In business management, the use of theoretical models should guide managers in the complex decision-making process and provide an indication of the strategic choices to be made. Most of the models adopted are based on assumptions of full economic rationality, but managers and entrepreneurs, as individuals, reveal behaviors that are not fully rational, being subject to emotional factors that can have an influence on the decision-making process. Some of them are inclined to decide based on instinct and intuition, especially when a significant amount of experience supports them. Other managers or entrepreneurs overestimate their ability to control events, believing that their personal abilities are superior to the aleatory components. Indeed, a set of predetermined models based on rationality cannot be sufficient to investigate the complex process related to making decisions. Knowledge about economic behavior and the decision-making mechanisms associated with it is still very little, and after decades of studies and theory building a cleavage is still persisting between the neoclassical approach to economics, which assumes that decisions are guided by rationality and related to the prospect of future rewards, and approaches that recognize the social and psychological bases of economic behavior, since decisions are made by humans, individually or as part of organizations. The economic perspective assumes that decision-makers are rational and consistent with the objective of maximizing a subjectively expected utility, based on an assumed absolute rationality (Blume, & Easley, 2008). The theory of expected utility, developed in the 1940s by Von Neumann and Morgentern (1999), provides the theoretical basis for studying human decisions. It makes mathematical modeling of the decision-making process, but does not consider some important variables involved in the decision process, such as the affective evaluation of the alternatives of choice and the limits of the individual's cognitive resources. This theory hypothesizes a utility function that assigns a numerical value to the satisfaction associated with different events. As a result, the choices of individuals are based on the calculation of the expected value associated with each of the alternatives they can choose from. On the other hand, the behavioral perspective adds more realistic parameters related to the influence of social norms, emotions, environmental factors, taking into account that humans' powers of computation and cogitation are limited, and people are not always consistent and stable in their behavior. Indeed, several other factors intervene in the decision-making processes, not only related to individual cognitive mechanisms, but also with regard to relational mechanisms, which are the basis of the functioning of markets. Market relations are nothing more than relationships between individuals who base their choices on apparently rational logics. One of the most well-known theories on market functioning according to the firm’s perspective is that of transaction costs analysis (TCA), proposed in its early versions by Coase (1937) and then by Williamson (1975; 1985) who formulated the most relevant statements about this theory. The TCA approach supported the academic literature in explaining the criteria of organizational forms and strategic choices, among which are diversification, vertical integration, internationalization, and various forms of cooperation and interaction among firms. Two key assumptions of human behavior support this theory: bounded rationality and opportunism. Bounded rationality assumes that decision makers have limited cognitive capabilities and a not fully rational behavior. This is due to limited information processing and communication ability (Simon, 1959). These constraints emerge in conditions of uncertainty, for which the context of an economic interaction cannot be specified ex ante and performance cannot be verified ex post (Rindfleisch & Heide, 1997). Opportunism is defined as "self-interest seeking with guile. This includes but is scarcely limited to more blatant forms, such as lying, stealing, and cheating. ... More generally, opportunism refers to the incomplete or distorted disclosure of information, especially to calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse" (Williamson, 1985, p. 47). Unfortunately, the TCA literature lacks an understanding of what determines limited rationality and opportunism, and which are the factors that have an influence on these dimensions of human behavior. In this debate, terminology itself should be clarified: the concepts of "utility”, “rationality”, "trust", and also “intelligence”, do not have universal meanings depending on the influence of ethics, social rules, physiological factors and even "visceral factors” (e.g. hunger, thirst, sexual desire, anger, fear) (Loewenstein, 1996).

Strategic Decision-Making in International Context

Fabio Musso
2020-01-01

Abstract

In business management, the use of theoretical models should guide managers in the complex decision-making process and provide an indication of the strategic choices to be made. Most of the models adopted are based on assumptions of full economic rationality, but managers and entrepreneurs, as individuals, reveal behaviors that are not fully rational, being subject to emotional factors that can have an influence on the decision-making process. Some of them are inclined to decide based on instinct and intuition, especially when a significant amount of experience supports them. Other managers or entrepreneurs overestimate their ability to control events, believing that their personal abilities are superior to the aleatory components. Indeed, a set of predetermined models based on rationality cannot be sufficient to investigate the complex process related to making decisions. Knowledge about economic behavior and the decision-making mechanisms associated with it is still very little, and after decades of studies and theory building a cleavage is still persisting between the neoclassical approach to economics, which assumes that decisions are guided by rationality and related to the prospect of future rewards, and approaches that recognize the social and psychological bases of economic behavior, since decisions are made by humans, individually or as part of organizations. The economic perspective assumes that decision-makers are rational and consistent with the objective of maximizing a subjectively expected utility, based on an assumed absolute rationality (Blume, & Easley, 2008). The theory of expected utility, developed in the 1940s by Von Neumann and Morgentern (1999), provides the theoretical basis for studying human decisions. It makes mathematical modeling of the decision-making process, but does not consider some important variables involved in the decision process, such as the affective evaluation of the alternatives of choice and the limits of the individual's cognitive resources. This theory hypothesizes a utility function that assigns a numerical value to the satisfaction associated with different events. As a result, the choices of individuals are based on the calculation of the expected value associated with each of the alternatives they can choose from. On the other hand, the behavioral perspective adds more realistic parameters related to the influence of social norms, emotions, environmental factors, taking into account that humans' powers of computation and cogitation are limited, and people are not always consistent and stable in their behavior. Indeed, several other factors intervene in the decision-making processes, not only related to individual cognitive mechanisms, but also with regard to relational mechanisms, which are the basis of the functioning of markets. Market relations are nothing more than relationships between individuals who base their choices on apparently rational logics. One of the most well-known theories on market functioning according to the firm’s perspective is that of transaction costs analysis (TCA), proposed in its early versions by Coase (1937) and then by Williamson (1975; 1985) who formulated the most relevant statements about this theory. The TCA approach supported the academic literature in explaining the criteria of organizational forms and strategic choices, among which are diversification, vertical integration, internationalization, and various forms of cooperation and interaction among firms. Two key assumptions of human behavior support this theory: bounded rationality and opportunism. Bounded rationality assumes that decision makers have limited cognitive capabilities and a not fully rational behavior. This is due to limited information processing and communication ability (Simon, 1959). These constraints emerge in conditions of uncertainty, for which the context of an economic interaction cannot be specified ex ante and performance cannot be verified ex post (Rindfleisch & Heide, 1997). Opportunism is defined as "self-interest seeking with guile. This includes but is scarcely limited to more blatant forms, such as lying, stealing, and cheating. ... More generally, opportunism refers to the incomplete or distorted disclosure of information, especially to calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse" (Williamson, 1985, p. 47). Unfortunately, the TCA literature lacks an understanding of what determines limited rationality and opportunism, and which are the factors that have an influence on these dimensions of human behavior. In this debate, terminology itself should be clarified: the concepts of "utility”, “rationality”, "trust", and also “intelligence”, do not have universal meanings depending on the influence of ethics, social rules, physiological factors and even "visceral factors” (e.g. hunger, thirst, sexual desire, anger, fear) (Loewenstein, 1996).
978-88-31205-04-7
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11576/2681593
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact