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Wednesday, 31 October 2012

Choice theory and managerial decision making

Choice theory and managerial decision making

Choice theory and managerial decision making
From the rational choice theory, several conclusions can be made concerning the decision making by the management of business organization.

Individualized decision making.
The management of an organization has autonomy in making decision that will lead to maximum profit for the organization on behalf of the shareholders. Individuals make decision according to their understanding of the situation in reference to the available choices. Therefore, the decision making can be affected by individual decision maker as some attempt to include their personal interest without their knowledge when making choices.

The rational theory of choice is based on this individualized model where one makes choices according to their personal understanding of the action that maximizes profit for the organization. This choice or the decision made is based on individual preference, the information one has and the cognitive ability of each individual in a single decision making unit of an organization.

Collective decision.
Managers tend to consider their self- interest and are viewed as cynical especially when responding to the organization’s environmental incentives.  Their self interest has been seen to take a precedent consideration before the shareholders interest in the course of action. To ensure collective decision making, those formulating and implementing the policy of the organization should ensure the incentives they include are in line with institution organizational which are correct in order for the right code of conduct and behavior to automatically develop among all those involved in the decision making of the organization.

The incentive given shapes the decision making environment by influencing the managers to make optimal choices if those incentives are in consistence with their self-interest. The owner of the business should therefore ensure a specific behavior is created within the business environment to enhance collective decision making.

Anticipating the outcome.
Managerial decision maker are presented with alternative course of action and they must choose the course of action that brings most returns to them. An individual should therefore anticipate and estimate the outcome of each alternative course of action and choose the one that result to the greatest utility.

Organization goals and the attainable goals.
It is logical that all organization goals may not be possible to attain. As individuals make choices in relation to the organization goals and the means of attaining them, the interaction between the individual preference and constraints are seen from the rational theory of choice as the ingredients of attaining those goals.

The choice theorists define attainable goals as those organizational goals that express the preferences of individual decision maker. They are motivated by those goals and therefore, they will act under the conditions which are the constraints and the knowledge of the organization they have.

Competition in the market.
Competition in the market encourages decision makers to make choices that will lead to increased returns and have time to scrutinize each choice with reference to other choices and have perfect information about the outcome of each choice they have made. As argued by Alchian, 1946, entrepreneurs are known to be keen in maximizing profits in order to survive in the market.

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