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Family Business Decision Making Process That Will Be Affected By Bounded Rationality

A family business decision making process will be most impacted by bounded rationality due to the large number of factors that are considered in each decision.  

The majority of the decision making process consists of checking the various dimensions to see if either it matches what you are looking for or if it will provide you with what you are looking for. For example, if you are looking for the best computer for your needs, you will need to check the dimensions of the computer such as if it has the necessary software and the safe route.

Before analyzing the family business decision making processes that will be affected by bounded rationality, it is important to understand what bounded rationality is. Bounded rationality is when individuals base decisions on their limited knowledge and experience. In other words, they make decisions based on their perception of the world.

So, here are 6 family business decision making processes that will be most affected by bounded rationality.

Choice

The choice is a decision making process that relies on several different factors, the number of factors being a function of bounded rationality.  Bounded rationality is the idea that an agent will focus on some aspects of a problem while neglecting others. This means that they will exclude some alternatives without considering them while considering others.

Satisficing

The reason it is more likely to be affected by this type of reasoning is that an individual or group making a decision will choose a satisfactory solution because they want to make sure they make most of the information they have. The notion being if they go into the decision making process with the intent to select the best solution then they are unlikely to choose a solution that will be optimal. They are interested in selecting a satisfactory solution that can use up all the information they have. The reason that that is the case is if they select a satisfactory solution, then the solution will be a policy that allows them to attain their goal, without having to use extra resources.

Hiring Process

The third family business decision making process to be affected by bounded rationality is the hiring process. When deciding between two candidates for a position, bounded rationality comes into play. This decision-making process is based on the job interview instead of the employee’s performance, which increases the chance for inaccuracy. For example, if one of the candidates has an accent, has to take frequent bathroom breaks, or makes constant phone calls, the decision maker will pass them over, even if they are qualified for the position. 

This decision-making process can hurt the company in the long run because they may be passing over the best candidate for the job. When someone is ultimately hired, the company automatically assumes they are qualified for the position. They may be unqualified or qualified, but either way, there is biased decision making that ultimately affects the company. This process also has the potential not to choose the best person for the job because the decision maker does not have the time to thoroughly review the candidate’s qualifications for any mishaps.

Income Splitting

In a family business decision-making process, bounded rationality will most likely affect the decision to split income.  A family business decision making process will be most affected by bounded rationality when the decision to split income is discussed.  

I believe the process of splitting income will be most affected by bounded rationality. To decide on splitting family income, it takes a lot of time to make the best decision. This can be exhausting especially when it takes mental energy to weigh out multiple options. When people are bound by rationality, they are unable to make the best decision about splitting income.

Managerial Decision Process

In the family theory of the firm, the one most likely to be affected by bounded rationality is the managerial decision process. The point is that the bounded rationality model postulates that when managers make decisions, they will be unable to gain access to all of the relevant data that would be necessary to make the wisest decision that they could. Instead, they will gather the best available information and then frame it in a manner that makes it seem most pertinent to their decision. Of course, this means that they will still be making a decision based on the information that they can access, but that the information that they can access and use might not be all they could get.

Limited Knowledge

A conventional family firm will always be exhibiting characteristics such as slow decision making, socialized knowledge and small-scale resource division. These processes are always going to be slow and largely irreversible decisions that have an overall common view which is also generally irrational. In contrast, a fast-paced environment such as a conglomerate type firm can be expected to have quicker decisions based on ‘specialists’ knowledge. Additionally, a conglomerate’s likely decision-making structure will allow for more individual divisions and branches. The fact that these situations won’t have the factor of socialization and reliance on intuition suggests that ultimately there would be less bounded rationality. 

In conclusion, If a business decides to employ a family decision-making process it will usually be most affected by bounded rationality. This is because human decision-making cannot be perfect and if the decisions were always perfect and rational then there would be no point in the business turning over and employing new workers, or renovating old buildings. No business does this, so bounded rationality is a very logical assumption.

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