1.4. Opportunism, fairness, and cooperation

Question 1

What’s a rational offer according to economic theory?

Answer 1

• people should offer 99-1
• people should accept 99-1

Question 2

Economic theory vs. reality

Answer 2

• people are more generous (33% offer 50-50)
• most people reject anything worse than 80-20

Question 3

2 ways to model behaviour

Answer 3

1. Homo Oeconomicus
2. Human being (behavioural view)

Question 4

Homo Oeconomicus

Answer 4

figurative human being characterized by the infinite ability to make rational decisions

Question 5

Rational behaviour assumptions

Answer 5

1. Individuals have ranking of preferences that is complete and transitive, internally consistent and that has a maximum
2. Concordet paradox: violation of transitivity (a>b, b>c-> a cannot < c)
3. Individuals have full information about all the possible outcomes from all the possible choices
4. All information available for free
5. Individuals have the cognitive ability and time to calculate the optimal choice

Question 6

Rational behaviour breakdown

Answer 6

• Individual maximizes utility under given constraints
• Make decision in isolation: not much room for reciprocity, trust and emotions => behave more opportunistically

Question 7

Decision trees

Answer 7

a diagram that sets out the options connected with a decision and the outcomes and economic returns that may result

tool used by people with rational behaviour

Question 8

Advantages of decision trees

Answer 8

• force the decision maker to consider all of the options and variables related to a decision
• an easy to follow diagram which allows for numerical considerations of risk and economic returns to be included
• approach encourages logical thinking and discussion amongst managers
• Are simple to understand and interpret.
• Have value even with little hard data. Important insights can be generated based on experts describing a situation (its alternatives, probabilities, and costs) and their preferences for outcomes.
• Can be combined with other decision techniques.

Question 9

Disadvantages of decision trees

Answer 9

• accuracy of data used is doubtful. Estimated economic returns may only be accurate when experiences have been gained from similar decisions
• probabilities of events occurring are based on past data, but circumstances change
• aid decision making process but cannot replace the consideration of risk and the impact of qualitative factors on a decision - environment, attitude of workforce, approach to risk taken by managers
• expected values are average returns, assuming that the outcomes occur more than once. Allow a quantitative considerations of risks but do not eliminate those risks
• Assignment of probabilities and expected values prone to bias

Question 10

Bounded rationality

Answer 10

the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

Question 11

Bounded rationality assumptions

Answer 11

1. Limited information: info is costly and may not be retrievable
2. Uncertainty: in most managerial decision, the probabilities are unknown (decision trees)
3. Unclear priorities: cost, time, quality and scope of a project
4. Cognitive limitation
5. Time limitation

Question 12

Behavioural view

Answer 12

• draws on psychology and economics to explore why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models
• “Maximization” of well-being
  
  • Preference are shaped also on emotions, trust and reciprocity
• It has social needs
• Cooperative behavior
  
  • It may still be opportunistic

Question 13

Satisficing

Answer 13

Decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world

Question 14

Steps of satisficing

Answer 14

1. Preliminary expectations
2. Exploratory research
3. Evaluation
4. Expectations adjustment
5. Decision

Question 15

Homo Oeconomicus vs. Behavioural view

Answer 15

HO:

• Utility maximization
• Perfect or full information
• Limitless cognitive ability
• Opportunism

Behavioural:

1. Utility satisfaction
2. Ill-defined problems
3. Bounded rationality
4. Altruism, emotions

Question 16

Theory X (authoritarian management style)

Answer 16

• The average person dislikes work and will avoid it when they can
• Most people must be forced with the threat of punishment to work towards to objectives
• Average person prefers to be directed, avoid responsibility and is relatively unambitious, wants security above all
• Self-centered -> not focused on organizational goals

=> tight control, no development, produces limited and depressed culture

Question 17

Theory Y (participative management style)

Answer 17

• Effort in work is as natural as work and play
• People will apply self control and self dedication in the pursuit of organisational obj, without external control or threat of punishment
• Commitment to objectives is a function of rewards associated with their achievement
• Accept and seek responsibility
• Capacity to use a high degree of imagination, ingenuity and creativity in solving problems

=> liberating and developmental control, achievement and continuous improvement achieved by enabling, empowering and giving responsibility

Question 18

Self-fulfilling prophecies in Theory X

Answer 18

1. Hypotheses regarding human being = “X”
2. Organizations are prescriptive and constrictive
3. Behavior are restrictive and opportunistic
4. Support for hypothesis X

=> cycle

Question 19

Self-fulfilling prophecies for Theory Y

Answer 19

1. Hypotheses regarding human being = “Y”
2. Organizations delegate responsibility
3. Behaviors are cooperative
4. Support for hypothesis Y

=> cycle

Question 20

Group behaviour

Answer 20

• Organizations have clear goals, formal structures and procedures, information systems, etc.
• Hence, a model of perfect rationality may provide a better representation of group decisions
• BUT, even group behavior is often not perfectly rational