives, they did not want to admit to making a bad decision and simply increased their commitment to the original one.9

Using rationality and common sense to influence decision making is very important—we must not forget the role of plain and simple human intuition. Intuition is used in everyday life, such as knowing not to grab a hot baking pan with your bare hands. It ranges all the way to the corporate level, where managers often use their own intuition when making corporate decisions. Intuitive decision making is a subconscious process of making decisions on the basis of experience and accumulated judgment. Five different identified aspects of intuition comply with the different types of decisions made. The first is a values- or ethics-based decision. Managers will recall the ethics system they were raised with and base their

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564 Part VI Managerial Areas of the Hospitality Industry

A DAY IN THE LIFE OF DENISE SIMENSTAD

National Sales Manager, San Diego Convention Center, San Diego, California

Denise Simenstad is the national sales manager at the San Diego Convention Center. Her work here starts early and usually ends when the timing is good. What she does in those hours, though, is good customer service and remarkable work.

Denise comes into work at about 8 a.m. When she arrives at her office, she checks her voice mail, e-mail, and inbox messages. From then on, the day is not her own. She’s working and attending to customer activity.

Her day-to-day activities keep her busy throughout the day. First, Denise responds to customer inquiries.These inquiries consist of prospective customers calling her to inquire about date and space availability at the convention center,the cost of renting meeting rooms or exhibit halls, and checking whether other, similar shows are booked in the facility.

She then usually leads a tour or, as it is better known, a “site inspection” of the facility to show customers the available physical space, including the lobby, exhibit halls, ballroom, meeting space, and outdoor space.Then she shows them the ancillary services that the convention center provides, such as the audiovisual facilities,food and beverage, telecommunications, security services, business services center, and so on. All of this makes for a complete tour.

Denise then prepares proposals (dates, rates, and space letter) for prospective customers.This ranges from a group of 100 people for one day to a trade show for 15,000 people to 250,000 guests for five days. She includes a package of information concerning the floor plans, rates, regulations,and other pertinent information.

After all of that, Denise answers customers’questions about the facilities available and capabilities. She fields questions on the sizes of rooms, capacities of the facilities, rates, distance between pillars on the exhibit floor, floor loads, dimensions of freight doors, number of committable hotel rooms in the downtown area, number of packages available, and more.

Then comes the duty of issuing and negotiating license agreements (contracts) with outlines, dates, space and rates, insurance requirements, indemnification issues, cancellation classes, guarantees, and so on.

To start wrapping up, Denise attends meetings with other sales managers in the office to discuss business strategy concerning who is considering them for a meeting, how they can close the deal, what other managers are working on, what type of business seems to be prevalent right now, and so on.The sessions continue with yet another meeting with event managers, the people responsible for the operational aspect of an event once it is contracted. In this meeting they all go over any operational concerns and check to ensure that promised sales are delivered. If a client is in-house,they send a gift to his or her hotel room (just prior to arrival) and then go on the floor to check the show and ensure that clients are satisfied with service received.

The day usually ends at about 5:30 p.m. for Denise.The day can go on even longer if a customer is in town. In this case, she makes sure that her customers are wined and dined and attended to well by entertaining them; providing breakfast, lunch, and/or dinner; and basically showing them what San Diego is all about.

Courtesy Denise Simenstad

decisions on personal morals. The second is an experience-based decision. Through trial and error, the manager has gained experience and will base a decision on past learning. Affect-initiated decisions are those that are based on a manager’s emotions and feelings. The fourth type is a cognitive-based decision. The manager’s previous training, learned skills, and gained knowledge influence the

decision-making process. Last, the manager may use his or her subconscious mind to retain data and process it in such a way that it will influence the type of decision he or she will make.

Intuition and rationality are separate but are often used in combination in most decision making. The two complement each other to offer the manager an ideal solution for the decision-making process. As an example, consider a manager who has to make a decision on a situation that is similar to one he has come across in the past. Instead of using careful analytical rationality, he will make a decision based on a “gut feeling” and act quickly with what appears to be limited information. The decision is ultimately made based on his experience and accumulated judgment.

► Check Your Knowledge

1. List criteria for making a rational decision.
2. Give an example of satisficing.
3. What are the five aspects of intuition?

Types of Problems and Decisions

Several different types of decisions match different types of problems. They are applied as solutions, depending on the various situations that arise. Managers who are aware of these differences can use them to their advantage.

The two major types of decisions are programmed decisions and nonpro-grammed decisions. A programmed decision involves situations that recur on a regular basis, allowing the response to be a handled with a “programmed” response. In a programmed decision, the response will occur on a repetitive basis; for example, when the number of New York steaks goes below a specified number, an order for more is automatically placed. Programmed decisions generally become a standard operating procedure. Alternatives are not necessary most of the time because the problem statement is familiar, and therefore the solution is in close reach because of past successful decisions made. The response to a shortage of New York steaks is simply a reorder; the alternatives are truly limited. A programmed decision is made in response to a recurring problem; the approach to dealing with it has become repetitive and therefore does not require a careful analysis.

A nonprogrammed decision is nonrecurring and made necessary by unusual circumstances. The type of problem that induces a nonprogrammed decision is a poorly structured problem. These types of problems are usually new or unusual to the decision maker. More often than not, the information on the problem is incomplete or unavailable. This generally increases the difficulty gradient of finding an appropriate solution. Most important, though, the problem is unique and nonrecurring, such as which computer hardware and software a restaurant should install or whether to expand through franchising or company-owned

t Level in Organization Poorly Structured Well Structured Type of Problem Figure 17-8 Nonprogrammed and Programmed Decisions. (Derived from Stephen P. Robbins and Mary Coulter, Management, 7th ed. Upper Saddle River, NJ: Prentice Hall, 2002, p. 161.)

restaurants. These distinctive decision situations are not likely to recur for several years and require a custom-made decision.

The more sophisticated a company is, the more programmed decisions are made. Many large corporations have policy and procedure manuals to guide managerial and supervisory decision making. Nonprogrammed decisions call for greater analysis, innovation, and problem-solving skills. Figure 17-8 diagrams programmed and nonprogrammed decisions and the level in the organization.

Decision-Making Conditions

In a perfect world, we would have all the information necessary for making decisions. However, in reality, some things are unknowable. This leads us to decision-making conditions. Decision making includes three major conditions: certainty, risk, and uncertainty. These three conditions all have individual characteristics that define each.

The ideal situation for making a decision is one of certainty. A decision of certainty includes knowing all of the alternatives and therefore having no risk involved when making a decision, because the outcome is known. A good example for this condition is illustrated by a hotel investment specialist who is allotted a share of the hotel’s profit. The investor’s options are clear and defined. He knows exactly how much interest is earned on bonds and how much interest is offered by various banks, the security issues, and how many years it will take for them to mature.

Making a decision that involves risk is one of the most common situations. Here the decision maker is not certain of the outcome of the situation. However, through personal experience, or a simple “gut feeling,” she can estimate the probability of the outcome. Although not all alternatives are properly researched, by using historical data, probabilities can be assigned to various alternatives and the best probable outcome ultimately chosen. This is called a risk condition as it relates to decision making and is characterized by having some knowledge of the outcome of the various alternatives, combined with the element of unpredictability.

For example, a popular hotel is thinking about adding on family apartments to its property. So far the largest room they have is a double; the family rooms would

Rational Decision Making

Professional managers at the Sheraton Hotel and Resort in San Diego provided us with a real-life problem that deals with making rational decisions: How much space should we reserve for large parties? For example, if a group of 500 reserves a room, and only 300 show up, the other 200 spaces are basically “dead space,” which could have been rented out to another party of 200 people. To protect themselves from this kind of dilemma, the hotel has attached a food and beverage price to each room. If you reserve the room, the food and beverage price is charged automatically, even if the guests don’t show up.

need to have beds for four people along with a kitchenette. Perusing past historical data helps make the decision somewhat clearer. In the past year alone, 40 percent of all customers were families of three or more. Reviewing the customer comments, managers find that the demand for a family apartment is relatively large. Although the construction of an apartment building will cut into the revenue, the rental profit made from these more expensive apartments is likely to outweigh costs in fewer than three years. Also, the hotel is hoping to attract an even larger family crowd to its property once it offers apartments. Although all of the past data is valuable information and can to some extent predict the future, a factor of risk is involved because there is always some level of unpredictability about the future.

Uncertainty situations are characterized by having to make a decision when the outcome is not certain and when reasonable outcome estimates can’t be made either. These situations often arise when alternatives to the decision are limited because of lack of adequate information. Although conditions of uncertainty are not as common as situations of risk, managers still find themselves confronted with uncertainty in decision-making situations.

Decision-Making Styles

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Decision makers differ in their way of thinking; some are rational and logical, whereas others are intuitive and creative. Rational decision makers look at the information in order. They organize the information and make sure it is logical and consistent. Only after carefully studying all of the given options do they finally make the decision. Intuitive thinkers, on the other hand, can look at information that is not necessarily in order. They can make quick decisions based on their spontaneous creativity and intuition. Although a careful analysis is still required, these types of people are comfortable looking at all solutions as a whole as opposed to studying each option separately.

The second dimension in which people differ is each individual’s tolerance for ambiguity. Managers who have a high tolerance for ambiguity are lucky in that they save a lot of time while making a decision. These individuals can process many thoughts at the same time. Unfortunately, some managers have a low tolerance for ambiguity. These individuals must have order and consistency in the way they organize and process the information so as to minimize ambiguity.

Upon review of the two dimensions of decision making, way of thinking and tolerance for ambiguity,

and their subdivisions, four major decision-making style become evident:10

1. The directive style entails having a low tolerance for ambiguity as well as being a rational thinker.

Individuals who fall into the category of having a directive decision-making style are usually logical

Making Decisions: Rationality, Bounded Rationality and Intuition

Making Decisions: Rationality, Bounded Rationality and Intuition

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Making Decisions: Rationality, Bounded Rationality and Intuition

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