Understanding The Cognition And Bounded Rationality Commerce Essay

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Human beings may be misled in their decision-making when being confronted with a certain analogy or metaphor. These analogies are associated with a certain understanding or mental image, based on which an individual may take certain decisions. However, these mental images may not adequately represent the actual, real situation at hand. Mintzberg et. al present the metaphor of "the third leg of a stool" (2009: 158). This metaphor suggested to senior managers that the potential acquisition supports the high growth rates, thus provides additional stability by being the required "third leg". To the company managers this metaphor suggested that the company is entering a line of businesses that is not "closely related", thus bearing certain risks that might affect the current business negatively.

The example of this metaphor underlines the notion of "bounded rationality" (Simon, 1947), as it shows that individuals are not always able (or do not intentionally use) their information-processing capacities. The managers in this case could have discussed a commonly accepted "language" or at least state the core facts that are connected to the certain acquisition. By doing so, the decision could have been grounded on a factual analysis of the situation, rather than by sharing a metaphor that is associated with a mental image.

Biases in decision-making

Mintzberg et. al (by citing Makridakis, 1990) present a variety of biases that may occur in decision-making (2009, 159). These types of biases range from "search for supportive evidence" to "optimism, wishful thinking"; all of these biases have something in common: they direct the decision-making of an individual in one direction or the other. For example, individuals may be confronted with "selective perception", thus evaluating a certain situation based on own experiences or backgrounds. Another bias is "underestimating uncertainty", which is a form of excessive optimism. Individuals, in this case, do not recognize the presence of different constraints that may affect the result of their decision-making.

Another example of a bias in decision-making is "conservativism". This bias involves the failure of an individual to mentally accept new information that is relevant to a certain decision. An individual may stick to the results of a prior research, even though a more recent research has provided particular evidence that rejects the first research.

These biases restrict absolute rationality, as human beings are not able to process unlimited amounts of information. Additionally, human beings do not have sufficient computational abilities to evaluate these amounts of information.

Cognitive maps

Individuals map information in mental schemas. Information is processed by human brains and placed in a certain schema or map from which individuals can retrieve required information when necessary. These schemas can direct the decision-making of an individual efficiently "from an information-processing point of view" (Mintzberg, 2009: 169). However, as Mintzberg et. al point out, apart from the efficiency of information-processing, the schemas or maps can ignore certain information that has not been captured, but may be relevant to evaluating a certain situation. Another problem concerning cognitive maps, is the decision of the individual to act upon the retrieval of certain information for his or her "schema". Even though an individual may have stored the required information for decision-making in a certain situation, it is not sure whether he or she is actually going to make use of that information.

2. Decision making and strategy

Watch again Mintzberg's Youtube video on decision making: http://www.youtube.com/watch?v=DyvXu3lSSG0. Read carefully what Mintzberg et al. write on "intuition" as a way of decision making.

Name and explain pros and cons of using intuition for decision making. Relate your argument to the other two forms of decision making that Mintzberg explains in his Youtube video.

Intuition in decision-making involves uncertainties and risks, because there is no analytical analysis involved. Intuitive decision-making can lead to creative and fast decisions in organizations, which can be described in Mintzberg form "doing first". The processes required to take a decision based on intuition is not as time-consuming as using rational measures. Especially in environments with rapidly changing contingencies, intuition may be an advantageous tool to take decisions. Eventually, this can lead to a competitive advantage. Companies that use the rational approach are less flexible and cannot adapt the environment as quickly as companies using intuitive decision-making. This form of decision-making can be characterized by Mintzberg as "Thinking first". An example of intuition might be Steve jobs at Apple. Market research pointed out that people would not have a phone without buttons you can press. The decision of Steve Jobs was risky, but eventually the market of mobile phones was dominated with these kinds of phones.

However, intuitive decision-making has to deal with many uncertainties and a lot of risk is involved. The chance of failure with intuitive decision-making is larger compared to the rational approach, but when the intuitive way of making decisions is successful, the successes will be greater then in the rational approach.

According to Mintzberg et. al (2009), intuition is largely triggered by emotions. Even though Mintzberg and his colleagues stress the positive implications of this fact, it may also bear disadvantages, as it can lead to several biases, for example "optimism" or "wishful thinking". Decision-makers that are in a particular mood may be tempted to take a decision based on a temporary feeling. If this feeling diminishes, the decision-maker may regret the decision.

Discuss in which ways and how far (they may not all fit) the three forms of decision making relate to how strategy is understood in the design, planning, and learning school described by Mintzberg et al.

Thinking first

The "thinking first" form of decision-making may apply to both the design and the planning school. As the famous picture "THINK" of Thomas J. Watson Sr. suggests, thinking is seen by the design school as the ultimate way to design and formulate a unique, well-considered strategy for the organization. The planning school also promotes intensive analysis and thinking before actually formulating a strategy, which will eventually be designed in a formalized and complex manner.

Seeing first

The "seeing first" way of decision-making primarily applies in this example rather to the design school, but mostly to the entrepreneurial school. Within the framework of the design school strategies are formulated based on experience. While in the design school strategy is formulated based on the experience and expertise of the CEO as main strategist, who obviously needs to see things first in order to build op the required experience to develop and formulate a strategy. Concluding, the "seeing first" form of decision-making is a clear characteristic of the entrepreneurial school; the design school only uses this form marginally.

Doing first

This form of decision-making perfectly relates to the learning school. The approach described by the learning school, namely developing strategies based on "trial and error", is clearly initiated by "doing first" instead of thinking or seeing. Since the planning and design school prescribe to think before acting, this form of decision-making does not apply to both schools.

3. Incrementalism - on the development of better theories for strategy formation

Explain in a few sentences Lindblom's concept of "disjointed incrementalism". Then explain why Quinn's logical incrementalism is more appropriate and helpful for explaining strategies and strategy forming.

With his notion "disjointed incrementalism", Lindblom (1963), cited by Mintberg et. al., argues that "policy making" is a fragmented or disconnected, never-ending process in which decisions are made primarily to solve problems, rather than to fully exploit potential opportunities or to reach ultimate goals (Mintzberg et. al, 2009: 189).

Quinn (1980a, b) agrees to the fact that strategy or policy formation is incremental, but does not recognize its "disjointed" or "disconnected" nature. By doing so, Quinn does not characterize the incrementalism of decision-making as problematic, but as a chance to gradually and logically learn from subsequent decisions and strategies. Rather than to think first and act afterwards, strategists learn from the implementation of earlier decisions by simultaneously forming new strategies.

The approach of Quinn is more appropriate for explaining strategies and strategy forming, as it shows that emerging strategies and learning may have positive implications on the development of new strategies, based on which strategy formation can be optimized. Lindblom only describes that strategy formation is fragmented and difficult to coordinate. Opposed to that, Quinn developed eight prescriptions that are connected to this fragmented strategy formation process. These prescriptions support managers or policy in handling "learning", thus incremental and step-wise adapting the current strategy.

4. Comparing theories

The relationship between the formulation of a strategy and the implementation of a strategy is different in the planning, the entrepreneurial, and the learning school. Describe shortly how formulation and implementation relate to each other in these three schools. Think of at least two advantages and disadvantages of each approach/school. You may provide them in a table but please write down whole sentences.

In the planning school, strategies are formulated based on an extensive analysis of hard data executed by "planners". The conclusions drawn from this analysis are presented to the responsible management, often in so called "scenarios". Senior management, with the support of the strategic planning staff, develops very formal and complex strategies that are prescriptive in nature. After formulating the strategies, these are implemented by the staff of the respective organization, without great attention to emergent strategies. The main advantages of the planning school are the clarity and the efficiency in formulating the strategies, as strategies are very formal and organizations have clear processes on how to develop and execute these strategies. However, once a strategy has been formulated, there is no attention to changes in contingencies or emergent strategies, which makes organizations rather inflexible. The formalization of strategy formation and implementation also leads to a decreased level of creativity, as members of the organization are not triggered to innovate, as they are expected to simply execute the strategies formulated by senior management.

The entrepreneurial school focused the strategy formation process on a single leader, the entrepreneur, who develops strategies based on "intuition", "judgment", "wisdom", "experience" and "insight" (Mintzberg, 2009: 130). The entrepreneur develops a sense of direction, which is called "vision", which is based on his or her own personality and not on extensive analyses ("audit") as in the planning school. This underlines the descriptive nature of this school, as it discusses how strategies are formulated in certain organizations, and not how strategies "should be" formulated, such as in the design, planning and positioning schools.

As the single strategist, the entrepreneur, faces a high degree of uncertainty, strategy formation is characterized by "dramatic leaps", which are based on the entrepreneur's semiconscious analysis (Mintzberg, 2009: 140 / 149). Opposed to the planning school, the entrepreneurial school recognizes the importance of emergent strategies, with which the strategist is confronted. Additionally, the formulation and execution is not planned to the same degree, but rather spontaneous and "dramatic".

One major advantage of the entrepreneurial school is the flexibility in designing and executing strategy. Additionally, there is room for creativity and the possibility to make use of an emergent opportunity that accidentally comes along. However, with regards to uncertainty, the strategist or entrepreneur takes decisions based on intuition and not on an extensive analysis, which may prevent major mistakes or failures in estimating or forecasting certain events. The school also does not provide information on the actual decision-making process of the strategist, which is rather seen as a "black box". Without information on these decision-making processes, it is difficult to build models or theories that future managers or strategists can learn from, except for the advice to search for a "visionary leader".

The learning school, opposed to the entrepreneurial school, does not require one leader to develop and formulate the strategy of the organization. Rather than that, this school promotes that the whole organization takes part in the learning process, which contributes to the overall strategy formation. Learning is achieved by trying out a particular strategy, then evaluating it, and formulate a new strategy. As opposed to the planning school, the learning school argues that strategies must emerge and be adapted after a certain time period. The planning school prefers to develop a strategy first, and then implement it, no matter if certain contingencies force the adaptation of the strategy.

Therefore, one main advantage is that this school stresses the stimulation of knowledge creation throughout the whole organization; additionally, the school leaves room for creativity to all organizational members.