Business managers and CEOs usually rely on rational decision making. Using logic and analysis to determine the best course of action has long been considered the best way to make decisions. Fact-based decisions help companies determine which products to launch, which target demographics to advertise to, and how to handle customer service issues.
Executives and employees make business decisions every day. They may use rational thought and research to make these decisions or use their “gut instincts” or emotions to tell them what to do.
Some people are better at intuitive decision making than others. Business people use intuition when facts and figures aren’t available, or when there’s no time for formal research before making a decision.
Analytical decision-making is normally used by large businesses when there’s enough time and research material available to determine the right course of action. Ration decision making is a careful process that uses facts and a step-by-step process. Rational decisions may use a list of pros and cons for every possible solution.
Rational vs. Intuitive Decision Making: An Overview
Emotions oversee our behavior in our personal lives and, to some extent, in our careers, according to psychology. Consumers associate certain traits with brands, just like they do with people. Choosing a brand is the same as choosing a friend or Significant Other.
However, when it comes to business decisions, emotions may cloud your reasoning. Using a data-driven and objective decision-making process will help you make sound, unbiased business decisions.
Rational decision making is important in marketing and other businesses, but you can also use it to make decisions in your personal life. Biases and beliefs may cause you to make errors in judgment, but data shows us cold, hard facts. In business, rational decisions are often favored over intuitive decisions.
Rational decision making assumes that you’ll make decisions to cut down costs and increase benefits in business (and in personal finance decisions). Economic Theory dictates that people want to get the best products at the lowest price. People will judge the benefits of a product (usefulness or beauty ) compared to similar objects.
People then compare prices and will choose the product that provides the best benefits at the lowest cost.
The rational thought model also features the following assumptions:
- The person or business has the right information to make a choice
- There’s measurable information that you can analyze and collect
- You have the cognitive ability and resources to compare each alternative against the others
- The rational decision-making method only concerns quantifiable factors. Logical assumptions are based solely on objectivity and facts.
- This process doesn’t consider altruism, loyalty, or personal feelings. Desires and feelings aren’t part of this system.
Some people think the rational thought process of decision making simplifies choices and causes people to make unrealistic assumptions.
Tools, processes, expert knowledge, and data offer the best information for many business people and individuals to come to the best decision in a particular situation. When you have facts at your disposal and lack the experience or emotional intelligence to make an intuitive decision, use the rational decision-making process.
Rational decision making is the most orderly way to come to a business solution. Rational thought optimizes utility. The answer will be in alignment with the beliefs and preferences of the decision-maker or company.
Rational decisions satisfy consistency and completeness. These logical solutions aren’t based on emotional whims or one person’s hunches or feelings. Reasonable solutions rely on facts and figures. Use structured questions to answer every problem. Address possible risks with factually sound approaches, not guesses or emotions.
Employees and outside researchers gather information for analysis. This process may be relatively simple or take weeks or even months. Once alternatives are determined, the researchers list the consequences of each action.
Rational decisions should come to the same conclusion when you present the same set of data. Collaborative decision making, therefore, is usually rational and data-driven.
More About Rational Decision Making
The Bounded Rationality approach considers environmental and cognitive limits and notes that we should act rationally within our boundaries. Some decision-making theories use bounded rationality to engender realistic results.
The cost of gathering information is considered detrimental to the results gained from gathering that data in rational ignorance. If collecting research and data will cost too much and take too long, it is better to remain ignorant, according to this decision-making theory. Consider decision value along with the effort put into the decision process.
Rational choice has many benefits, and in most cases, rational decision-making is indicated, especially in business. If you don’t have any limitations in cost or time, breaking down complex decisions will work for you. You should address goals and problems and indicate what needs the answers will fulfill.
Use computers, mathematics, scientific methods, and logical thought to arrive at possible solutions. The decision-making process results in improvement when arranged into a system of processes or procedures. Use a proven list of decision-making tools and techniques. Increase the resources you have to analyze and access data you need to solve problems.
This ideal is an approximation that supports a broad application of predictions and decision making. Rational decisions provide the standard for the increasing complexity of today’s business decisions.
A rational decision-making process is the best system to use, considering current limitations. Determine how to cope with information overload and enhance your capabilities to better rational choice.
Limitations of Rational Decision Making
The limitations on rational choice have to do with falling short of the original idea of the rational model. Three areas cause problems in the rational decision process.
There are limits to human capabilities. Humans can gather and interpret data in simple or constrained situations. Understanding and gathering enough information to solve complex problems is limited by human intelligence. Humans have limits on how they formulate as well as solve complex problems.
People also tend to settle on an acceptable but imperfect solution when obstacles get in the way of work or personal goals.
There are also limits on the quantity, quality, and accuracy of information humans can gather. The decision-making methods assume that the company or individual has access to the required data that influences the cause and effect relationships and consequences that will be a result of that decision.
Time limits may cause a delay in implementing a solution, and this delay may mean the alternative chosen by the rational method won’t work. In some cases, it’s better to use the quicker, but less scientific, intuitive reasoning method.
How Rational Decision-Making Works in Business: An Example
In a business, rational decision making involves analyzing a set of criteria to arrive at the best possible solution. For example, Annie manages a clothing store. The district manager has asked her to increase monthly profits.
Annie needs to determine the best way to do that, and she doesn’t have a lot of time to try different tactics. She’ll be out of a job if she doesn’t improve profits quickly. If Annie uses the rational method of decision making, she’s going through a step by step process consisting of the following points:
- Define the problem
- Identify the criteria needed to solve the problem
- Give importance to each issue identified in the criteria
- List alternative solutions
- Evaluate alternative solutions.
- Select the best solution
Defining the Problem
Annie already knows the problem, as the district manager identified it. Her monthly profits are low, and she needs to increase them. Business people who don’t have a superior informing them of an exact problem need to determine the cause of financial or HR issues, either through discussion with team members or brainstorming potential root issues.
Identify Criteria for Decision Making
Choosing the decision criteria is the next step. Annie has to find variables that will help her determine the best solution. What is the relevant data that will increase monthly profits? Cutting costs is essential, but Annie doesn’t want to lay off any employees.
Changing the menu, shortening store hours, and finding different clothing lines to sell are some possibilities. Annie may also want to look at low-cost or free marketing methods, such as increased customer referrals.
The criteria used for decision making will affect the quality of products and services, customers, and employees. Annie needs to consider the pros and cons of these changes before coming to a solution.
Weigh the Criteria
Weigh the criteria by allocating importance to each one. Annie thinks that how the decision will affect employees is the most crucial aspect of the decision. The other elements carry a lesser but equal weight.
List the Alternatives
Now Annie needs to list all the solutions she thinks will help increase profits. They include:
- Select new clothing lines that will generate more income
- Shorten store hours to limit overhead
- Lay off employees who make large salaries
- Increase cost-efficient marketing and promotions
Annie has to evaluate all the alternatives and find the best one(s). She doesn’t need to stick to one method to bring overhead down and increase sales. She may choose to shorten store hours on slow days and offer promotions, such as coupons or reduced prices on weekends, to improve the bottom line.
Select the Best Solutions
After looking at all the alternatives, Annie decides to shorten store hours. After looking at sales figures, she notices that few customers come into the store on Monday, and most of them don’t buy anything. She decides to close the store on Mondays.
Example #2 – Rational Decision Making and Digital Marketing
In marketing, it’s important to assess that you have a problem before implementing a data-driven research process to find the right decision. Collect as much data as you can from the perceived problem area and examine it. Do you have a real problem according to the data, or are you worrying for nothing?. Analyze the data to determine if you need to do further research. You may be worried about fluctuations in your blog traffic, but initial research may determine the problem was a one-time glitch, and further analysis isn’t needed.
However, if you find that there is a real problem, you need to brainstorm possible solutions. The more potential solutions you have, the better chance you have of solving your problem. Brainstorm with a team or on your own.
If you find you have a downturn in online sales, you may want to increase email marketing, social media posts, or offer online discounts for targeted customers. You can also institute all three options or two of the three choices.
Determine the possible results of each solution. We can never predict with 100 percent accuracy how a potential decision will play out, but we can get a pretty good idea pf the outcome.
For example, using email newsletters, social traffic, and twice a week, blogs may sound great in theory, but your team may not have the money or resources to employ all three simultaneously. Increasing blog posts to once a day on Facebook may only increase your blog traffic by five percent will only produce a minimal increase in traffic and sales.
You find you’ll only get a marginal increase by using two of the three methods. However, you may discover that using high-volume keywords in blog posts and other content will drive up your Google page ranking and lead more visitors to your site.
Test the Potential Best Solution
Based on our evaluations, choose the best solution and test it. Monitor your results. If you don’t see the progress you want, develop another solution. You may use an organic traffic strategy to create new content that has current search volume potential.
Track and analyze your test solution. If the testing offers excellent results, you can implement the solution long-term. For example – after a month, a 21 percent increase in organic traffic and a 14 percent increase in blog traffic shows the natural approach was best.
If your test didn’t solve the problem, implement the other alternatives temporarily until you find one that does work.
Multiple Criteria Decision Analysis
The Multiple Criteria Decision Analysis (MCDA) offers a good balance between intuition and rational thought. This method uses a framework to evaluate options against specific criteria for success and adjustments defined for risk.
Dr. Benjamin B. Tregoe and Dr. Charles H. Kepner developed this technique in 1965. Their book, “The Rational Manager,” set the foundation for modern business decisions. The Kepner-Tregoe Matrix and Grid Analysis are related to the Multiple Criteria Decision Analysis.
MCDA is a valuable tool that you can use to make many complicated decisions. This method solves problems appearing as a choice among many options. The Multiple Criteria Decision Analysis gives you a support tool to focus on logic and consistency.
This method lets you divide the decision into small, understandable components and analyze each separate part. You can then integrate the elements into an appropriate solution. MCDA has five main parts:
- Group or individual decision-makers
- Alternatives or decision options
- Interests or decision criteria
- Consequences and outcomes associated with each alternative
Group decision making benefits from this formula. Groups can talk about problems so that each member speaks about the core values that are important to him or her. People can speak about trade-offs for each decision alternative. Group members can think, question, re-think, adjust, test, and come to a conclusion.
Multi-Criteria Decision Analysis is used in science and health, as well as business. You can apply it to complex personal decisions, such as selling a house, investing, or moving to another city. Planners and scientists use MCDA to make environmental decisions, like assessing natural ecosystems and protecting natural capital.
MCDA in Action
For example, a group hired to decide on the location of a new aquatics facility can break down their decision into the following components
Define the location needs and possibilities by choosing several sites that have the appropriate space, transportation access. Four or five site options may be considered optimum.
Identify the interests of the stakeholders and possible users of the facility. Environmental impact, traffic impact, ease of access, ease of use, facility size, parking, cost, future implications, and compatibility with the surrounding area are basic concerns. Decision-makers may add various concerns under each interest
Under “ease of access,” for example, group members could look at how people would get to the facility by bus, train, bicycle, car, or foot. More transportation options mean more potential users.
The next step is to build a decision framework by listing interests and sub-interests. Connect each interest/sub-interest to the location that best fits the goal.
Use a relative or ordinal scale to rate the viability of each site, as it relates to the interests/sub-interests. A relative scale means each alternative is assigned a number in relation to the other alternatives. Use an ordinal scale to give a number rating to each alternate as it relates to every interest or sub-interest
Now rate the stakeholder/potential user needs. List the interests and consider how vital transportation, cost, parking, nearby stores, and restaurants, etc., are to prospective users.
Rate each location according to their number rating for each sub-interest and stakeholder need.
Check and Discuss Results
Compare the scores and discuss the results. You may have a clear winner or a tie. Some board members may have objections even if there is a clear winner. Drop any site rated low by all members from the alternative list.
Review and discuss the scores of the remaining sites. The alternatives with similar scores are ripe for debate. You can adjust scores for interests and sub-interests after additional discussions. The group members may agree to approve an option after these discussions and re-assigned ratings.
Discuss these ratings with site planners or others outside the decision group for better clarification. Change some ratings to a number group (3 to 5 instead of 4, for example.
After one or more discussions, your group may arrive at a decision. If you don’t choose an alternative, you can continue discussing and re-assigning ratings, contact outside experts or look at other site alternatives.
Other Decision-Making Techniques
You can use different decision-making techniques to determine the best solution for work or personal matters. Some methods are purely rational, while others combine rational techniques with other types.
We’ve discussed rational and intuitive techniques, but people can also use a random, informal method to make a decision. Some methods use both intuitive and logical elements, so you take advantage of your cognitive and emotional capabilities, as well as your “sixth sense.”
Random decision-making is rarely mentioned regarding business or even personal decisions, and it’s generally frowned upon by experts and laypeople alike. However, a 2014 study conducted on rats by U.S. neuroscientists showed that random decisions are sometimes accurate.
Rodents switch from making decisions based on experience to the random mode when confronted with unpredictable situations. Random decisions sometimes benefit rats, but they can help humans in unpredictable or unfamiliar territory, too
In financial matters, a Cost/Benefit Analysis provides data so you can weigh the cost of certain projects or products and compare them with the value or benefit they give you.
You can focus on analysis to improve your decision-making skills while enlisting experts to help you. Asking for experts’ advice lets you learn the thought pattern they’ve honed from years of experience.
A Paired Comparison Analysis compares options against each other to determine relative importance. Unfortunately, little or no information is shown in this technique that identifies the reasons for choosing each alternative.
The trial and error approach is used in our personal lives from childhood, and can also be used in business decisions. The consequences for a failed decision should be minor so that you can move on to the next possible solution easily. A failed decision needs to prompt you to see why the wrong action failed, and what lead you to choose it.
Simple AHP or Hierarchy Analytic Hierarchy Process is similar to the Multiple Criteria Technique. This method uses Paired Comparison and mathematics to address intuition and subjectivity used in a decision-making process. Dr. Thomas Saaty developed AHP. This combination technique was first used in the 1970s to address complex group decisions.
A Decision-Making Tree is a technique that helps you visualize decisions with many stages. This tree sketch addresses hard to define outcomes. If you have constrained resources, a decision tree can help you find better investment strategies.
The centuries-old approach of weighing the pros and cons can be used in business and personal situations. Other names for this approach include Force Field Analysis, T-chart, Plus/Minus/Interesting (PMI), Pro/Con/Fix(PCF), and Weighted Pro/Con. This method is limited because it only weighs two options at a time.
A Simple Influence Diagram or Influence Diagram (ID) graphically shows a decision-making situation. An influence diagram is a simple version of a decision tree. This diagram grows exponentially with more variables.
Game Theory is appropriate when the behavior of customers, vendors, the government, and other outside individuals and organizations will be affected. You consider how your decision will impact the actions of others and how those actions will benefit or harm your business. You can use Influence Diagrams to show possible reactions to every potential decision. Game Theory is also used in philosophy.
The drawback to the Game Theory method is the belief that a simple assumption can solve decisions,
Net Present Value, or NPV, and Present Value, or PV, are employed for investment and capital budgeting decisions.Net Present Value is often referred to as a Single Criteria technique.
Multi-voting is used for group decisions. You eliminate low-priority alternatives and then pare down the alternatives to more appealing ones.
Conjoint analysis implements a statistical option for market research decisions. This method looks at the psychological trade-offs consumers make to get a service or product’s attributes. The conjoint analysis helps business position products/services in the marketplace.
Use Affinity Diagrams and the KJ Method to correct information overload during the decision-making process. Organize data and ideas using brainstorming techniques and figure out the best alternatives after you’ve listed all options.
Heuristic decision-making methods involve trial and error. Trial and error aren’t always accurate. So experimentation is needed to improve results. Use heuristics to reduce options and saves time.
The scientific method explores scientific questions but can be applied to business decisions. Experiments are used to confirm or eliminate.hypothesis. This method is also considered to be a heuristic approach.
Linear Programming (LP) optimizes limited resources. This mathematical technique uses linear equations to represent requirements. LP is useful in the operations research field.
What is the Best Decision-Making Technique for Business?
The technique known as Multi-Criteria Decision Analysis is the overall best model for value decisions. You can apply it to all types of decisions. This method is simple, but you can increase or decrease its complexity when needed. Capture knowledge from a decision with this established process and reuse it from others making similar decisions.
Every business problem requires slightly different decision-making techniques. You can alter and combine methods to arrive at the right outcome for every business situation.