What Is Rational Behavior?
Rational behavior refers to a decision-making process that is based on making
choices that result in the optimal level of benefit or utility for an individual. The assumption of rational behavior implies that people would rather take actions that benefit them versus actions that are neutral or harm them. Most classical economic theories are based on the assumption that all individuals taking part in an
activity are behaving rationally.
Rational Behavior
Key Takeaways
- Rational behavior refers to a decision-making process that is based on making choices that result in an optimal level of benefit or utility.
- Rational choice theory is an economic theory that assumes rational behavior on the part of individuals.
- Rational behavior may not involve receiving the most monetary or material benefit, because the satisfaction received could be purely emotional or non-monetary.
Understanding Rational Behavior
Rational behavior is the cornerstone of rational choice theory, a theory of economics that
assumes that individuals always make decisions that provide them with the highest amount of personal utility. These decisions provide people with the greatest benefit or satisfaction given the choices available. Rational behavior may not involve receiving the most monetary or material benefit, because the satisfaction received could be purely emotional or non-monetary.
For example, while it is likely more financially beneficial for an executive to stay on at a
company rather than retire early, it is still considered rational behavior for her to seek an early retirement if she feels the benefits of retired life outweigh the utility from the paycheck she receives. The optimal benefit for an individual may involve non-monetary returns.
Further, a person’s willingness to take on risk, or conversely, their
aversion to risk, may be considered rational depending on their goals and circumstances. For example, an investor may choose to take on more risk in his own retirement account than in an account designated for his children's college education. Both would be considered rational choices for this investor.
Behavioral Economics
Behavioral economics is a method of economic analysis that considers psychological insights to explain human behavior as it relates to economic decision-making. According to rational choice theory, the rational person has self-control and is unmoved by emotional factors. However, behavioral economics acknowledges that people are emotional and easily distracted, and therefore, their behavior does not
always follow the predictions of economic models. Psychological factors and emotions influence the actions of individuals and can lead them to make decisions that may not appear to be entirely rational.
Behavioral economics seeks to explain why people make certain decisions about how much to pay for a cup of coffee, whether or not to pursue a college education or a healthy lifestyle, and how much to save for retirement, among other decisions that most people
have to make at some point in their life.
Investors may also make decisions primarily based on emotions, for example, investing in a company for which the investor has positive feelings, even if financial models suggest the investment is not wise.
Example of Rational Behavior
For example, an individual may choose to invest in the stock of an organic produce operation, rather than
a conventional produce operation, if they have strong beliefs in the value of organic produce. They may choose to do this regardless of the present value of the organic operation compared with that of the conventional operation, and despite the fact that the conventional operation would earn a higher return.
Chapter FIVE Perception and Individual Decision Making
What Is Perception, and Why Is It Important? Perception A process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. • People’s behavior is based on their
perception of what reality is, not on reality itself. • The world as it is perceived is the world that is behaviorally important.
Factors that Influence Perception E X H I B I T 5– 1
Person Perception: Making Judgments About Others Attribution Theory When individuals observe behavior, they attempt to determine whether it is internally or externally
caused. Distinctiveness: Shows different behaviors in different situations. Consensus: Response is the same as others to same situation. Consistency: Responds in the same way over time.
Attribution Theory E X H I B I T 5– 2
Errors and Biases in Attributions Fundamental Attribution Error The tendency to underestimate the influence of external factors and overestimate the influence of internal factors when
making judgments about the behavior of others In general, we tend to blame the person first, not the situation.
Errors and Biases in Attributions (cont’d) Self-Serving Bias The
tendency for individuals to attribute their own successes to internal factors while putting the blame for failures on external factors Thought: When students get an “A” on an exam, they often say they studied hard. But when they don’t do well, how does the self-serving bias come into play? Hint: Whose fault is it usually when an exam is “tough”?
Frequently Used Shortcuts in Judging Others Selective Perception People selectively interpret what they see on the basis of their interests, background, experience, and attitudes.
Frequently Used Shortcuts in Judging Others Halo Effect Drawing a general impression about an individual on the basis of a single characteristic Contrast Effects Evaluation of a person’s characteristics
that are affected by comparisons with other people recently encountered who rank higher or lower on the same characteristics
Frequently Used Shortcuts in Judging Others
Projection Attributing one’s own characteristics to other people Stereotyping Judging someone on the basis of one’s perception of the group to which that person belongs
Specific
Applications in Organizations Ø Employment Interview – Perceptual biases of raters affect the accuracy of interviewers’ judgments of applicants Ø Performance Expectations – Self-fulfilling prophecy (Pygmalion effect): The lower or higher performance of employees reflects preconceived leader expectations about employee capabilities. Ø Ethnic Profiling – A form of stereotyping in which a group of individuals is singled out—typically on the basis of race or ethnicity —for intensive inquiry,
scrutinizing, or investigation
Specific Applications in Organizations (cont’d) Ø Performance Evaluations – Appraisals are often the subjective (judgmental)
perceptions of appraisers of another employee’s job performance.
The Link Between Perceptions and Individual Decision Making Problem A perceived discrepancy between the current
state of affairs and a desired state Decisions Perception of the Decision Maker Choices made from among alternatives developed from data perceived as relevant Outcomes
Assumptions of
the Rational Decisionmaking Model Describes how individuals should behave in order to maximize some outcome Model Assumptions • Problem clarity • Known options • Clear preferences • Constant preferences • No time or cost constraints • Maximum payoff
Steps in the Rational Decision-making Model 1. Define the problem. 2. Identify the decision criteria. 3. Allocate weights to the criteria. 4. Develop the alternatives. 5. Evaluate the alternatives. 6. Select the best alternative. E X H I B I T 5– 3
The Three Components of Creativity The ability to produce novel and useful ideas Three-Component Model of Creativity Proposition that individual creativity requires expertise, creative-thinking skills, and intrinsic task motivation E X H I B I T 5– 4 Source: T. M. Amabile, “Motivating Creativity in Organizations, ” California Management Review, Fall 1997, p. 43.
How Are Decisions Actually Made in Organizations? Bounded Rationality Individuals make decisions by constructing simplified models that extract the essential features from
problems without capturing all their complexity.
How Are Decisions Actually Made in Organizations? (cont’d) Ø How/Why problems are Identified – Visibility over importance of problem •
Attention-catching, high profile problems • Desire to “solve problems” – Self-interest (if problem concerns decision maker) Ø Alternative Development – Satisficing: seeking the first alternative that solves problem – Engaging in incremental rather than unique problem solving through successive limited comparison of alternatives to the current alternative in effect
Common Biases and Errors Ø Overconfidence Bias – Believing too much in our own ability to make good decisions Ø Anchoring Bias – Using early, first received information as the basis for making subsequent judgments Ø Confirmation Bias – Using
only the facts that support our decision
Common Biases and Errors Ø Availability Bias – Using information that is most readily at hand • Recent • Vivid Ø Representative Bias – “Mixing apples with oranges” –
Assessing the likelihood of an occurrence by trying to match it with a preexisting category using only the facts that support our decision Ø Winner’s Curse – Highest bidder pays too much – Likelihood of “winner’s curse” increases with the number of people in auction
Common Biases and Errors Ø Escalation of Commitment – In spite of new negative information, commitment actually increases Ø Randomness Error – Creating meaning out of random events Ø Hindsight Bias – Looking back, once the outcome has
occurred, and believing that you accurately predicted the outcome of an event
Intuition Ø Intuitive Decision Making – An unconscious process created out of distilled experience Ø Conditions
Favoring Intuitive Decision Making – – – – A high level of uncertainty exists There is little precedent to draw on Variables are less scientifically predictable “Facts” are limited Facts don’t clearly point the way Analytical data are of little use Several plausible alternative solutions exist Time is limited and pressing for the right decision
Individual Differences in Decision Making Ø Personality Ø Aspects of conscientiousness and escalation of commitment Ø Self Esteem Ø Gender High self serving bias Ø Women tend to analyze
decisions more than men. Source: A. J. Rowe and J. D. Boulgarides, Managerial Decision Making, (Upper Saddle River, NJ: Prentice Hall, 1992), p. 29.
Organizational Constraints on Decision Makers Ø Performance Evaluation – Evaluation criteria influence the choice of actions Ø Reward Systems – Decision makers make action choices that are favored by the organization Ø Formal Regulations – Organizational rules and policies limit the alternative choices of decision makers Ø System-imposed Time Constraints – Organizations require decisions by specific deadlines Ø Historical Precedents – Past decisions influence current decisions
Cultural Differences in Decision Making Ø Ø Ø Problems selected Time orientation Importance of logic and rationality Belief in the ability of people to solve problems Preference for collective decision making
Ethics in Decision Making Ø Ethical Decision Criteria – Utilitarianism • Seeking the greatest good for the greatest number – Rights • Respecting and protecting basic rights of individuals such as
whistleblowers – Justice • Imposing and enforcing rules fairly and impartially
Ethics in Decision Making Ø Ethics and National Culture – There are no global ethical standards. – The ethical principles of global organizations that
reflect and respect local cultural norms are necessary for high standards and consistent practices.
Ways to Improve Decision Making 1. Analyze the situation and adjust your decision making style to fit the
situation. 2. Be aware of biases and try to limit their impact. 3. Combine rational analysis with intuition to increase decision-making effectiveness. 4. Don’t assume that your specific decision style is appropriate to every situation. 5. Enhance personal creativity by looking for novel solutions or seeing problems in new ways, and using analogies.
Toward Reducing Bias and Errors Ø Focus on goals. – Clear goals make decision making easier and help to eliminate options inconsistent with your interests. Ø Look for information that disconfirms beliefs. – Overtly considering ways we could be
wrong challenges our tendencies to think we’re smarter than we actually are. Ø Don’t try to create meaning out of random events. – Don’t attempt to create meaning out of coincidence. Ø Increase your options. – The number and diversity of alternatives generated increase the chance of finding an outstanding one. Source: S. P. Robbins, Decide & Conquer: Making Winning Decisions and Taking Control of Your Life (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2004), pp. 164– 68. E X H I B
I T 5– 5
Chapter Check-up: Perception It’s your little sister’s senior Prom night, and she notices that everyone is wearing the same dress she has on! Which perceptual shortcut may be occurring? •
Escalation of commitment • Representative bias • Availability bias • Hindsight bias
Chapter Check-up: Perception It’s your little sister’s senior Prom night, and she notices that everyone is
wearing the same dress she has on! Which perceptual shortcut may be occurring? • Escalation of commitment • Representative bias • Availability bias • Hindsight bias Discuss with your neighbor what the answer would be if your sister came home and said “I just knew that everyone would buy that dress!”
Chapter Check-up: Perception If all of these perceptual shortcuts happen unconsciously, how can we keep the stereotypes we have from interfering with the way we work in group projects? Identify two
specific things you could do to help prevent stereotypes from inhibiting effective group relationships. Discuss with a neighbor.
Chapter Check-up: Decision Making Michael has just discovered he is
registered for two classes at the same time and must make a decision about which one to take this semester. He considers the professor teaching this semester, the time of the class, and the classes his friends are taking. He then considers his options for when he can take each class again, as well as the costs and benefits for taking each this semester versus later next year. He then makes his decision. Michael has just engaged in what?
Chapter Check-up: Decision Making In making his decision, Michael forgot to consider the implications of the color of paint in the room where each class was being offered. Given that room color
can influence mood, which can influence performance, why didn’t Michael consider it?
Chapter Check-up: Decision Making Michael engaged in the rational decision making model, and didn’t
consider the paint color of the rooms because he operates under the confines of bounded rationality.
Chapter Check-up: What biases might have affected Martha Stewart’s judgment?
Discuss with a classmate.
Which of the following is a decision
bias indicates the tendency of an individual to attribute his or her own successes to internal factors while putting the blame for failures on external factors. Rational decision-making model refers to a decision-making model that describes how individuals should behave in order to maximize some outcome.
What are the four primary methods for making individual decisions quizlet?
Directive..
Analytical..
Conceptual..
Behavioral..
In which of the following types of bias does a person's mind appear to give a disproportionate amount of emphasis to the first information it receives quizlet?
With hindsight bias, ________. a person's mind appears to give a disproportionate amount of emphasis to the first information it receives.
Which of the following describes the fundamental attribution error multiple choice question?
Which of the following describes fundamental attribution error? Occurs when we draw an impression about an individual on the basis of a single characteristic, such as intelligence, sociability, or appearance.