Theories of Decision-making

Normative Decision Theory:

It is a classical approach to decision-making. This theory identifies the best decisions by selecting one perfect decision-maker who has perfect knowledge, rationality and accuracy in taking the best decisions. This theory also focuses on practical application and deals with how managers should make decisions. It forms the basis for decision analysis. This theory aims at identifying and developing various techniques, methods and tools that support people in making better decisions. It is also known as the prescriptive theory of management.

The theory was generally propounded by PF Drucker and Ansoff. This theory is generally used where decisions are to be made with regard to quantitative data, numbers such as economics and finance. The key focuses of the theory is generally used where decisions if they want to maximise their productivity.

The theory is based on various assumptions such as there is perfect information about the decision to be made, there is certainty and the aim is to maximise the behaviour. Various decision-makers have a consensus over the values of input variables. It also assumes that the decision-maker fully relies on computed values which in return help him in making decisions. He knows what he desired to reach (ends) and how he can reach them (means) in advance. Here, the decision-maker is neutral, he abstains from biases, disliking or liking and judgement and relies on logical reasoning.

This theory is apt for decisions that are to be made repeatedly. Thus, the decision-maker is economical and focuses on programming the decisions so that there is the maximum output with minimum efforts and time input. However, this theory faces criticism as there is a scope of ignorance and uncertainty. Due to lack of time, resources and knowledge, the decision-maker sometimes act as satisfied rather than maximiser. This implies he makes decisions that are just sufficient and not maximising. Rationality is an idyllic theory however it is impractical because organisations deal with human behaviour which is dynamic and complex.

Another limitation of this theory is the assumption that there is consent over values. Various decision-makers do not affirm certain values of the inputs. This creates disharmony in the process of decision-making. It is also known as rational theory or economic man theory.

The steps in making rational decisions are defined by Stephen Robbins as

Describing the problem.
Identifying the criteria for decision making.
Assigning a value to the decision-making criteria.
Developing various options or alternatives.
Assessing the options.
Selecting the finest alternate.

Descriptive Theory:

The descriptive theory is known as a positive theory. This theory was propounded by March and Ceyart. This the opposite of rational theory in the sense that it focuses on identifying the decisions that people actually make rather than what they are supposed to make.

It explains and characterises the consistencies in various choices made and not what ought to be made. It is dependent on observed behaviours and individuals and groups under certain assumptions and situations.

This decision-making theory helps in better coalitions as the decisions are made on basis of human behaviour and not numbers. The key focus here is how the superiors actually make decisions. It is known as behavioural decision theory.

However, the theory faces limitation as the term coalition means a compromise between various stakeholders, i.e. the government, customers, shareholders employees etc.

Bounded Rationality Theory:

It is rational decision theory, the decision-maker aims at optimising the decision by selecting the best alternative. However, bounded rationality theory states that the decision-maker is bounded by various constraints such as time constraints, intellectual limitations to the information processed by them. Hence, his rationality is bounded. In these circumstances, he cannot make optimal decisions but satisfying decisions.

It was proposed by Herbert A. Simon. He propounds that the attainment of rationality is unrealistic. It is rare to achieve rationality. It is based on the principle that the human mind cannot perceive retain and retrieve all the information (future, present or past) and data given to him. The manager, being a human will not be able to identify all the alternatives available to solve the problem even with the help of machines and computers. Hence, because of this limitation and foundations, the decision-maker will make decisions that are just satisfactory and not optimal. The term satisfactory implies a course of action that is not just good enough in solving the said problem. The person making a decision has his own soft emotions, hence he can't make unbiased decisions. His preferences and experiences will alter the decisions. Hence, bounded rationality is associated with 'satisficing rather than 'optimising.

Practical Approach:

This theory of decision making is based on both behavioural and rational approach. It focuses on giving a more realistic decision-making process for the organisation. The theory postulates that the manager should generate all alternatives (taken from a rational approach) but he should identify all the alternatives within the stipulated period of time and financial resources (taken from a behavioural approach). Thus, it amalgamates the two theories, i.e. finding all the possible plans but within the resources.

This theory uses the analytical framework of the normative approach and moderating influence of the behavioural approach. It is appropriate for the managers who take impulsive and rushed decisions or who keep changing their decisions rapidly, as they do not use much data or rationality to identify all possible alternatives and derive the decision.

Personal Approach:

It was given by Janis and Mann. This theory focuses on how individuals actually make a decision when they're agitated, worried, nervous or anxious be it in the personal or organisational atmosphere.

It is also known as the 'conflicted model'. This theory deals with the conflicts personally faced by the decision-maker, especially in difficult decision-making conditions. However, the approach deals with life decisions such as education, career, job marriage etc. It also focuses on the aspects of postponement and reasoning are the devices through which individuals evade taking decisions and undergoing stress related to decision-making.

The decision-maker, as per this approach judges the situation as per his moral standards. If any decision confronts his ethics then such a decision is not taken.