BUSI1702OrganisationalDecision

Making
Lecture2 Rationaldecisionmaking Part
1
Whatmakesachoice rational?
Dr Minjie Cai
Senior Lecturer in HROB
E: m.cai@gre.ac.uk

©Minjie Cai 2021

Lecture 2 goals  To develop a conceptual
understanding of rationality,
rational choice theory, and
institutional logic

 To establish an awareness of the

importance of problem
definition in organisational
decision making

©Minjie Cai 2021

Which one would you choose?
You are invited to participate in a research about your experience of
online education. In return, you are offered the following options.

A. Receive a £25 voucher

B. Donate a £25 voucher provided by the research team to a charity of
your choice

©Minjie Cai 2021

Scenario 1
According to rational choice theory, you would have chosen A.

A. Receive a £25 voucher

B. Donate a £25 voucher provided by the research team to a charity
of your choice

©Minjie Cai 2021

Which one would you choose?
You are invited to participate in a research about your experience of
online education. In return, you are offered the following options.

A. Receive a £25 voucher

B. Spin a wheel that gives you 90% chance to win a £20 voucher &
10% chance to win a £100 voucher

©Minjie Cai 2021

Scenario 2
According to rational choice theory, you should have taken the time
to calculate the possibility of gaining a voucher with a bigger value
and therefore chosen B.

A. £25
B. 0.9 x £ 20 + 0.1 x £100 = £18 + £10 = £28

©Minjie Cai 2021

Rational choice theory
Individuals are rational actors driven by self-interests.

Individuals are capable of

 identifying all alternatives
 calculating the probability of all possible outcome of each
alternative with the given information
 evaluating all costs and benefits of each outcome

Individuals are expected to choose

 an optimal option with the highest probability of achieving
the most desirable outcome
(Coleman, 1990)
©Minjie Cai 2021
What makes a choice
rational?
Rationality at the individual level from a traditional economic
perspective
 Purposive actions intended to maximise utility
(Coleman, 1990)

 Rational actors in organisational context

 Stakeholder A vs. Stakeholder B’s interests
 Stakeholder A’s interest in X (i.e. cost reduction) vs. Stakeholder A’s interest Y
(investment in staff development)
(Brunsson, 2007)

©Minjie Cai 2021

What makes a choice
rational?
Rationality at the individual level from a traditional economic
perspective
 Purposive actions intended to maximise utility
(Coleman, 1990)

 Rationality in organisation context

 A property possessed by an organisation
 A product of social interactions between organisational actors
 An outcome of practice
(Cabantous, Gond & Johnson-Cramer, 2010)

©Minjie Cai 2021

Rational choice & organisation
 Example:
Institutional logics affect business model development in the German
Car-sharing economy
 Acquisition & merger: the influence of dominant views & interests of
stakeholders

1980s community
individual mobility
building - green
- car sales
economy

©Minjie Cai 2021

Rationality & institutional logic
From a static property to dynamic product of interactions
 Institutional logic (Haveman & Gaultieri, 2017)
 Assumptions, values, & beliefs that provide meanings to organisational
activities & experience of time and space

 Determines the attention of key decision makers on particular problems

 i.e. Is air pollution a problem that a car company should address?

©Minjie Cai 2021

Rationality & problem definition
 We often design solution without properly define the problem!
 Problems as intrinsically subjective representations of external realities

(Smith, 1989)
Individual beliefs, Problems are
preferences, and intrinsically
capabilities subjective

External Problem
realities identification
©Minjie Cai 2021
Which problem is better defined?

A. WeWork reported serious financial losses in the first quarter of 2021.

B. WeWork has seen a drop in revenue since the COVID-19 pandemic.

C. WeWork urgently needs strategic changes to recover from the loss of

$3.2bn in 2020 and  $2.1bn in the first quarter of 2021.

©Minjie Cai 2021

Problem definition
 Organisational decision making should begin with defining problems
 Conceptualise a problem an explicit & specific manner
 The ways how we define and refine problems fundamentally shape our decision-
making

Information
type and
Information content
search
Direction of method
problem
Perception solving
of the process (Smith, 1989)
problem
©Minjie Cai 2021
Problem definitions & rational choice

The case of NASA space shuttle Challenger

 Morton Thiokol engineers: O-rings present safety
issues in low temperature.
 How to make the O rings operate properly under low
temperature?

 Morton Thiokol managers:

 What is the level of acceptable risk?

 NASA managers:
 When can the Challenger be ready for launch without delay?
©Minjie Cai 2021
Problem definitions & rational choice

The case of NASA space shuttle Challenger

 NASA managers’ problem definition was
prioritised:
 When can the Challenger be ready for launch
without delay?

 This problem resulted in a rational justification

of ‘acceptable risks’

©Minjie Cai 2021

 (Smith, 1989)
©Minjie Cai 2021
 (Smith, 1989)
©Minjie Cai 2021
Rational choice & organisation problems

Organisation

Individual Collective
interests interests Symbolic &
Rules & incentives
physical resources

Social Organisation
capital objectives
Control Coordinate

©Minjie Cai 2021

(Abell, 2006; 2014)
Theory in practice
 Some organisational problems are easier to
observe & define than others

 Some organisational problems are more

likely to obtain stakeholder recognition
than others

 Example: financial losses vs. problematic

organisational culture

©Minjie Cai 2021

Theory in practice
 The applicability of rational choice
theory to solving some organisational
problems is contested
 Many organisational problems lack conditions
that underpin rational choice theory
 Imperfect information & uncertainty
 Asymmetric access to information & power
 Limited capacity

Example: HGV Driver Shortage Causing Fuel Panic

Buying Amidst Petrol Station Closures | Good
Morning Britain

©Minjie Cai 2021

Theory in practice
 The applicability of rational choice theory to solving some
organisational problems is contested
 Some seeming profit-oriented solutions could induce false economy
 Example: reducing investment in workplace health and safety for cost-cutting

 The illusion of one optimal solution

 Example: reward management (individual vs. team incentives)

 Many organisations have no contingency plan

©Minjie Cai 2021

Key learning points
 Rational choice theory sets assumptions about predict individual decisions
driven by self-interests with access to full information & ability to
calculate possibilities of alternatives

 The ways how an organisational problem is defined are influenced by

stakeholder interests & can influence the direction of organisational
decision making

 Rational choice theory has both useful implications and limitations in

decision making related to organisational problems
©Minjie Cai 2021
Thank you

©Minjie Cai 2021