behavioural theory and bounded rationality

Question 1

Who founded behavioural theory? What does behavioural theory say about assumptions for decision making made by neoclassical economics?

Answer 1

Herbert Simon
Behavioural theory emphasises the limits of rational decision making and insists on the economic consequences of cognitive limitations . It is opposed to the neoclassical assumptions about the omniscient rational man, actually men only have access to a limited set of options and rationality in organisations take place within specified limits

Question 2

What are the limits to pure rational decision making?

Answer 2

during decision making, individuals are limited by
- availability of information/knowledge
- speed of mental processes
- sense of purpose

Question 3

What is bounded rationality, in a few words?

Answer 3

bounded rationality is the idea that human decision making is limited by a set of factors -humans dont have access to all the information and so this means they cannot maximise their decisions and can only suffice them
decision making takes place within clearly defined cognitive limitations

Question 4

How does bounded rationality sometimes mean we fail to change ineffective behaviours ?

Answer 4

because we dont have enough info and we fail to process info for better decision making

Question 5

How do we cope with bounded rationality?

Answer 5

we develop procedures that overcome the limits of rationality and that isolate us from the rest of the world by selecting a limited number of variables and consequences

Question 6

What do organisations do in regards to bounded rationality?

Answer 6

organisations help us build these procedures through:
- stable expectations
- design of the org
- standard procedures
- work division
-centralised authority
- intermediate goals directing our attention

Question 7

What is equilibrium in behavioural theory?

Answer 7

when interests of the organisation and of employees are aligned which is not easy since org and individual goals often differ

Question 8

What’s x-inefficiency and what are examples of it?

Answer 8

for eg in a situation of monopoly x-ineffiency can easily arise

Question 9

In what ways can we show that x-inneficiency exists?

Answer 9

try to improve the productivity of your organisation
show that other firms manage to get more output from equal inputs

Question 10

Where are sources of X-inefficiency?

Answer 10

useless expenditures like maintenance of excess capacity
benefits above the rational level
investment in lobbying to enlarge the power of the organisation but have a marginal efefct on its eco model