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The concept of bounded rationality

In the previous step, we discussed the ‘collection of people’ and ‘economic actors’ as constituents of the organisation. People or managers inside the organisation have the greatest role and influence over strategy.

Managers are rational beings and they try to make logical judgments to make sensible choices in the face of myriad opportunities and threats. However, the business environment is vast and complex to the extent that managers acting along and within teams lack the capacity to understand; they are not supercomputers.

Managers’ intelligence and their ability to process, analyse and interpret information is limited by:

  • Limited time to think decisions through (especially in fast-paced environments like investment banking, digital media, computing, artificial intelligence etc.)
  • Prior life experiences, skills and competencies already acquired
  • Assumptions about the world and how things should work
  • Personal preferences, attitude and motivation
  • Cognitive ability

As a result of these factors, managers make constrained decisions. Rather than being the best or optimum course of action, managers formulate and implement strategies that ‘make sense’ in the context of self-conscious factors. This phenomenon is the concept of bounded rationality. The reasons for bounded rationality include:

  • Managers’ assumption that the future will resemble the past, therefore tried and tested strategies should be repeated because they have worked before.
  • Managers’ tendency to communicate and interact with peers who share similar thinking, cultures and attitudes. This leads to homogenisation or sameness within the organisation, often referred to as ‘groupthink’. If not checked, groupthink leads to managers collectively thinking in the same way and failing to see threats facing the organisation.
  • Managers’ predisposition to reject information that challenges their worldview, values or beliefs. This is ‘selective perception’.
  • The tension between satisficing and optimising. Managers typically ‘satisfice’ by setting and reporting acceptable targets when the alternative is to ‘optimise’ by gaining maximum returns from the resources deployed.

Your task

To further our understanding of the consequences of bounded rationality within firms, the following task compares the health and safety attitudes of pilots and surgeons. You will notice a cultural disparity between the two professions and draw conclusions on the optimum mindset for managing risks in aviation, healthcare and beyond.

Listen to the BBC podcast on embracing failure and uncertainty, from 00.00 – 06:26 available on https://www.bbc.co.uk/programmes/b06mc8j9 and make a note of the answers (which will be revealed later) to the following questions:

1) What are the names of the panel?

2) What is the best way of increasing our odds of winning in the future?

3) How is the culture of aviation different from medicine?

4) Why is the aviation culture not applied to healthcare?

5) How many deaths are caused by preventable medical errors in the US?

6) What is the accident to take-off ratio in aviation?

7) How can failure be embraced in other fields?

8) Will faith in an institution be lost if errors are admitted?

Further reading

Syed, M. (2015) Black Box Thinking. London: John Murray Publishers

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This article is from the free online course:

Strategy as a Process and Measures of Success: An Introduction

Coventry University