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The Bounded Rationality

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Emotions act on a wide range of situations causing biases and errors (Rabin 1998). In short, this means that in certain circumstances the complex, human logical apparatus ceases to process rationality, which establishes grounds for the emergence of bounded rationality. “The other is that in interactive situations of complication, agents cannot rely upon other agents they are dealing with to behave under perfect rationality, and so they are forced to guess their behavior. This lands them in a world of subjective beliefs, and subjective beliefs about subjective beliefs (Arthur 402).”
Bounded rationality plays on suggestion. Bounded rationality could affect managers because there is not enough information for the manager to make a rational decision. In such occasions, he has to rely on suggestive guesses and interpretations. This may create errors and mistakes in the strategic course that the organization is taking. Beach (1996) describes the implicit favorite model of decision making. First, the need for taking a decision is determined. Then, alternatives are identified and a selection for the implicit favorite alternative is chosen. Afterward, criteria must be established to match the implicit favorite and alternatives compared with the implicit favorite criteria. In the end, the implicit favorite is confirmed and finally selected. This type of model can be best utilized by people who know what they strive for and what their goals are. In situations, when for example the individual is looking for a job and he hasn’t set his aims yet, the implicit favorite can affect the selection of a job. The selection can be influenced by the salary, proximity of the office, extra working hours, business trips and job position.
The business world is a dynamic one and recently it has become less structured too. Thus, managers are forced to use their intuition in essential situations especially when there is a lack of information. Intuition is often mistaken for emotions, though. Although intuition is formed in the subconscious level, intuitive decision making is a combination of quick qualitative and quantitative analyses (Quinn 1980). Intuition can help decision making because it is based on past experiences and knowledge deeply rooted in your subconscious rational thinking. Thus, relying on our intuition can aid us in situations when there is little information available. Intuition can be used in situations when the circumstances are rapidly changing and there is no time for analyses. Intuition is needed also in expedient decision making when the problem is poorly defined and structured. If the deal is not structured, incomplete, there are conflicting points or ambiguity, intuition is required. We can define escalation of commitment as the tendency to invest additional financial resources in seemingly losing non-beneficial projects because they cost already lots of effort, money and time. The perceptual blinder can influence the escalation of commitment on the bases of emotions – fears or anger.