BEHAVIORAL DECISION THEORY AND BUSINESS POLICY Developments in Business Simulation & Experiential Exercises, Volume 8, 1981 150 BEHAVIORAL DECISION THEORY AND BUSINESS POLICY Dallas T. DeFee, State University of New York at Binghamton ABSTRACT Theoretical and empirical work in Behavioral Decision Theory can enrich the traditional business policy course. Business policy should integrate normative and descriptive theories of individual and organizational behavior. One means of accomplishing this objective is to view policy formulation and implementation as a series of key strategic decisions made under conditions which vary from certainty to ambiguity. POLICY AND THE DILEMMA OF RATIONAL CHOICE Recent advances in the field of Behavioral Decision Theory pose a dilemma for teachers and students of business policy. On the one hand, there are growing social demands for accuracy, fairness and account- ability in policy making both for business and governmental organizations. These pressures compel managers and administrators to adopt increasingly objective, rationalistic and formalized procedures to insure that policies regenerate sound choice. On the other hand, there is growing evidence that individuals have severe limitations in their ability to process information and generate optimal solutions to problems. Recent research summarized by Wright [4] strongly suggests that individuals use heuristics to simplify their cognitive information processing requirements. Steinbruner [3] argues that cognitive mechanisms generate organizational policies that cannot be accounted for by rationalistic norms. This discrepancy between social expectations for sound choice and actual performance in planning and policy making creates a dilemma; either the policy maker must openly violate rational norms and face outraged consumers or constituencies, or must place a premature, and often unwarranted, emphasis on formal methods which paradoxically may undermine the efficacy and legitimacy of management [2]. STRATEGIC DECISION MAKING STRATEGIES A partial resolution of the dilemma of having to make rational decisions in the context of cognitive limits and organizational constraints is to conceive strategic choice as occurring in one of four conditions. When outcomes are known and prediction is close to perfect, the policy maker must simply insure goal consensus and act. When prediction is far less than perfect, the policy maker can act rationally by following the dictates of expected utility theory. uncertainty is the condition of known outcomes but unknown probabilities associated with each outcome. Here the appropriate course is to experiment in order to generate probability estimates. Finally, ambiguity is the condition of unknown outcomes, in which case techniques of management science and rational decision must give way to the operation of "sensible foolishness” [1] until the problem can be more clearly defined and Outcomes identified. Thi8 conceptual scheme allows both descriptive and normative theories to be discussed under one rubric. Normative decision theory forces the policy maker to consider the future by specifying potential outcomes associated with choice, assessing the probabilities associated with each outcome, and selecting the strategy is most likely to produce a future consistent with value preferences. Any strategic choice may be optimal with a given set of distinct outcomes and associated probabilities, but nonetheless turn out to be a failure. However normative decision theories assume at least conditions of uncertainty and most often posit conditions of risk. Descriptive theories, on the other hand, offer a reasonably consistent set of generalizations about how individuals actually make decisions1 e.g. through negotiation, simplifying heuristics, satisfying and retrospective rationalization. This behavior makes sense when outcomes are indistinguishable, preferences are fluid, and the linkages between actions and outcomes are problematic. SUMMARY The business policy course should be designed to advance student understanding of strategic choice behavior. An examination of the relationship between the formal characteristics of a choice situation and appropriate strategies for decision making reveals that both normative and descriptive theories of choice behavior can be reconciled. Policy generation can be viewed as an effort to move the context of choice from a condition of ambiguity to the more favorable conditions of uncertainty, risk, and ultimately, certainty. REFERENCES [1] Cohen, Michael D. and March, James G. Leadership and Ambiguity (New York: McGraw-Hill, 1974). [2] Landau, Martin and Stout, Jr., Russell. “To Manage Is Not To Control: Or the Folly of Type II Errors,” Public Administration Review, Vol. 39, 1979, pp. 148-156. [3] Steinbruner, John D. The Cybernetic Theory of Decision (Princeton: Princeton University Press, 1974). 14] Wright, William F. “Cognitive Information Processing Biases: Implications for Producers and Users of Financial Information,’ Decision Sciences, Vol. 11, 1980, pp. 284-298. Table of Contents Volume 8, 1981 The Promotion: Human Sexuality in Organization The Simulation of Chaos Leadership Development in a Simulated Urban/Suburban (U/S) Environment Tomed: A Computer Game Emphasizing Social Responsibility/or/why the Pop-Top Can? Integrated Brain Activity and the Manager's Job: Utilizing the Troika Model What does R2 Have to do with a Product Management Course? An Analysis of the Effects of Jungian Problem-Solving Style Dimensions on Marketing Decisions Bargaining Behavior in Personal Selling and Buying Exchanges Extending the Simulation Product Life Cycle A Generalized Algorithm for Designing and Developing Business Simulations Operationalizing a Test of a Model of the Use of Simulation Games and Experiential Exercises Pygmalion and Perception: An Experiential Exercise Behavioral Consequences of Reward Regarding Employee Absenteeism in an Industrial Setting: An Operant Conditioning Approach The Simlab Program: The Use of Experimental Simulation and Process Analysis for the Development of Management and Organizations Designs for Research on Simulation-Games, Cases, and Other Experiential Exercises The Role of Students in The Case Method Weaknesses in Research Design Critical Variables in Research on the Educational Value of Management Games Research Questions for Cases Research on the Learning Effectiveness of Business Simulation Games - A Review of the State of the Science The Effects of Valuation Techniques on Holding Cost During Inflationary Periods: A Simulation Exercise The Operations Simulation - A Study in Game Development Applying Guided Design to the Production/Operations Management Course: A Progress Report and Evaluation Terminal Data Entry and Retrieval Systems Simulations and Microprocessors Microcomputers and Related Technology for Simulation Gaming Microcomputers - A New Technology for Innovations in Business Simulations Microprocessor Controlled Interactive Video Simulation Business Game Design: From Theory to Practice The Success of a Computerized Simulation in Microeconomic Pedagogy The Test Preview Game: Applying the Game Show Format Providing a Real World View of the Personal Function: A Simulation Finding an Effective Means of Teaching Managerial Behavioral Skills: Two Different Experiential Teaching Methods Compared A Management Development Program Based on the Experiential Learning Model Participant Type Differences in Response to Experiential Methods: An Informal Look Preparing Student Groups to Participate in Experiential Group Projects: An Organizational Development Approach An Instrument for the Assessment of Learning Dimensions: A Progress Report of the Learning Dimension Scale (LDS) An Empirical Analysis Relating the Learning Style Inventory to Memory and Logical Ability Teaching Styles in Simulation Experiential Learning Versus Traditional Teaching Styles Student Perceptions of Effective Teaching Behaviors Problems in Evaluation of Experiential Learning in Management Education Students' Perceptions of Learning by Simulation A Relative Evaluation of Experiential and Simulation Learning in Terms of Perceptions of Effected Changes in Students Overview of Computer Based Business Games in Business Policy Classes Behavioral Decision Theory and Business Policy Giving Accounting Students Writing Experience as Job Preparation Getting to First Base with MBO: An exercise for Writing and Evaluating Objectives Dimensions of Conflict in Experiential Learning Consumer Alienation and Perceived Relevance of the Business Simulation Using the Self-Reference Criterion to Simulate Culture in Internationalized Business Course Experiential Learning in a Cross Cultural Setting- The Practice of Simulation Approach to Business Education in Japanese Universities Student' Perceptions of the Use of a Computerized Simulation in Teaching Management Information Systems Using the Case Study Approach to Develop a Microcomputer Bases, Fully Integrated, Data Base Driven, Management Information System The Case Study as a Tool for Organizational Change: Applying the Steel Ax to the Designers of Management Information Systems Toward a Theory of Teaching Business Policy A Case Study in the Use of Experiential Learning (A Management Game Simulation) to Enhance Student Understanding of Strategy Evaluation and Policy Formulation Suggestions for Integration of the Business Administration Core Publishing Opportunities and Requirements for Business Simulation and Experiential Learning Materials How do we Apply Experiential Learning Intercollegiate Case Competitions for M.B.A. Students: Initiation and Implementation Teaching Business Policy and Strategy Using the Incident Process The Learning Co-Op Approach to the Core Policy Course Meeting the Managerial Skill Shortage - Is Academia Up to It? An Empirical Analysis of Experiential Learning Reinforcement International Experiential Learning: Experience is the Best Teacher Encouraging Student Participation During International Academic Programs European Summer Study Program: Can you, Should you, What Does it Take? Travel Seminars in Europe: How can I Direct One? International Experiential Learning: Student Evaluation ABSEL: Empirical Findings on the State of the Association Sensitivity of Performance Scores in Business Simulations Improving the Learning of a Business Simulation Game by Increasing the Process Content Student Participation in Deciding Performance Criteria for Grading in an OB Course: An Exercise and a Case Study Markup for Profit: A Simulated Self-Administered Experience in Retail Pricing The Investment Decision Game: An Experiential Learning Approach to Stock Market Decisions Through Gaming CHIPS: A Marketing Channels management Game External Validation: An Experimental Approach to Determining the Worth of Simulation Games Teaching Performance Appraisal Skills: An Experiential Approach In Support of Experiential learning: Results of a Follow-Up Survey The Introductory Management Course: Taking Theory Application One Step Further Decision Efficiency and Effectiveness in a Business Simulation The Implications of Cognitive Processing Variables and the Complex Decision Simulating the Simulation for Enhanced Player Rationality Simulation/Experiential Learning Audit