Discuss the differences between Normative vs.

Descriptive school of thoughts in decision

making by relating your discussion with Rationality and Bounded Rationality. Also, discuss
the practical implications of each domain on managerial decision-making?
Answer
Descriptive models focus on how people make their decisions in their everyday lives, normative
models focus on how perfectly rational agents should make decisions. Normative decision theory
models the ideal decision for a given situation. In normative theory, People are assumed to be
fully rational. Normative decisions always try to find the highest expected value outcome. A
fully rational person is capable of arriving at the highest expected value with perfect accuracy.
On the other hand, descriptive decision theory is more about what will occur in a situation, not
what should. Descriptive decision theory takes into consideration outside factors that influence
someone’s decisions toward less optimal, less rational ends. People make the decision based on
their own evaluation of uncertainty, risk, and expected level of gain.
To understand this, we shall play a game. In this game, all you do is to flip a coin. If the coin
lands heads, a dollar is added to the pot. If you decide to flip the coin again, and it lands heads
again, the pot doubles to 2 dollars. On a third heads flip, the pot doubles again to four. And so
on. If you flip tails at any point, the game is over, but you keep the pot regardless. How much
would you pay to enter this game?
Mathematically, you should want to pay any price. A coin flip could theoretically land heads an
infinite number of times in a row. The cost-benefit analysis should thus be obvious. You will be
rich. For a one-time fee, you stand to make an untold amount of profit. Does that seem
reasonable, though? Does it even seem possible? Can we actually expect that the coin could land
heads millions of times in a row? Should we even expect the coin to land heads ten times in a
row?
This experiment is known as the St. Petersburg Paradox. In theory, you should throw your
money at a game. In practice, it would be a challenge to find a rational human being willing to
pay more than maybe 50 dollars to play. Expected utility, an essentially irrational decision,
dictates whether someone plays this game. A normative assessment tells us to empty our life
savings into this game. A descriptive assessment reveals, however, that nobody would play this
game for more than a handful of dollars, because the odds of winning more than a handful are
virtually nil.
Rationality refers to the decision-making process that is logically expected to lead to the optimal
result, given an accurate assessment of the decision maker’s values and risk preferences.