Breaking the Limits of Bounded Rationality

California Mountains

Our minds may be boundless but our rationality has limitations. The ability to make accurate and beneficial decisions is one of those core abilities that separates the successful from the unsuccessful. Our rationality is bounded by constraints of ability, time and information which forces us to follow a proper decision-making process to improve outcomes. In organizations, constraints in decision-making ability impacts executive effectiveness as well as employee performance.

Bounded Rationality, developed by Nobel Prize winning economist Herbert Simon, states that human beings have limitations on their abilities to make decisions within given circumstances. We are limited by our cognitive abilities, the information they have and the amount of time we need to make a decision. When under pressure to act people inaccurately make decisions that lead to poor outcomes.

The study of bounded rationality is important for anyone who needs to make important decisions. Whether one is in the military or an executive, understanding the bounds of our rationality makes a big difference in determine our best course of action in difficult situations. As decision-making increases so does our ability to create optimal outcomes through better choices.

All decisions are goal-directed and seek to maximize opportunities while reducing risk. From an economic perspective, all actors make decisions that put themselves in the most advantageous position. Only when they don't have the right information, ability to understand, or time to make a decision does the less than optimal outcomes occur.  Knowing these constraints can also help people make sound decisions that lead to increasingly opportune results.

Information, Intelligence and Time

People are bound because they are not "all knowing" and live in an environment that doesn't provide them with all the answers they need at the time they need them. People are forced to make choices with imperfect information that leads to less than perfect outcomes. The data available to them can be subjective, partial, and in many cases inaccurate.

They are also limited in their knowledge and mental faculties. Intelligent people may be able to make better decisions but they are also limited by their ability to understand their environment and process information quickly. As people become more educated they often increasingly make optimal decisions but are still subject to the constraints of human capacity.

We can't spend our lives making a single decision. As new challenges present themselves we settle on a decision and move forward. Life is a series of decisions that we must meet, accept, decide, and implement on so that we can get onto the business of survival. It makes no difference if you are deciding over employment, relationships, coffee or tea, or life choices because the time mechanics work in much the same way.

Objective Rationality

Objective rationality occurs when people make decisions that others would understand while subjective rationality happens when you cannot be convinced you made a wrong decision. We can see objective perceptions when it is a reasonable conclusion under the circumstances while someone who is subjective believes they are right under nearly all circumstances.

To avoid subjective reality we must be willing to explore options and alternatives. According to Simon, “The task of decision involves three steps: (1) the listing of all the alternative strategies; (2) the determination of all the consequences that follow upon each of these strategies; (3) the comparative evaluation of these sets of consequences” (1997, p. 67)

People wittingly or unwittingly use decision processes that lead to outcomes. Their objective rationality in a situation is based on knowing 1.) alternative behaviors, 2.) consequences for maximization, and 3.) their values. Thus people will look at all of the potential behaviors, determine the potential consequences of each and make decisions based on their personal values.

Impact on Organizations

Organizations are collectives of people who make tens of thousands of small decisions that lead to organizational success. When information is limited employees may not have the data necessary to make appropriate decisions. It is also possible that lack of organizational identity and time constraints can make day-to-day employee decisions difficult.

It is important to ensure that employees are aware of their roles, have the information to do their jobs well, and are empowered to solve problems as they arise. Employees will be guided by their bounded understandings to decide important issues over the scope of their responsibilities.

Improving decisions requires looking at the flow of information within organizations, the skill development/selection of employees, and the overall incentives within the organization. When factors that lead to better decisions are created employees will be pushed to make better decisions that help optimize work outcomes.  They will foster group expectations that can reinforce positive decisions.

A Better Way of Making Decisions

 Before making a major decision we should consider the potential outcomes and this takes time. To do this well requires that we do some research and get as much information as possible. For example, if you are going to buy a car a person will research the different types of cars available, assess personal needs, and understand the financial options. Useful information from consumer reports and customer feedback may aid in the selection process.

The same can be said of executives who must explore multiple choices before finalizing a strategic path. The investment costs between two alternative strategies or product lines can be substantial. The quality and quantity of information will determine its usefulness in decision making. Researching each of the alternatives and then assessing the company's capabilities can lead to optimal outcomes.

 Old or Young Woman
Anonymous Illustrator 

What we don't want to is let our personal biases blind us to possibilities. What we see is often a reflection of our inner selves. To increase our accuracy means to review our own personal illusions by allowing for multiple perspectives before solving a problem. If we are not able to utilize evidence based decision making principles and understand how we construct meaning from the information (good or bad, right or wrong, future or now), then we are doomed to repeat mistakes again and again because we haven't stepped outside our bounded reality😉. 

When faced with a major decision consider the following process to improve decision making:

1. Recognize the problem.
2. Formalize an understanding of the problem.
3. Research the problem.
4.  Determine the root cause of the problem.
5. Explore alternate paths and outcomes that overcomes the problem.
6. Compare and contrast possible choices for optimization.
7. Chose the path that has the greatest flexibility and likelihood of success.
8.  Maintain the ability to step back or adjust course if unknown issues arise.
9. Reassess the strategy occasionally.

 Simon, H. A. (1997). Administrative behavior: A study of decision-making processes in administrative organization (4th ed.). New York, NY: Free Press. 

Report Shows Americans Need Help Avoiding Financial Ruin

Fancy cars and designer clothing make us look great but hide a deeper problem of little personal savings and poor fiscal management habits. We think everyone is doing better than us, but according to a Bankrate.com study, 63% percent of Americans haven't set aside even $1,000 to cover emergencies. To avoid future financial ruin and get on the right fiscal track you should consider a budget overhaul based on your needs.

We as Americans can be too focused on how we look today without balancing out the needs of tomorrow. A chart by the Organization for Economic Co-operation and Development shows that the average household savings rate is 4% which is lower than other many other countries.

Making changes can help you overcome problems and begin to save money while living a more genuine life.

Risks of Low Emergency Savings
If you are drowning in bills and debt, you might consider adjusting your habits to encourage higher levels of savings. You never know when an emergency occurs such as an unexpected hospital bill, car issues, accident or bill might show up. If you have less than a 1K in your bank account you could be setting yourself up for financial failure when all other avenues are exhausted.

Understand Your Spending
 Before you can really understand how to proceed in creating a savings plan, you should have a reasonable idea on what you are spending every month. Some of these expenses such as mortgage/rent are stationary while others are more flexible. If you are spending $6 on lattes each day, then this adds up to $180 a month that can go into your piggy bank.

Stop Comparing Yourself
A big part of our spending is associated with comparing ourselves to others. If they have a nice car, and we don't, we might feel as though we are not successful. The problem is you don't know if they are losing their house, have no savings, or are stressed out from their spending. Focus on yourself and forget what your friends and neighbors have.

Be Aware of Subconscious Motivation
You will also need to understand what motivates your spending. Purchases are not always based in what we need but in deeper subconscious emotions. This is one reason some people become addicted to spending and eventually find themselves deep in a financial hole. Ensure that what you are buying brings you long lasting satisfaction (i.e. gym) or something you need (i.e. food).

Make Conscious Choices Over Your Spending
Once you understand waste in your spending and what motivates your spending you can make long lasting changes. Cut out those items that are not essential or not worth their cost. This is an individual choice as life must still have flavor, but it is likely you are spending money on things you don't need or only bring short spurts of satisfaction.

Pay Down Costly Debt First
Focus on getting rid of debt that is eating up your current income like high credit card interest or bills that can be paid off quickly. Suffer paying these things off in the short run so you don't keep getting plagued by them in the long run. Move from the most costly debt to longer-term debt so that you are continually lowering your debt-income ratio.

Create Long-Term Savings
Start taking money that you have saved from implanted fiscal changes and put that into your long-term savings. Give yourself a solid 5k of short-term emergency money and then move to investing in long-term interest bearing accounts like CD, mutual funds, etc... The more money you put into these growth accounts, the more wealth you will create into the future.

Adjust Your Lifestyle
Finally, adjust your lifestyle to match your financial needs.  Reverting to previous habits won't do you much good in the long run. Solidify the changes by finding new ways to enjoy yourself instead of eating out a few times a week or buying items you don't need. Consider focusing ways to create greater freedom from financial worries and perhaps start a side business.

Can be reprinted with link and citation/attribution. 

 Abel, M. (January 23, 2015). Report Shows Americans Need Help Avoiding Financial Ruin. Academic-Capital. Retrieved http://www.academic-capital.net/2016/01/report-shows-americans-need-help-on.html

How Emotions Enhance Leadership Skill

All great achievements in society start with a conversation. As ideas spread they take on a life of their own. Leaders put themselves at the center of these conversations by influencing the direction of discussion. National, local, business, personal and just about every other type of leader share similar traits. Those who can define events and use emotion to encourage greater action carry the unique traits of great leaders.

Effective communication is intertwined with the ability to motivate people through the use of emotions. Positive and negative emotional communication styles influence how followers feel (Bono & Ilies, 2006). Leaders ability to influence the mood of a crowd can motivate them to act in ways that leads to successfully overcoming challenges.

The Leader can help followers understand and frame ideas in a way that can contribute to better future group performance. Events are socially constructed based on the explanations that are brought forward and don't easily change afterward (Cornelissen, Manere, & Vaara, 2014). Leaders are opinion makers who attract followers that are willing to act on their beliefs.

Emotions help us encode information in a way that helps us recall and remember it (Murray & Kensinger, 2014). Deep processing uses emotions to grease the brains wheels.  A leader that offers appropriate emotional components to their message helps others encode information in a way that creates greater relevance for followers.

The power to give meaning and have that meaning be recalled when people think about an event is an important part of defining our environment.

Leadership communication is about finding meaning for people and helping them generate solutions to problems. The bigger the problem, and the more widespread the effects, the bigger the potential influence of leadership communication that uses emotions to re-frame crisis into something meaningful. When people are seeking solutions leaders with communication skills can step in and make a lasting impact on people that can lead to meaningful understanding and change.

Bono, J. & Ilies, R. (2006). Charisma, positive emotions and mood contagion. The Leadership Quarterly, 17 (4).

Cornelissen, J., Mantere, S. & Vaara, E. (2014). The contraction meaning: the combined effect of communication, emotions and materiality on sensemaking in the Stockwell Shooting. Journal of Management Studies, 51 (5). 

Murray, B. & Kensinger, E. (2012). The effects of emotion and encoding strategy on associative memory. Memory & Cognition, 40 (7).

CEO Traits Influence Short and Long-Term Company Performance

Successful CEO's have some common traits that help them improve the organizations they lead. CEOs are subject to their stable personality traits influence how they see the world and overcome challenges. Strategic actions are based in CEO personality and impacts the financial performance of the firm. Knowing which traits to look for can have an impact on the long-term performance of the firm.

It wasn't long ago that gruff, emotionally unattached and perceptually powerful CEOs were desirable. They demanded short-term results which could be seen immediately in stock price their benchmarks which leads to increasing compensation. Lifespan at any particular organization was between two and four years leaving the long-term consequences for the next leader to handle.

Research supports the idea that the CEO's personality influences a firm's financial performance and its longevity. A study conducted at Stanford University discovered that CEO's personality impacted culture that in turn influenced performance (O'Reilly, et. al., 2014).  CEO focus and approach to the workplace created lasting contributions (or detractors) to the way in which other people think creating tangible outcomes.

The central personality of the CEO impacts how they see, interpret, and use information. Those who sense situations seek to analyze and defend positions while those who are more intuitive attempt to analyze and prospect new opportunities (Gallen, 2010). As an organizational leader, their decisions will weigh heavily on how they use their past knowledge to solve current problems.

CEO's leaning toward defend strategies will naturally seek to consolidate holdings and streamline operations toward market depth. They may invest heavily in existing marketing to increase cash flow and layoff employees to influence financial metrics that have an impact on short-term stock prices.

Entrepreneurial CEO's may use these defend strategies to get over an immediate crisis but ultimately seek to expand their holdings. This could mean developing new products, expanding services, retraining employees, and reinvestment that influences long-term income and stock performance. As long-term decisions are made to support business fundamentals the more capacity the business builds.

 Where one consolidates the other seeks to expand as a long term-strategy. Because personality has such a big influence on business outcomes it is beneficial to consider the following traits:

Short and Long-Term Planner: CEO's should be able to think short and long-term. They should be concerned about how today's decisions will impact the organization 5 or so years down the road. If they cannot create a logical chain on how immediate decisions create new opportunities for future decisions, then they should seek alternative solutions.

Empathetic Communicators: Before one can truly lead a company they should have people skills that include the ability to formulate strong communication patterns among employees. Their discussions should be inclusive and seek to inspire and support in a way that creates better performance outcomes. They should be able to use empathy so they can understand others and create win-win situations that enhance human capital.

Analytic Entrepreneurs:  CEO's should be willing to take calculated risks and should have intuitive prospecting mindset that consistently seeks out new opportunities. These opportunities might be new product lines or enhancing existing lines. Any reasonable opportunity should be investigated, analyzed and when beneficial, implemented. They should be "ideas" people that leave companies in a stronger position.

Motivated Builders: The deep internal need to build bigger things should be present. This drive is apparent in the way in which the person seeks out new challenges that test themselves to create something lasting. They should be driven to achieve and develop bigger and more powerful companies. Their goal should be to leave a legacy.

Creative Problem Solvers: Business is a sequence of problems that must continually be bested and overcome. As the company overcomes these problems they naturally will become stronger. Innovative companies that solve problems in creative ways make market breakthroughs that lead to competitive advantages. Ensuring that your CEO has the very same skills needed to bring the company to new heights is important.

Life-Long Learner: CEOs that seek to learn and develop their whole life are worth much more than those who are narrow-minded and fail to update their knowledge. The life-long learner is capable of weighing and balancing new information to keep their practices relevant and make sound decisions as situations emerge. They are at their best so they can run the organization at its best.

Gallen, T. (2010). Personality and Strategy. Acta Wasaensia No. 221. University Wasaensis.

O' Reilly, C. et. al. (2014). The Promise and Problems of Organizational Culture CEO Personality, Culture, and Firm Performance. Group Organization Management, 39 (6). 595-625. Retrieved http://gom.sagepub.com/content/39/6/595.abstract

How Going Zen Increases Your Workplace Communication Skills

Communication is as much about how we feel as it is about how we think. Thinking and feeling are connected in a way where one impacts the other. If you having a tough day and someone comes to you with a problem then you are likely to make a snappy response. This reflects on you within the workplace and can impact your perception.

Taking a few minutes to get perspective and relax can help you get the emotional balance you need to achieve your goals. When someone comes with a problem take a moment and relax before acting. This will help to ensure that your responses are well thought out and appropriate.

This means getting a little zen in your life. Take time to relax, think about what is important to you and learn to respond to problems appropriately. This requires the ability to not let stress cause an overreaction or an inappropriate response. Get grounded so you are working from a place of "you".

You may need to make some changes so that you feel that you are fulfilled as a person. It could mean lifestyle changes in terms of eating, exercise, hobbies, spending habits, and even the way you look at the world. Find what those stresses are and either reduce, change or remove them.

A quick tip is to take a moment to breathe, slow down and think. Get into the moment and reflect before you respond. The more you are able to have emotional control the better off you will be in your daily responses and work effectiveness. Success is the process of gaining knowledgeable of your feelings and giving them appropriate outlet to achieve your goals.

Intuition and Math as Methods of Picking Stocks

If people acted rationally the stock market would be one of the easiest places to make money. Simple mathematical formulas could tell us just about everything we need to know. Fortunately, people do not always act rationally and the mystery of the stock market is alive. The use of intuition and mathematics may just balance out our selection needs for better outcomes. 

No one has a golden formula that predicts outcomes. Some of the best investment firms use complex software, tools, and formulas and at times still get it wrong. They hedge their offerings in a way that helps ensure risk is minimized. 

Most of us do not have the ability to use these systems for our personal uses. They are expensive and complex. However, most people can use their intuition and follow up with a more concrete analysis to help determine when to buy and sell stocks. 

Intuition isn't about blindly picking any stock you want without consideration to market principles. It is about studying different stocks, reading the news, talking to people, and finding out what industries you like. 

The more you learn the more likely your intuition will dig deep into your unconscious and pick stocks that have the most market appeal to you. The stocks will "feel right" and draw your interest because you may find some unique value in them even though you are not consciously aware of why. 

Instead of fighting...just go with it! Explore your interest. 

You don't want to leave everything to intuition. It only helps you explore areas of interest and potential investment options. Exploring ideas without restriction is one method but it should be followed up with more scientifically oriented analysis.

Some methods you can use to conduct an analysis can be found HERE. These are simple formulas that will help you use a method beyond intuition to make sound judgments. 

Knowing what you want to do and understanding the market is the first step in investing. After that you will want to learn some basic math and make calculations that are beneficial in your decision making process. Remember that most information you need is public. With time, patience and practice you can learn to slowly beat the market. 

Ethics and the "Power of Being"

Ethics is a stand for the power of being. It is not for the weak, feeble minded, or the faint of heart. It requires a belief and strength few can muster from deep within to make a stand for something greater then themselves. When entire social and business networks have bought into lower values and the need for self-gratification it can be difficult to make a stand for something more important.

The problem has been realized over and over in almost every great ethics case. People are subject to their social networks and must follow the rules set forth by society. There are higher order values that represent ideals in society and there are lower order expectations that create day-by-day rules of social engagement.

Look back at ethics cases where major foul play occurred and you will find a network of people who found it was easier to keep their mouth shut, play by the rules, and live by the expectations. They have almost no incentive to stand up for anything beyond what was offered for them today.

It always takes someone who is willing to take risks to expose the wrong doings of others. They must be connected to their social networks to understand what is going on but also disconnected enough to make a stand against behavior that impacts both themselves and society.

People do not stand up unless they believe in something greater then themselves. They may run into a web of legal buffoonery where justice is more akin to the price paid for an expensive Rolex then it is for any sense of higher purpose to society. Often....those with the deepest pockets spin the truth any way they want!

Standing up for ethics is the power of being. It is a power that says, "I stand for something better!" It is the whistle blower who wins in the long run-they own themselves. While others suck the life out of our American principles it is those who take a stand that have an internal compass that sets standards that others for others. Few things are accomplished by taking the road most often traveled.