Rational Choice Theory in Business Decision Making

Rational Choice Theory in Business Decision Making 2

The rational choice theory’s preference assumption requires individual to be aware of their preferences in terms of:

Completeness of preferences.
For any two course of action or action, one should at least be more preferred than the other.  Two actions may be equally good and the managers may be indifference between taking action A and doing away with action B. However, some small level of differences should be seen by the manager and rank the two actions or products that are equal.

From preference function above, if a manager preference between dealing with products p2 and pn, he should be able to rank them in an order of preference, that is p2 ≤ pn, where pn is at least preferred to p2.

Transitivity of preferences.
In the example above, p1 is preferred to p2 while p3 is preferred to p1. Therefore, due to transitive nature of preferences, p3 is preferred to p2.

Reflexive and monotonicity of preferences.
If by undertaking two courses of action gives returns just slightly higher than undertaking one of the actions, then undertaking one of the actions is better. This is the reflexive nature of preferences.

Sometimes when comparing actions or products, one may have more or both of the products, or might only have more of one product due to monotonic preferences. In the previous example it may be challenging comparing products p1 and p3 since both are profitable.

Perfect knowledge
The theory assumes decision makers have perfect information concerning the outcome as a result of the choice made. It is worth noting that depend on chance or probability to describe the expected outcome.

Cognitive ability
This premise is about the cognitive ability of the decision makers of the business organization.  Individuals are presumed to have time to scrutinize each choice with reference to other choices and the ability to understand what each option requires. One is also expected to have read and understood the goals of the organization.