Important theories of decision making

There are many theories designed to show how decisions are, or should be made in the business world. Ernest Dale explains the following theories of Decision Making.

Marginal Theories:

From economics, come the marginal theories, which explain the way in which profits may be maximized. They are based on the law of diminishing returns, which states that as extra input of one type added to a business, output increases, but each new increment of input adds a smaller increment of output.


Mathematical Decision-making:

Mathematical techniques, supplemented by the use of computers, have provided considerable aid in decision – making. In some cases, they have done away almost entirely with the need for it.

Some of the uses of operations research can practically eliminate the need for judgment in deciding specific questions that formerly required management know-how.

Also the construction of mathematical models while it may not remove the need for judgment can make it very much easier to grasp the essential factors in a situation.


Psychological Theories:

Theories of decision-making based on managerial economics or mathematics all presuppose that the manager is, at least as far as his business decisions are concerned, an ‘economic man’ – that is, he maximizes company profits as far as his ability, the law, and his ethical standards permit.

But some observers do not find this to be the case. Herbert A. Simon, for example, holds that companies do not largely seek the highest profit possible. Instead, he believes they attempt to satisfy. How satisfaction differs from profit maximizing is explained in this way:

While economics man maximizes-selects the best alternative from among all those available to him, his cousin, whom we shall call administrative man, satisfies-for a course of action that is satisfactory or ‘good enough’, examples of satisfying criteria that are familiar enough to businessmen if unfamiliar to most economists are ‘share of the market’ adequate profit, ‘fair price’.


According to this theory, only when the level of attainment falls short of what the manager considers a satisfying or adequate level, does the real search for more profitable courses of action begin? At die same time, the level considered satisfactory begins to drop.