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Managerial Decision Making: Focus on Risk and Rationality

Choice and Rationality

Bounded presupposes that all human decisions and actions are preconditioned and limited by the tractability of the decision problem (Frank, 2008). In other words, human beings act in accordance with some patterns that emerge in their mentalities under the impact of particular situations or reactions. The given idea acquires the increased importance in terms of behavioral economics. Thus, Frank says that the status and position of every consumer precondition his/her economic behavior, which can be used by managers with the primary goal to achieve some goal and sell a certain object (Frank, 2008). At the same time, he emphasizes that the rationality of choices can be doubted because of the existence of different factors affecting one or another situation (Frank, 2008). For instance, Frank offers the example of paying tips to a waiter. From the economic point of view, it cannot be viewed as an investment in the improvement of services; however, people do it as they feel a specific obligation to act in this way (Frank, 2008). For this reason, they feel no regret when doing this action, and, at the same time, there is no alternative, which might make them feel unhappy (Frank, 2008).

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In such a way, behavioral economics can be applied to different situations to analyze them and generate benefits. Frank is sure that today, every leading department of significant companies should have a skilled behavior economist as a response to fast-changing demand and the nature of alternatives. At the same time, applying the axiom of the independence of irrelevant alternatives in rational choice theory, individuals attempt to act rationally if there is an idea of appropriate choices (Frank, 2008). For this reason, applying this very knowledge to real-world conditions, behavioral economists can analyze the existing trends and precondition the further development of various tendencies.

Probability and Risk

The functioning of any company or organization is impacted by multiple internal and external factors that should be taken into account when creating a strategy and formulating short and long-term goals. For this reason, there is a need for credible information and its correct use to evaluate all existing risks and make the only appropriate decision about the future rise. Today, many companies prefer to use inside information, attempting to generate a competitive advantage and function more effectively than its rivals. However, Kahneman warns people from using this sort of data as it might be inaccurate (Kahnerman, 2011). One of his basic assumptions is that analyzing risks from inside, a specialist lacks the understanding of the complete image of the problem and, as a result, can be biased in his/her judgments. It will result in the use of incomplete or incorrect information and failure (Kahnerman, 2011).

In terms of the decision theory, strategic decisions can be made only by using credible and relevant information acquired from trusted sources. Revolving around the issue, Kahneman (2011) states that professionals might use their intuition and experience, but only in cases when other options are not available, or there is a lack of time. At the same time, the reliance on intuition and incomplete insider information might precondition crashes similar to the Financial Crash of 2008, when the current market and economic conditions were wrongly analyzed and interpreted. In such a way, using inside information can always be a risky affair because of the inability to correlate it with other pieces of data and conclude about the dominant forces affecting the market at the moment. It creates the basis for the rapid deterioration of the situation and undesired outcomes in the short and long runs.

Critical Analysis

The transitivity of preferences is one of the major assumptions in management and the central component of the majority of rational decision-making theories (Thomas, 2020). Cogitating about it, it is possible to state that to have the property of transitivity, a consumer, or a group of consumers, or their society, should prefer a creation option to other, and also prefer it when another option emerges (Thomas, 2020). As far as the consumer choice is affected by multiple forces and the existing pool of offerings, this transitivity acquires the top priority regarding their final decisions, whether to buy a particular good or not. In the context of Frank’s statements about behavioral economics, the property of transitivity can be linked to rational choices that are also predetermined by social status, class, and personal preferences. Under these conditions, consideration of this aspect becomes vital for strategic planning.

As for the risk assessment methodologies, their importance is also accepted by Kahneman as he views them as a potent tool to understand the current situation and conclude about an opportunity of a particular action. In this perspective, the concept of expected value becomes especially meaningful as it helps to establish the desired goal and generated benefit and select options that might help to achieve it by using available information (Thomas, 2020). Moreover, mean-variance analysis, as the process of weighing risks, or variances, in terms of expected return, is another potent tool of decision-making that should rest on only credible data (Thomas, 2020). In such a way, both these tools are used in management and economics to evaluate all existing factors that might impact the further development of the situation and precondition the changes in strategy implemented by a unit at the moment. The tool’s significance increases when the level of uncertainty is high, and there are other stressors that should be taken into account.

The risk importance of risk assessment increases in hard times, which means that nowadays, in terms of the pandemic, the strategic choices should be supported by the results of comprehensive risk assessment activities. The improvement can be achieved in several ways. First of all, it is vital to consider the impact of disruptive change in all spheres of the economy. It is obvious that the functioning of companies will alter along with the strategies used by them. That is why the appropriate assessment criteria should include the gradual change under the impact of pandemics.

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References

Frank, R. (2008). Lessons from behavioral economics. Challenge, 51(3), 80-92. doi:10.2753/0577-5132510305

Kahnerman, D. (2011). Daniel Kahneman: Beware the ‘inside view’. McKinsey. Web.

McKinsey Quarterly. (2010). Strategic decisions: When can you trust your gut? McKinsey. Web.

Thomas, C. (2020). Managerial economics. Foundations of business analysis and strategy (13th ed.). McGraw Hill.

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