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Choice Theory

There are some features of individual and organizational strategy and decision-making that are both critical and yet far too often neglected.

Rather than recognising that things are constantly in flux, that preferences change, that the choices we make do not conform with notions of near complete knowledge, too many people rely on models of the world which really only apply in a vacuum!

Much of economics, especially neoliberal or market economics, relies very strongly on such a model. Yet research by various people such as winners of the Nobel prize for economics Herbert Simon (1978) and Daniel Kahneman (2002) – the branch of economics known as behavioural economics – shows all too clearly how far off the mark are judgements made by people not familiar with the circumstances they are making predictions about.

People imagine a near perfect world and believe they can accurately forecast the outcomes of their decisions. It is in this context that we must judge exhortations that leaders must make rapid decisions so as to lead in the race to the top in order that we might all become wealthy. Nobel prizewinners in economics write wonderful things to the effect that rational choice does not exist and yet politicians, the International Monetary Fund and those people who pass for economists such as market analysts and persons from financial institutions, daily regale us with their generally wrong forecasts of what is going on and continue to peddle the proposition that the world is near perfect and we just haven’t woken up to the fact!

A fundamental problem, then, is belief in the existence of rational choice. The last extract in this section concerns a recent book by Nobel prizewinner (economics, 1998) Amartya Sen (“Rationality and Freedom”, Belknap Press/Harvard University Press), which deals with this issue.

Patience, Vision, the Right people and the Right Time

The Metaphor Of The Sultan, The Bard, And The Dervish

An article by Professor Hans Hinterhuber entitled “Oriental Wisdom and Western Leadership” (The International Executive, Vol. 38/3, p. 287-302 (May/June 1996) commences with the following story (adapted from Hazrat Inayat Khan (The Sufi Message, Vol. II, London: Barrie and Rockliff, 1960) and R. Zundel (“Der Kalif und der Sanger,” Die Zeit (Hamburg), January 3, 1986). Hinterhuber says, at first sight [this story] has nothing to do with leadership. It is a very old story, of Sufi origin, and tells us of a sultan who likes to hear a very famous bard.

‘Following the customs of his time, [the sultan] gives the order that the bard should come to the palace and demonstrate his art. The servants of the sultan, however, come back with the notice that the bard is not interested in coming to the court. The sultan then looks for the advice of a dervish; the dervish agrees to help the sultan. At first, nothing happens. Whenever the sultan asks when the bard will appear, the dervish answers that the time has not yet come. Many months pass, during which the sultan again and again asks for the bard and gradually masters his impatience, and eventually the dervish declares that now the time has come.

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Cordoba, Spain (More)

‘”Bring him to my palace,” orders the sultan. But the dervish answers: “Sir, this is not the right approach. We have to meet him.” The sultan and the dervish set out, visit the bard in his house, and are very well accepted. The bard, however, even now is unwilling to give a demonstration of his art. The dervish suddenly begins to intone the famous song of the bard, it sounds very good in the ears of the sultan. The bard listens, his interest has been roused. As soon as the dervish has finished his song, the bard begins to sing incomparably. The sultan has never heard a more beautiful and perfect song.’

In the view of Hinterhuber, the lessons to be learned from this story are:

  1. effective leadership and engaged followership need patience and concentration upon a vision
  2. every entrepreneurial action needs the right timing
  3. leadership needs the right people, where “right” is very difficult to define with respect to entrepreneurial talent and personal performance.

“Leadership is a state of constant learning and of creating an atmosphere in which all followers can deploy their best energies for the implementation of the strategy they have contributed to formulate. Every leader is also a follower who has to report to key stakeholders. For effective leaders and engaged followers there is no time to be wasted making excuses for not performing, no time to lose covering up old tracks.”

THE MANAGEMENT OF AMBIGUITY: DECISION-MAKING AND CHOICE THEORY

One of the challenges of leadership and management is coping with ambiguity. One of the issues is what really happens when people have to make decisions. Two good metaphors for the modern world and the arena of decision-making are those of Ralph Siu and James March. Ralph Siu’s is Chinese baseball, James March’s is the sloping, multigoaled soccer field.

Ralph Siu and Scientific Management

Ralph Siu’s views are in a number of papers. One is “The Art of Chinese Baseball and Research Management”, Research Management, January 1975, p. 15-18.

Chinese Baseball is like ordinary baseball with pitcher, batter, fielders and bases, But while the ball is in the air anyone can move any of the bases anywhere.

Ralph Siu identifies three rules to be applied to any decision: does it add up?; (2) does it sound OK?; and (3) does it feel right? He observes that logic and arithmetic may suffice for the first question but are no help with the second and third. This leads Siu to propound a number of aphorisms which may guide decision making (see below).

He asks,

There are five management principles of Chinese Baseball.

  1. Act from an instantaneous apprehension of the totality: the key word is apprehending – reach into a mass of conflicting data and opinions and pull out what is right. A wholist [sic] strategy finds a tentative solution which is right but imprecise until the end point is reached.
  2. Subsume yourself and resonate – clearly define the operating concern and the context and resonating one against the other.
  3. Keep multiple tactical targets within reach until the moment of final commitment – total commitment to a single target locks one into a rigid course of advance; instead settle for several targets or a prime target with fallback substitutes.
  4. Be propitious – elegance and style in doing things – arrive at a decision when it is required, not as soon as possible, don’t allow wishful thinking to distort the estimates of the time a task will take.
  5. Orchestrate the virtual presences – something that is not real in the time-space dimension yet exerts practical effect as if it were. Myths which drive cultural progress and wars are examples as is the square root of -1.

Aphorisms:

Siu’s proverbs for planning include

Siu’s proverbs for operations include

James March and the reality of decision-making

James March, James G. March (Jack Steele Parker Professor of International Management (Emeritus), Professor of Political Science (Emeritus), Professor of Sociology (Emeritus) at Stanford University, California) is the author of A Behavioral Theory of the Firm (1963 and 1991) and co-author, with 1978 Nobel prizewinner (Economics) Herbert Simon, of the book Organizations (1958 and 1993).

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Krakow, Poland (More)

In an important article by March, entitled “Theories of Choice and Making Decisions”, in the journal Society for November-December 1982 (pp 29-39), March compares the arena of decision-making to a sloping multigoaled soccer field on to which (temporary) players may rush at any time to kick the ball in the direction of whatever goal seems to be right at the time.

March says, most people believe that choice involves:

  1. identifying the alternatives;
  2. identifying one’s preferences;
  3. estimating the consequences of each alternative and the likelihood of its occurrence; and then
  4. selecting that alternative which most closely matches one’s preferred consequence.

James March shows, however, that there are fallacies in this:

  1. we cannot know all the alternatives;
  2. our preferences may change with time – what we value now may not be valued later;
  3. conflict between objectives is assumed to be reducible by trade-offs; and
  4. in the real world precise choices are often not made, even when all the information is available.

Instead, when faced by a problem, people ask: What kind of a situation is this? What kind of a person am I? What would a person like me do in a situation like this? And one does it! Often when one has a problem one connects to it whatever solution appears to be around at the time.

Leadership is a state of constant learning and of creating an atmosphere in which all followers can deploy their best energies for the implementation of the strategy they have contributed to formulate. Every leader is also a follower who has to report to key stakeholders. For effective leaders and engaged followers there is no time to be wasted making excuses for not performing, no time to lose covering up old tracks.

Hans Hinterhuber
Act from an instantaneous apprehension of the totality: the key word is apprehending – reach into a mass of conflicting data and opinions and pull out what is right. A wholist [sic] strategy finds a tentative solution which is right but imprecise until the end point is reached.

Be propitious – elegance and style in doing things – arrive at a decision when it is required, not as soon as possible, don’t allow wishful thinking to distort the estimates of the time a task will take.

Ralph Siu
Power comes from a favorable position for trading favors. Thus it comes from the possession of resources and the idiosyncrasy of preferences, from valuing things that others do not and having things that others value. If you have valued resources, display them. If you don’t have them, get them – even if you don’t value them yourself. Grab a hostage. Power comes from a reputation for power. Thus it comes from appearing to get what you want, from the trappings of power, and from the interpretations people make of ambiguous historical events.

James March
There is no rule for combining individual preferences into a social choice that does not generate paradoxes. Suppose, for example, that a society wants to decide whether the proceeds of a national lottery should be spent on education, health, the arts, or sports. We are tempted to think that there must be some way of taking each citizen’s preferences about the outcome and combining them to produce the choice of society as a whole. Arrow’s theorem demonstrated that there is not.

Kenneth Arrow

Whilst choice theory assumes that the primary reason for decision making is to make choices, decision making is in fact a ritual activity. As March says,

“the rituals of choice infuse participants with an appreciation of the sensibility of life’s arrangements: they tie routine events to beliefs about the nature of things, they give meaning and meaning controls life..”

Studies of managerial time persistently indicate very little time spent in decision making. Rather, managers seem to spend time meeting people and executing managerial performances of one sort or another. Or as Tom Peters put it, “the manager, with endless interruptions, has limited options for direct action. The apparent disorder of most organisations in fact can provide the latitude and time required for the sorts of intervention by which the organization can be nudged in the desired direction and, to some extent, its course controlled.”

Action does not always stem from following rules. Instead, it comes from matching a changing set of contingent rules to a changing set of situations. March points out that formal organisations are systems of agents. “A political vision of them emphasises the problems of using self-interested individuals as agents for other self-interested individuals. If we assume that agents act in their own self-interest then we seem to require some idea of how to ensure that the self-interest of agents coincides with the self-interest of principals.

“Agents are often bribed or co-opted, trust and loyalty are hard to find, the temptations to revise contracts are frequently substantial, and promises of uncertain future support are easily made worthless in the absence of some network of favour giving…There is a tendency for the political aspects of decision making to be interminable. An organization is a political system of partly conflicting interests in which decisions are made through bargaining power and coalition formation.

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Waterfall, Grampians,
Victoria (More)

“Power comes from a favorable position for trading favors. Thus it comes from the possession of resources and the idiosyncrasy of preferences, from valuing things that others do not and having things that others value. If you have valued resources, display them. If you don’t have them, get them – even if you don’t value them yourself. Grab a hostage. Power comes from a reputation for power. Thus it comes from appearing to get what you want, from the trappings of power, and from the interpretations people make of ambiguous historical events.

“Power comes from being trustworthy. Politics is trading favors, and trading favors is a risky game. A first principle of politics is that if everyone is rational, no one can be trusted. A second principle is that someone who never trusts anyone will usually lose because although no rational person can be trusted, some people are innocent and can be trusted. Those who, by chance or insight, trust those who can be trusted will have an advantage over those who are unconditionally untrusting. A third principle is that all players will try to look trustworthy even though they are not, in order to be trusted by those people who might become winners (by virtue of being willing to trust some people). A fourth principle is that the only reliable way of appearing to be trustworthy is to be, in fact, trustworthy. Thus all rational actors will be trustworthy most of the time. And so on.

James March’s advice to the Headmistress of an Academy on tactics for successful influence is based on the observation that a decision-makers’ choices are orderly but seldom consequential. Therefore, he says,

“First, persist. .. there is no essential consistency between what happens at one time or place and what happens at another, or between policies and actions. Decisions happen but may be unmade or modified by subsequent episodes.

“Second, have a rich agenda. There are innumerable ways in which disorderly processes will confound the cleverest behaviour with respect to any one proposal, however they cannot frustrate large numbers of projects.

“Third, provide garbage can decision opportunities. ..in a disorderly process many issues become intertwined with each other simply by virtue of their simultaneity. ..provide attractive irrelevant choice opportunities for problems and issues.”

“The Way to Reason” by Amartya Sen

The following are extracts from the review by Alan Ryan (Warden of New College, Oxford) of this book in the New York Review of Books Volume 50, Number 19 (December 4, 2003)

“The twenty-two chapters [of the book] are on two themes central both to economics and to political theory and moral philosophy. The first is the nature of individual rationality. “Rationality,” says Sen, “is interpreted here, broadly, as the discipline of subjecting one’s choices – of actions as well as of objectives, values and priorities – to reasoned scrutiny.” This is fighting talk from an economist; economics has for many years adopted very narrow conceptions of rationality, concentrating either on the capacity to choose efficient means to what are presumed to be selfish ends, or even more minimally on consistency in choice. What ends we pursue and how we have come to adopt them are widely thought not to be any of the economist’s business.

“Sen insists “that it is important to reclaim for humanity the ground that has been taken from it by various arbitrarily narrow formulations of the demands of rationality.” This is not merely because, as we shall see, some transparently crazy behavior is rational by the standards of these narrow formulations; it is also because the prestige of economics among the other social sciences is such that sociologists, legal scholars, and political scientists have been applying its analytical methods to their own disciplines under the label of “rational choice theory.” The first, introductory, chapter of this book is the best discussion of what is wrong with narrow notions of rationality that a lay reader is ever likely to come across; it might with advantage be turned into a pamphlet and given to incoming graduate students in all the social sciences.

“The second theme with which Sen is concerned is the question of social choice: Is there a rationally defensible way of getting from the preferences of rational individuals taken one by one to what a whole society should choose? There are those who consider that there it is not even sensible to think of a society choosing at all: Robert Nozick’s Anarchy, State, and Utopia (1974) argued passionately that it did not, that there are only individuals and their choices; James Buchanan, the 1986 winner of the Nobel Prize in economics, has been a fierce critic of the idea of aggregating individual preferences into a “social choice.””In 1950, Kenneth Arrow (joint winner of the Nobel Prize in economics, 1972), a graduate student at the time, published his “impossibility theorem” – its formal title was the more optimistic-sounding “General Possibility Theorem” – which showed that (given a few apparently quite irresistible requirements) there is no rule for combining individual preferences into a social choice that does not generate paradoxes. Suppose, for example, that a society wants to decide whether the proceeds of a national lottery should be spent on education, health, the arts, or sports. We are tempted to think that there must be some way of taking each citizen’s preferences about the outcome and combining them to produce the choice of society as a whole. Arrow’s theorem demonstrated that there is not.

“One might think that this result should spell the end of social choice theory. In fact, of course, it did the opposite. It inspired so many economists, including Arrow himself, to look for ways around the impossibility, and to devise alternative ways of getting from individual choice to social decision, that as Amartya Sen observes in a footnote, major economics journals finally had to discourage submissions on the subject because they were swamped.

“Sen’s guiding principle is that we have to think about human beings in ways that do justice to the complexity of their values and beliefs… ”

Amongst the other books by Amartya Sen is Development as Freedom (New York: Anchor, 1999); a review of that book was published in the March 29 2001 edition of the New York Review of Books. That wonderful Australian Institution, the ABC still has Sen’s lecture “Global Doubts as Global Solutions” in the Alfred Deakin series given on May 15 2001 and broadcast on 16/05/01.