Decision Theory

What is Decision Theory of Management? Definition and Meaning

What is Decision Theory?

The decision theory of management holds the belief that a manager should make rational decisions. A manager involved in the decision-making process should make quality decisions that have a significant impact on managerial effectiveness, organizational efficiency, and productivity which are the basis of organizational success.

The decision theory of management was developed by Herbert Simon, in 1986, and was awarded Nobel Prize for this outstanding work. Other contributors to this theory include Luther Gulick and Lyndall Urwick.

According to this theory, managers‘ primary responsibility in organizations is making decisions. When deciding on the organizational structure, establishing goals, putting plans into effect, launching new products, choosing new hires, investing in fixed assets, and many other daily tasks, they ought to be involved in the decision-making process.

A rational decision-making method entails choosing the best option from a set of available alternatives. A manager needs to make logical decisions.

According to Simon, a manager should follow these steps to make rational decisions for organizational efficiency.

  • Define the problem clearly
  • Define decision premises
  • Identify relevant or potential alternatives
  • Evaluate alternatives
  • Select the best one
  • Implement
  • And, evaluate and review the results.

Managers require a variety of tools and approaches to help them make decisions. To make a sound decision, they can employ a variety of mathematical techniques, including probability, sampling, linear programming, game theory, etc.

Theoretically, a rational decision-making process that is tested to fulfill and constrained by bounded rationality is how ideal decisions are produced. This method of decision-making presupposes that managers may encounter situations involving uncertainty, ambiguity, and non-programmed decision-making.

Related: What is Planning?

Beliefs, attitudes, abilities, routines, resources, and credentials may constrain a choice. The decision-maker is satisfied with their choice up until that point, when they tend to look for the next option, according to this theory.

Contributions of Decision Theory:

  • This theory provides a rational decision-making process depending on the mathematical tools.
  • It is helpful to make effective decisions on the basis of proven theory.

Limitations of this theory:

  • This theory is limited to economic rationale.
  • The consideration of this theory is still very limited and narrow.
  • It only focuses on decision-making issues.

Read Next: 12 Theories of Management

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