Explain what is implied by the assumption that decision-makers are rational? How is the assumption of rationality used in the economic analysis of individual behaviour? In many academic disciplines much is spoken about rationality and rational choices. Economists generally refer to 'rational' choices and that individuals in economic theory are rational. By rational we mean people choose options which they perceive to be the best, given the circumstances they are in. In terms of making rational choices some of the conceivable options for example of going to work would be: · Actually going to work. · Staying at home · Going out shopping · Buying a house · Fly to the moon etc. But with these choices we face …show more content…
However the consequences of making a choice that may seem rational is not always taken into consideration as in many cases the choice taken may be actually irrational. For example, somebody deciding or not they should buy a sandwich with limited money, will certainly consider the immediate satisfaction of their hunger, but it is dependant on the individual how much importance they would give to the fact that they wouldn't be able to get the bus back home later that night and would catch a cold from walking back, resulting in days off work and subsequent loss of income. It could be said therefore that anyone who bought the sandwich would be considered 'irrational'. The assumption that one is always in possession of all their rational senses is a dangerous one to make. It can hardly be assumed that the decision of anyone already very drunk on a night out to buy another alcoholic beverage to be rational .They know that it will result in them being violently sick and lead to them regretting the purchase in the morning, yet this does occur as their intoxicated state has robbed them of the power of 'rational' thought. The same can be said of other conditions such as stress and being in love. In terms of decision-makers, rational decision making operates where "a decider in an environment must choose among alternative courses of action, each leading to a different expected environmental outcome, where some outcomes are
The challenge when working with others to make a decision is that we all have our own methods of coming to a conclusion. The rational decision-making model is comprehensive in the fact that it requires the decision maker to define the problem, identify criteria for making the decision, weight the criteria, develop alternatives, evaluate alternatives and finally select the best alternative (Robbins, S.P., Judge, T.A. 2009). The challenge with utilizing this method is the fact that most of the time in real world situations, facts are either limited or missed, time compression causes an oversight on all potential alternatives and people tend to choose the easier route to make decisions (Robbins, S.P., Judge, T.A., 2009). Intuition is a powerful tool, however it can also lead to quick and potentially bad decisions (Robbins, S.P., Judge, T.A., 2009). I can recall a conversation with a leader about an employee that made an error administering a medication. The manager had not spoken with the employee or
When it comes down to it, we all make our own decisions. We weigh the pros and cons to decide if the benefits outweigh the potential punishments. The idea of rational choice theory is that people choose their actions based on the options available and choose the one they most prefer. If their choice is to eat a donut or to not, when they really want to eat it, chances are they will eat it. Once you add in punishment, it gets more complicated. If the person were to be punished for eating it, they will most likely think it through more. Say, it’s a teenager who wants to eat the donut but he knows his father will ground him if he does. This donut is the teen’s favorite kind and he really really wants to eat the donut, but the risk of punishment is there, the teen will weigh the consequences against the benefits. Would he choose a few minutes of a tasty donut and risk being grounded for a week or would he choose to forgo the donut and not get in trouble? The act of having a choice to do something you want to do that also has consequences and causes you to rationally decide if it’s worth it or not is rational choice theory.
The decision making process includes cognitive processes that eventually lead to a choice in action while taking into consideration the alternative possibilities (Allen, Dorozenko, & Roberts, 2016). Not all choices have to lead to an action. The values and preferences of the person making the choice also comes into play when making the final decision. Problem-solving to obtain a certain goal or satisfactory by a solution is the main reason people go through the decision making process (Stefaniak, & Tracey, 2014). This process has many factors that end with one final result or solution. The decisions made can be rational or irrational and can be determined by explicit or tacit knowledge (Qingyao, Dongyu, & Weihua, 2016). Since the decision making process can be very difficult at time, psychologists have viewed the process in different perspectives to get a better understanding (Rossi, Picchi, Di Stefano, Marongiu, & Scarsini, 2015). The different perspectives include; psychological, cognitive, and normative or communicative rationality.
Decisions are what direct a average person's life. Some decisions are easy some are hard. But that’s the way of life and how it works.
My example of the rational choice theory of today is the mexican drug controls of December 2011. The drug trafficking organization in Mexico was highly rational, self-interested actors seeked to maximize profit.
Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years. Her decision to continue holding the same portfolio of assets will be an example of:
1. I agree with Melvin Konner when he said “People do not think or act rationally, even in their own self interest (944).” This can be seen in when people panic in high situations such as a fire. Recently, someone livestreaming, which is essentially a live recording of something, set his home on fire. Instead of thinking calm and rationally he attempted to put the fire out with other flammable materials.
Have you ever made a decision and later completely wonder why it is you made that decision? “Sway The Irresistible Pull of Irrational Behavior” by Ori Brafman and Rom Brafman examine moments of our lives where we could easily be swayed. The Brafmans discuss topics like commitment and value attribution. With examples of what attracts us into making a bad decision. The brilliant authors make it easy to understand the analyzations of the situations. Where there is a possibility of being swayed. With proper analyzation we can prevent these situations from taking place again. Almost everyone has made a decision we misunderstand and behind that decision is an irresistible pull of irrational behavior. No one is perfect, and no one can avoid being swayed into an irrational situation, not even me.
Economists have often modelled human decision makers as completely rational. According to this model, rational people know their own preferences, gather and accurately process all relevant information, and then make rational choices that advance their own interests. However, Herbert Simon won a Nobel Prize in economics by pointing out that people are rational, but only boundedly so in that they seldom gather all available information, they often do not accurately process the information
The concept of ‘rationality’ has been talked through the centuries. According to Grey (2013), rationality is a big question because of this proposition which has the meaning and difficulties seem to be defining of a whole set of issues which have resonated through both organisation theory and practice ever since. And rationality is the basis of a decision, rational decision makers are objective and logical, they reach the goal that maximises the value. Not only rationality is important to organisations, and also it can be identified in various kinds of management theories. This essay will introduce the different aspects of the concept of ‘rationality’ and make explanations that how these are recognised in different management theories.
However, this idea can be a divergence from reality, as in real life it is difficult or even impossible to find such agents that will make perfectly rational decision as reflected by irrational human behaviour. Though the assumption of individuals act rationally is important when analysing economics and interactions. This is because if we don’t assume everyone act rationally, if there’s a loss of welfare, we will not be able to decide whether it is the result of flaw in the structure or just because of irrationality.
Inadequate information, data, and knowledge. For rational decision-making to be accurate, reliable, and complete, information about various aspects of the problem under investigation is necessary. Possible future trends can be estimated with the help of such information. This facilitates rational decision-making. However, adequate and reliable information may not be available at the time of decision-making. As a result, the decisions may become defective or irrational or may prove faulty in the course of time. This is how decisions become irrational.
Many methods have been developed to simplify the decision making process. In this paper, the rational model of decision making will be discussed first. Then, some of the factors that cause deviation in the rational
Effective decision-making is very important on how probability can be applied therefore effective decision-making must be rational. As mentioned before, people who are deciding rationally are attempting to reach goals in a systematic way. They make sure
Parker’s budgeting decision is a good example of an individual acting with bounded rationality. This term was introduced by Simon in 1957 (as cited in Tolbert & Hall, 2008) to argue that normative models of decision making, which assume fully rational and objective judgement (Teale, Dispenza, Flynn & Currie, 2003), are unrealistic because human rationality is limited. Parker’s judgement may have seemed rational to him, but it was not rational for the organisation, a subtle distinction about rationality made by Storing (as cited in Tolbert & Hall, 2008). Parker’s judgement was also not rational in that he did not have all available knowledge and awareness of risk, which are the conditions of normative models (Teale et al, 2003) and the “official theory” of management (Anthony, as cited in Teale et al, 2003, p. 14). For example, Parker did not know about the variations in the terrain when he made his decision, and he also assumed that the assistant workers could work at the same physical rate that he could. Both of these limitations were factors resulting in a risk to on-time task completion.