MGT600 UNIT 1 INTELLIPATH

Bounded Rationality
Questions
ETHICALITY affects all aspects of bounded rationality and sets constraints on decision making

While individuals and organizations may vary considerably in how they make these choices, this
is a constant constraint on the decision-making process and does have a profound effect
on unbounded BOUNDED RATIONALITY.

WILLPOWER limits the extent to which the organization is willing to carry out the decision.

AWARENESS is a concept whereby people tend to focus on information in a way that may
ignore other available information that is outside of stereotypical behavior or thought processes.

BOUNDED RATIONALITY is the result of the recognition that it is the decision making
process not the end result that is important.

In bounded rationality all decisions are bounded in some way by_______.

Willpower and self-interest
Self-interest and morals
Compatibility and willpower
Willpower and competition

Click on the correct node represented by the scenario below:

Decision to invest in an unknown innovative technology, rather than save for

upcoming year WILLPOWER

AWARENESS is a concept whereby people tend to focus on information in a way that may
ignore other available information that is outside of stereotypical behavior or thought processes.
Click on the correct node represented by the scenario below:

Decision to concentrate on sales for a specific division within a global enterprise

AWARENESS

HUMAN BEHAVIOR suggests that willpower is limited by a tendency to place a higher value

on present conditions than on future conditions.

Click on the correct node represented by the scenario below:

Decision to cut production costs, but at a cost to the environment at your

manufacturing plants ETHICALITY
 Introduction
Bounded rationality is the result of the recognition that it is the
decision making process not the end result that is important. As
a result, all decisions are bounded in some way by self-interest
and willpower (Thaler, 2000), ethicality (Chugh, Bazerman, &
Banazi, 2005), and awareness (Bazerman & Chugh, 2005). Self-
interest dictates the context in which a decision is made while
willpower limits the extent to which the organization is willing
to carry out the decision (Thaler, 2000).

No decisions are made without some consideration of the ethics of that decision. Likewise,
decisions are shaped by knowledge of the facts and a valid perception of the environment in
which the decision making is to occur (Bazerman & Chugh, 2005).

Learning Materials
The
Concept of
Bounded
Rationality

This
diagram
illustrates
the concept
of bounded
rationality
as it affects
decision
making.
Ethicality's Effects on Bounded Rationality

Ethicality affects all aspects of bounded rationality and sets constraints on

decision making (Chugh, Bazerman, & Banazi, 2005). Decisions are not
made in a vacuum and there is certainly no long-term economically valid
decision that is woefully unethical; however, the above fact does not mean
that all decision are equally ethical or necessarily beyond questioning
(Bazerman, 2006). 

Constraints on decision making are intended to set the outer boundaries of

propriety not define in absolute terms the universal truths of what is ethical or
unethical. Every decision maker needs to recognize that his or her own
ethicality is limited and subject to many diverse influences (Chugh,
Bazerman, & Banaji, 2005). Often, people may be unaware of what these
limitations are and the extent to which they affect decision making
(Bazerman, 2006).
Self-Interest's Effects on Bounded Rationality

Many are familiar with the concept of maximizing self-interest, especially from an economic
perspective. Despite the fact that this concept is well ingrained in the thought process of those
who live in market-driven economies, self-interest is not unlimited or unchecked. There is an
acute awareness of the needs of others and of the impact that a decision might have on others
(Thaler, 2000). This realization has radically changed the perspective of rational choice in
decision making. Self-interest or, more particularly, the limitations of self-interest create a
boundary on decision making that is self-limiting and subject to much review and
debate. Concepts like fairness and rigid adherence to supply and demand forces change the
operation of economic self enhancement (Bazerman, 2006).
Willpower's Effects on Bounded Rationality

Human behavior suggests that willpower is

limited by a tendency to place a higher value on
present conditions than on future conditions
(Thaler, 2000). This leads to inconsistencies in
decision making that often results in adverse
future circumstances (Bazerman,
2006). Individuals or organizations might
mortgage their future to survive economically
today. 

Current decisions to make a purchase may take

priority over saving for the future. It is also likely
that an organization may decide to invest in a
project that will produce large short-term gains
but is questionable as to long-term sustainability
over a project that will not produce any short-term
gains but is likely to produce sustainable growth
in the long run. While individuals and
organizations may vary considerably in how they
make these choices, this is a constant constraint
on the decision-making process and does have a
profound effect on bounded rationality.
Awareness' Effects on Bounded Rationality

Awareness is a concept whereby people tend to focus on information in a way that may ignore
other available information that is outside of stereotypical behavior or thought processes
(Bazerman, 2006). If someone focuses on one moderately difficult task, he or she may miss
something else that is obvious but not necessarily part of the task he or she was assigned
(Bazerman & Chugh, 2005). This is blindness due to inattention. Likewise, one may be subject
to change blindness if unethical decisions that would normally be noticed if introduced all at
once are done incrementally over a period of time, making these changes less noticeable. There
is also a tendency to focus too much on a singular event and not on other events, which occur
concurrently (Bazerman, 2006). This tends to limit perspective in decision making.

Framing's Effects on Bounded Rationality

Decisions can be influenced by the way in which the problem is presented to the decision
maker(s). Humans tend to prefer certainty over uncertainty. Even pseudocertainty is preferred
over what is clearly uncertain. Based on these facts, it is possible to restate the problem in a way
that offers certainty of outcome over a reduction in the uncertainty of that outcome. Thus, a
decision maker is likely to choose a 20% probability of making a return that is 50% higher than
the less rewarding return with 25% probability (Bazerman, 2006).

The video below further explores bounded rationality:

 https://youtu.be/CA3W6bTqrQ0

Summary

As a result, all decisions are bounded in some way by self-interest and willpower (Thaler, 2000),
ethicality (Chugh, Bazerman, & Banazi, 2005), and awareness (Bazerman & Chugh, 2005). Self-
interest dictates the context in which a decision is made while willpower limits the extent to
which the organization is willing to carry out the decision (Thaler, 2000). No decisions are made
without some consideration of the ethics of that decision. Likewise, decisions are shaped by
knowledge of the facts and a valid perception of the environment in which the decision making is
to occur (Bazerman & Chugh, 2005). 

Key Terms

Bounded rationality is the result of the recognition that it is the decision making process not the
end result that is important. As a result, all decisions are bounded in some way by self-interest
and willpower (Thaler, 2000), ethicality (Chugh, Bazerman, & Banazi, 2005), and awareness
(Bazerman & Chugh, 2005).

Ethicality affects all aspects of bounded rationality and sets constraints on decision making
(Chugh, Bazerman, & Banazi, 2005). Decisions are not made in a vacuum and there is certainly
no long-term economically valid decision that is woefully unethical; however, the above fact
does not mean that all decision are equally ethical or necessarily beyond questioning (Bazerman,
2006). 

References

Bazerman, M. H. (2006). Judgment in managerial decision making (6th ed.). Danvers, MA: Wiley.

Bazerman, M. H., & Chugh, D. (2005). Focusing on negotiation. In L. Thompson (Ed.), Frontiers of

social psychology: Negotiations. London: Psychology Press.

Chugh, D., Bazerman, M. H., & Banazi, M. R. (2005). Bounded ethicality as a psychological barrier to
recognizing conflicts of interest. In D. A. Moore, D. M. Cain, G. Lowenstein, & M. H. Bazerman
(Eds.), Conflicts of interest: Problems and solutions from law, medicine, and organizational
settings. London: Cambridge University Press.

Gegerernzer, G. (2011). Bounded rationality [Video]. Retrieved from the You Tube website:

https://www.youtube.com/watch?v=CA3W6bTqrQ0

Thaler, R. (2000). From homo economicus to homo sapiens. Journal of Economic Perspectives, 14(1),
133–141.