Rational Decision-Making

1
Rational Decision-Making

• Define the Problem
• Identify the Criteria/Objectives
• e.g. maximize profits, gain market share
• Weight the Criteria (based on relative
  importance)
• Generate Alternative Solutions
• Rate each alternative on each criterion
• Compute the optimal decision
• calculate expected values

2
Rational Organizational Decisions

• Based on thorough strategic analyses, top
  managers make rational organizational decisions
  that will maximize performance
• Problems that limit rational decision-making
• Organizations are complex (and conflictual)
  systems Thiokol engineers managers
• Organizational culture shapes decision-making and
  estimation of success Challenger
• Decision-making biasesframing effects
  Challenger
• Problems are often ill-defined (e.g. tendency to
  miss the forest for the trees often focus on
  symptoms) Three Mile Island

3
Culture and Decision-Making Challenger

• Estimating Probabilities of Success
• Theory 1from statisticsneither previous
  successes nor failures change expected
  probability of subsequent success (e.g. coin
  flippingno culture effect)
• Theory 2previous success makes subsequent
  success seem less probable (become more
  complacent) previous failure makes future
  success for likely (become more vigilant)
• Theory 3previous success makes subsequent
  success seem more probable previous failure
  makes subsequent failure more likely
  (experience/learningpitfall overconfidence)

4
Framing Effects

• People respond differently to losses than to
  gains
• E.g. You are an administrator whose policies
  have just resulted in losses of 2 million. You
  must now decide which of two new projects to
  pursue. One project provides a certain return of
  1 million the other offers an even chance of a
  2 million return or nothing. Which do you
  choose?
• Challengerframed as a choice to avoid losses.
  There had been several launch delays another one
  would be a setback for the space shuttle program
  and other NASA missions
• Punchline Decision situations framed as losses
  (gains) leads to risk-taking (risk-aversion)

5
Rationality and Organizational Complexity

• Perrows article on Three Mile Island nuclear
  accident in 1979--radioactive emissions
• When organizations experience accidents, there is
  a need to rationalize problems as fixable
• Accidents are unique (natural disaster such as
  an earthquake, act of God)
• Accidents are discrete (an equipment failure
  that can be fixed and wont happen again)
• Accidents are calculated risks (there is a
  remote possibility that something could go wrong
  with the system for which we cant prepare)

6
Rationality and Organizational Complexity

• Hence, in the case of TMI, official reports
  wanted to focus on operator error and somehow
  rationalize the accident as a discrete event that
  could be fixed
• Perrow alternatively argues that TMI and nuclear
  plants in general experience accidents not as
  discrete events, but as a normal part of their
  operations
• ...because systems are inordinately complex and
  not well understood (problems understanding
  warnings, design equipment failure, operator
  error--resulting in negative synergy)

7
Rationality and Organizational Complexity

• We must be skeptical of rational systems views of
  managers as all-knowing--instead we must
  understand problems as part of the organizational
  context--is the problem really unique/discrete or
  is there something fundamentally wrong with the
  organization?
• From a natural system (or conflict) perspective,
  the idea of normal accident points to the limits
  of rationality, highlighting that organizational
  change and performance may be beyond the control
  of top managers

8
Summary

• Rational decision-making is hindered by many
  factors
• Organizational culture
• Decision-making biases (e.g. framing effects)
• Complexity of organizations
• In general, the cases of Challenger and Three
  Mile Island force us to view the managerialist
  (rational system) view of organizations with
  skepticism
• At the same time, attention to the natural system
  view that highlights how rationality becomes
  subverted can enable us to avoid such pitfalls
  and make decisions in a more rational manner