Which of the following is the first step in the rational decision making process?

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Rational Decision Making Model

A rational decision making model provides a structured and sequenced approach to decision making.

Using such an approach can help to ensure discipline and consistency is built into your decision making process. As the word rational suggests, this approach brings logic and order to decision making. Our rational decision making model consists of a series of steps, beginning with problem/opportunity identification, and ending with actions to be taken on decisions made.

There seems to be a problem with decision making. According to Ohio State University management professor, Paul C. Nutt, we only get about 50% of our decisions in the workplace right! Half the time they are wrong, so there is clearly plenty of scope to improve on our decision making processes. Based on his research into over 300 decisions, made in a range of organizations, he discovered that

Some tactics with a good track record are commonly known, but uncommonly practiced.

Why? Well one reason that emerged from his research is that:

Too often, managers make bad tactical selections ….. because they believe that following recommended decision-making practices would take too much time and demand excessive cash outlays.

Nutt argues that using good decision making practices actually costs very little. (Even less in this case because our rational decision making model is a free tool to help improve the way you make decisions!).

This article is part of our series on decision making. Our first article, types of decision making outlines a range of decision making approaches. Rational decision making forms part of what we have termed types of decision, categorized by process. In this category we have put two contrasting approaches, that of rational decision making and that of judgement or intuitive decision making.

A General Rational Decision Making Model

Rational decision making processes consist of a sequence of steps designed to rationally develop a desired solution. Typically these steps involve:

1: Identifying a problem or opportunity

The first step is to recognise a problem or to see opportunities that may be worthwhile. A rational decision making model is best employed where relatively complex decisions have to be made.

(So the first decision making lesson should be to ask yourself if you really have a problem to solve or a decision to make. Then read this article for more specific advice: Problem Solving Skill: Finding the Right Problem to Solve).

2: Gathering information

What is relevant and what is not relevant to the decision? What do you need to know before you can make a decision, or that will help you make the right one?

3: Analyzing the situation

What alternative courses of action may be available to you? What different interpretations of the data may be possible? Our Problem Solving Activity uses a set of structured questions to encourage both broad and deep analysis of your situation or problem.

4: Developing options

Generate several possible options. Be creative and positive. Read The Power of Positive Thinking for our five questions that create possibilities.

5: Evaluating alternatives

What criteria should you use to evaluate? Evaluate for feasibility, acceptability and desirability. Which alternative will best achieve your objectives?

6: Selecting a preferred alternative

Explore the provisional preferred alternative for future possible adverse consequences. What problems might it create? What are the risks of making this decision?

7: Acting on the decision

Put a plan in place to implement the decision. Have you allocated resources to implement? Is the decision accepted and supported by colleagues? Are they committed to to making the decision work?

Strengths and Weaknesses of the Rational Decision Making Model

However, we should always remember that whilst the model indicates what needs to be done, it’s often how things are done that characterises effective decision making.

Paul C. Nutt’s research illustrates that bad decisions were usually bad because two things were missing:

1. Adequate participation of stakeholders in the decision making process
2. Sufficient time spent generating a range of possible solutions

Too often those who should have been involved weren’t, and solutions were proposed and acted upon too quickly. Often with disastrous effects!

A second weakness arises if we attempt to use the model in isolation. This is particularly important where complex or important decisions are involved.

The principle assumption of the rational decision making process is that human beings make rational decisions. However, there are numerous factors which determine our decisions, many of which are not rational. In many situations decisions have to be made with incomplete and insufficient information.

Judgement, intuition, experience and knowledge all come together when making decisions. This critical aspect is further explored in our article: Intuition and Decision Making.

Putting the Rational Decision Making Model to work

Regardless of any perceived weaknesses these models are essential tools.

You’ll find more on these and other practical techniques in our related e-guides (below) or in Making Better Decisions.

Use the tools in this guide to help your decision making:

Tool 1: Do you need to make a decision? Tool 2: The POCA decision making model Tool 3: Decision levels Tool 4: 7 step decision making process Tool 5: Team decision making

Tool 6: Evaluating alternatives

See for yourself that a rational decision making model can help us to make better decisions – and thus help us to be better managers.

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Though everyone makes decisions, not everyone goes about the process in the same way. In fact, not everyone even uses a “process” to make decisions. There are various decision-making styles, and we will focus on the rational decision-making model. We will also become familiar with a common process that many groups and individuals follow when making decisions. Though almost everyone will agree that decision making should be rational, there are also some important contrasting ideas that often balance out the “rational” aspects to the process.

Learning Outcomes

• Summarize the steps in the rational decision-making process.
• Differentiate between prospect theory, bounded rationality, heuristics, and robust decisions.

The rational decision-making process involves careful, methodical steps. The more carefully and strictly these steps are followed, the more rational the process is. We’ll look at each step in closer detail.

Step 1: Identify the Problem

Though this starting place might seem rather obvious, a failure to identify the problem clearly can derail the entire process. It can sometimes require serious thought to find the central issue that must be addressed. For example, you have taken a new job and you may initially decide you need to find a new car for commuting back and forth from work. However, the central problem is that you need a reliable way to commute to and from work.

Step 2: Establish Decision Criteria

In this step, the decision maker needs to determine what is relevant in making the decision. This step will bring the decision maker’s, and any other stakeholder’s, interests, values and preferences into the process. To continue our example, let’s assume you are married. Some of the criteria identified might include budget, safety, functionality, and reliability.

Step 3: Weigh Decision Criteria

Because the criteria identified will seldom be equally important, you will need to weight the criteria to create the correct priority in the decision. For example, you may have weighted budget, safety, and reliability as the most important criteria to consider, along with several other slightly less critical criteria.

Step 4: Generate Alternatives

Once you have identified the issue and gathered relevant information, now it is time to list potential options for how to decide what to do. Some of those alternatives will be common and fairly obvious options, but it is often helpful to be creative and name unusual solutions as well. The alternatives you generated could include the types of cars, as well as using public transportation, car pooling and a ride-hailing service.

Step 5: Evaluate Alternatives

After creating a somewhat full list of possible alternatives, each alternative can be evaluated. Which choice is most desirable and why? Are all of the options equally feasible, or are some unrealistic or impossible? Now is the time to identify both the merits and the challenges involved in each of the possible solutions.

Step 6: Select the Best Alternative

After a careful evaluation of alternatives, you must choose a solution. You should clearly state your decision so as to avoid confusion or uncertainty. The solution might be one of the particular options that was initially listed, an adaptation of one of those options, or a combination of different aspects from multiple suggestions. It is also possible that an entirely new solution will arise during the evaluation process.

Data, Logic, and Facts

Rational decision making is defined not only by adherence to a careful process, but also by a logical, data-driven manner of following the steps of that process. The process can be time-consuming and costly. It is generally not worthwhile on everyday decisions. It is more useful for big decisions with many criteria that affect many people.

In the evaluation stage, the process usually requires numeric values.  The next stage will use these to calculate a score for each alternative. Some properties are not easily measured, and factors that rely on subjective judgment may not be trusted. If they are not fully weighted, the final analysis will lean toward whatever is easiest to measure. In a company, the final decision usually belongs to an executive, who takes the analysis as a guide but makes his own decision.

Ideas that Complement and Contrast with Rational Decision Making

Though most decision makers will recognize much that is commendable in the rational decision-making process, there are also reasons to consider complementary or even contrasting ideas. Taken to its extreme, the rational method might entirely discount factors that are of known and obvious value, such as emotions and feelings, experience, or even ethical principles. This danger, along with other limitations of the rational method, has led to the development of the following concepts to provide a more balanced and holistic approach to decision making:

Prospect Theory

Daniel Kahneman is one of the developers of prospect theory.

An epoch-making idea in the field of behavioral economics, prospect theory is a complex analysis of how individuals make decisions when there is risk involved. Most strictly rational approaches to questions of financial risk rely on the principle of expected value, where the probability of an event is multiplied by the resulting value should the event occur. Notice the numerical and logical approach to that analysis.

However, Daniel Kahneman and Amos Tversky, the developers of prospect theory, demonstrated through various experiments that most people alter that approach based on their subjective judgments in any given situation. One of the common examples of this is that many individuals think differently about the risk of financial loss than they do when considering situations where different levels of financial gain are concerned. In a purely rational approach, the numbers and calculations involved work the same way regardless of whether the situation is one involving potential gain or potential loss.

This graph shows how prospect theory describes individuals’ subjective valuations of profit and loss. Notice that the value curve is not a straight line and that the positive “gains” section of the curve is not symmetrical to the negative “losses” section of the curve.

Prospect theory is a description of how people made actual decisions in experiments. It doesn’t say whether this is right or wrong. It is in the hands of decision makers to determine whether these tendencies are justifiable or if they should be overridden by a rational approach.

Bounded Rationality

Another theory that suggests a modification of pure rationality is known as bounded rationality. This concept revolves on a recognition that human knowledge and capabilities are limited and imperfect. Three specific limitations are generally enumerated:

• Decision makers do not have access to all possible information relevant to the decision, and the information they do have is often flawed and imperfect.
• Decision makers have limited analytical and computational abilities. They are not capable of judging their information and alternatives perfectly. They will inevitably make misjudgments in the evaluation process.
• Decision makers do not have unlimited time to make decisions. Real-life situations provide time constraints in which decisions must be made.

In light of these limitations, the theory of bounded rationality suggests that decision makers must be willing to adapt their rational approach. For example, they must determine how much information is reasonable to pursue during the information-gathering stage; they cannot reasonably expect to gather and analyze all possible information.

Similarly, decision makers must content themselves with a consideration of only a certain number of alternative solutions to the decision.

Also, decision makers being far from perfect in their abilities to evaluate potential solutions must inevitably affect their approach. They must be aware of the possibility that their analysis is wrong and be willing to accept evidence to this effect. This especially includes situations in which they’re relying on predictions of an uncertain future. Uncertainty and inaccuracy often arise in efforts to predict the future. For example, your career decision is fraught with uncertainty as you don’t know if you will like the work or the work environment. What are decision makers to do when they are uncertain about potential results from their actions? This makes a strictly rational approach difficult and less reliable.

Heuristics

One of the approaches that might stem from a recognition of bounded rationality is the use of heuristics. These are analytical and decision-making tools that help simplify the analysis process by relying on tried and tested rules of thumb. A heuristic simplifies a complex situation and allows the decision maker to focus only on the most important pieces of information.

For example, a business might use their proven experiences and that of many other companies to conclude that a new product line requires a certain amount of time to gain market share and become profitable. Though there are many complex factors involved in market analysis, the business might use this proven rule to guide its decision making. When a proposed decision contradicts this rule, the company might discard it even if a complex and seemingly rational analysis might seem to support it.

Of course, there are exceptions to most rules, and the use of heuristics might prevent a company from following courses of action that would be beneficial. Likewise, heuristics that were once reliable rules might become obsolete because of changing markets and environments. Nonetheless, most analysts recognize heuristics as useful tools when used properly.

Robust Decisions

One final adaptation of the rational process that is becoming more prominent, especially in areas such as energy production and natural resource preservation, is the practice of making “robust” decisions.

Robust decisions revolve around the inability to predict the future with certainty. Rather than rely on an imperfect analysis to determine the “best” decision, a robust decision provides a plan that will work in light of numerous uncertainties. It supposes that a number of situations are all possible and provides a solution pathway that will be successful if any of those situations should arise. This pathway could potentially be a single solution that works in any of the likely future scenarios, or it might provide separate responses to be enacted depending on how the future uncertainties unfold.

Check Your Understanding

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.