Systems Theory/Decision Behavior

Behavioral Decisions

Behavioral decision research is concerned with how people make judgments and choices, and with how the processes of decision might be improved. The field of behavioral decision research is intensely interdisciplinary, employing concepts and tools from psychology, economics, statistics, and other disciplines.

Recently, experimental research on judgment and choice was said to be “psychology’s leading intellectual export to the social sciences as well as to a host of applied fields” (Tetlock, 2002, Psychological Review).

Studies in the psychology of individual choice have identified numerous cognitive, informational, temporal, and other limitations which bound human rationality, often producing systematic errors and biases in judgment and choice. One of the greatest factors in forming any decision is a perception of the decision maker. Perception is 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 i.e. the world as it is perceived is the world that is behaviorally important.

Types

There are three types of factors that influence perception:

1. Factors in the perceiver:

• Attitudes
• Motives
• Experiences
• Interests
• Expectations

1. Factors in the situation:

• Time
• Work setting
• Social Setting

1. Factors in the target:

• Novelty
• Motion
• Sounds
• Size
• Background
• Proximity
• Similarity

When individuals observe behavior, they attempt to determine whether it is internally or externally caused. This is the essence of attribution theory. When the individual behavior is observed there are three types of interpretation of this behavior, according to the attribution theory: (1) Distinctiveness: different behaviors in different situations; (2) Consensus: response is the same as others to same situation: (3) Consistency: response is the same over time.

Errors

As is the case with most theories, errors and biases are possible in the attribution theory. The fundamental attribution error is the tendency to underestimate the influence of external factors and overestimate the influence of internal factors when making judgments about the behavior of others. Self-serving bias is the tendency for individuals to attribute their own successes to internal factors while putting the blame for failures on external factors.

Perception and Decision

There is an obvious link between perception and decision. Decision is passed through a prism of individual decision-maker’s perception. This decision-making was (and still is) the subject of research of multiple disciplines. Few prominent decision-making models emerged. One that has been described and used the most is the Rational Decision- Making Model, which describes how individuals should behave in order to maximize some outcome. Economists favor theories based on axioms of rational choice. Decision-making behavior is assumed to be rational and consistent. Agents maximize utility or profits, and the information required to do so is either freely available or optimally purchased. In the most extreme form, exemplified today by rational expectations models, agents have perfect models of the economy and never systematically err. However, in order for this model to work, it should be in conformance with numerous assumptions:

• Problem is clear,
• Options are known,
• Preferences are clear and constant,
• No time or cost constraints are present, and
• Maximum payoff.

Steps to a Decision

Steps in the rational decision-making model are:

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.

However, we can judge from our experiences that people are not always rational, nor that they behave in the rational manner. To support this observation psychologists have documented numerous experimental results of departures from optimal behavior in a wide variety of decision-making tasks.

Limitations

Rationality is bounded by limitations of information, time, and cognitive capability. This is what Herbert Simon referred to as bounded rationality. Individuals make decisions by constructing simplified models that extract the essential features from problems without capturing all their complexity. This bounded rationality influences how the decisions are made in the organizations.

In a 1981 review Hogarth laments the "insufficient attention" paid "to the effects of feedback between organism and environment." By feedback is meant not merely outcome feedback but changes in the environment, in the conditions of choice, which are caused, directly and indirectly, by a subject's past actions. For example, a firm's decision to increase production feeds back through the market to influence the price of goods, profits, and demand; greater output may tighten the markets for labor and materials; competitors may react - all influencing future production decisions. Such multiple feedbacks are the norm rather than the exception in real problems of choice. As a result it has been difficult for behavioral decision theory to make much headway in analyzing the dynamics of aggregate organizations such as a firm or industry.

Types of People

Decision Theory does not in general provide a good description of people's decision behavior. Under some conditions Decision Theory may be approximately accurate: especially when experienced people are making consequential decisions (financial investors, lawyers negotiating a law suit settlement, etc.). But, even in these situations there are many violations of "rationality." Compared to Decision Theory's predictions, people are:

Boundedly Rational

• they violate "obviously rational" axioms
• they cannot "cognitively compute" all the probability X payoff values

Boundedly Selfish

• they care about fairness
• they are altruistic
• have Bounded Self-Control