Barriers in Application of Rational Decision

Topics: Decision theory, Decision making, Daniel Kahneman Pages: 8 (2377 words) Published: January 21, 2013
Barriers in Application of Rational Decision and
Methods to Overcome

Based on the “Expected Utility Theory”, “Rational Decision Making Theory” describes the process of “Economic Man” making a rational choice. With the development of the theory, its overly idealistic assumptions and practicability have sparked criticism from various camps. Some paradoxes, such as Allais Paradox and St. Petersburg Paradox were difficult to interpret by it. Some “decision biases” deviating from the theoretically optimal behavior were also noticed in the actual choice process. In this paper, we shall first briefly review the rational decision theory. Then, under the framework of the behavioural decision science, we will discuss the barriers in application of the model by exploring the influences that three factors――bounded rationality, uncertainty, and cognitive bias――bring to it. In each section, the author first gives examples to demonstrate the existence of effects, then proposes theories to explain the generation of obstacles, and finally discusses selective methods to overcome the barriers.

1. Rational Decision Making Theory
James G. March (1994, p.2) pointed out that rational decision processes were consequential, based on the preference and aimed at maximizing the expected utility. They are consequential means that “action depends on anticipations of the future effects of current actions”. A list of alternatives is then generated according to these anticipations. They are preference-based means that the criteria of evaluating the alternatives are identified by individual preferences. Outcomes are reflected in terms of different expected utilities. They are expected utility maximization-aimed means that after calculating expected utility of each prospect, a decision-maker will finally choose the one with maximal expected utility.

After concluding the steps of rational choice above, we can sum up the inherent assumptions of the rational decision-making model combing with the descriptions of the rational choice-makers’ characteristics given by Ward Edwards (1954) and Robbins et al. (2007, p.156-158): 1. The decision-maker could define the exact problem and obtain sufficient information in terms of quality, quantity, accuracy and integrity. 2. The decision-maker owns the ability to think of all conceivable actions and generate all feasible projects. 3. The decision-maker could anticipate all possible consequences, identify the uncertainties and exactly compute the probability of each consequence according to the probability rules. 4. The decision-maker’s preference system is integrity, which means they could retrieve the “utility” of each consequence from the value system and choose the optimal one with maximal expected utility.

Such overly idealistic and harsh assumptions which are often not feasible in practice make the rational decision-making theory faced with countless criticism from scholars. Herbert A. Simon is one of the representatives.

2. Barriers in Practical Application
3.1 Bounded Rationality
Before advancing his theory, Simon (1971) first criticized the authenticity of the perfect rationality, which raised many questions to the public: Could rational decision-makers obtain adequate information? Could decision-makers get all the possible alternatives and have the enough computing ability to calculate each probability of occurrence? Is the decision-maker’s preference system complete? Will the decision-makers only seek the optimal solution or just take a satisfactory solution instead? Negative answers to these questions imply that the assumptions of the rational choice model are hard to meet in actual decision-making process, which will directly cause obstacles in practical application.

By comparing the “Economic Man” in perfect rationality and the “Administer” in bounded rationality, Simon (1971) advanced the “Bounded Rationality Model” as an alternative to the traditional “Perfect...

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