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General Equilibrium Theory and Bounded Rationality Report


Abstract

Modern organisations have to operate in the VUCA environment, which brings to the fore the choice of the most efficient paradigm. Organisations need to choose an effective framework for making decisions. This report includes a brief evaluation of the general equilibrium and bounded rationality paradigms. It is concluded that the latter is more efficient in the contemporary business world especially when it comes to such sphere as IT or services. The leadership is of paramount importance in the process of change implementation as he/she empowers and inspires employees who accept the new culture based on the principles of the bounded rationality approach.

Introduction

The modern business world is characterised by a VUCA environment, and organisations able to adjust to this environment are the most competitive. The VUCA environment involves such features as Volatility, Uncertainty, Complexity and Ambiguity, but the majority of organisations are unprepared to respond to the new challenges (Mack & Khare 2015). It has been acknowledged that efficient leadership is one of the central premises for the company’s success.

This report includes a brief evaluation of the use of two theoretical frameworks concerning leadership and change. The general equilibrium theory and unbounded rationality framework will be employed. The report will also include a brief description of a particular strategy based on one of these frameworks.

General Equilibrium Theory and Its Implications

The general equilibrium theory had been the major paradigm up to the 1970s. This framework involves making decisions based on thorough analysis and the focus on particular benefits for the company (Rosanas 2011). The major advantage of the decision is its being evidence-based. The manager can make sure that the right decision is made many facts are taken into account. At the same time, the primary shortcoming of this method is its thoroughness. It requires significant time and effort. It also requires an efficient system where employees share knowledge (data) and collaborate effectively (Eppler & Kernbach 2016).

Still, many companies resort to this framework. An example is British Petroleum as the organisation has various standards and rules related to the process of decision making (Our strategy 2016). All operations, especially those concerned with new sites exploration, involve a thorough analysis of various factors. This strategy requires significant resources that are available in the case of BP. The leader plays the central role in the process of the decision making, and the hierarchy is quite significant.

This framework is quite effective for such large companies operating in the industrial or technology segments. These spheres are highly competitive, but the decisions often imply multimillion funds allocation. Thus, the leading companies try to remain on the safe side and implement thorough research prior to making decisions. However, it seems inappropriate for other organisations especially those operating in the sphere of IT, services and so on.

Bounded Rationality Paradigm

The general equilibrium framework was highly criticised in the 1970s, and a new approach came into existence. The bounded rationality theory is based on the assumption that the factors to be taken into account are non-finite in nature, and it is simply impossible to take into account all of them due to the scarcity of data or time (Stringham 2012). Therefore, the leader should make a decision based on the first alternative satisfying the major requirements. Such companies as Google are leaders in the sphere of IT. These organisations utilise the bounded rationality framework.

The industry of IT is very competitive. The new entry is quite easy as very moderate funds are necessary to start a new business. Therefore, companies do not have much time to collect and analyse all the necessary data to make decisions. Decisions are often made quickly, which is a competitive advantage of such companies. Google, for instance, encourages launching various startups and funds numerous projects (Our culture 2016). The role of the leader in such companies is to empower rather than supervise while the hierarchy is not rigid (Mack & Jungen 2015).

One of the major challenges associated with the use of bounded rationality theory is that a company can lose funds or choose the wrong strategic goals. However, Google shows that these challenges can be met as the company funds many projects and does not focus on one program or goal. At that, the advantage of the use pf the paradigm is that the company can be competitive and innovate as well as lead in the VUCA environment.

Conclusion

In conclusion, it is possible to note that the organisation operating in such spheres as IT, services, consumer goods production and sales and so on will benefit from the use of the bounded rationality approach. The organisations; hierarchy should not be rigid, and the leader should empower people and be their mentor. It is the leader’s responsibility to implement the change and adjust the company’s culture and strategy to the challenges associated with the VUCA environment (Rowland 2016).

The action plan for the organisation will include the following steps. The development of a network where all the employees are linked (Mack & Jungen 2015). This will ensure the efficient exchange of knowledge and ideas. Employees should be encouraged to share ideas. The next step is the provision training that will help the employees to understand the nature of the new approach and its benefits. Employees should be able to choose the best alternatives within a shorter period of time.

Finally, the bounded rationality framework should become an integral part of the organisational culture. It is important to note that the leader is the change agent who will inspire employees to implement the change. These steps will make the organisation more competitive.

Reflective Essay

I have always related myself to the type of people relying on the general equilibrium approach. I tried to collect as many details as possible to be able to make a decision. I understood that it took too much time especially with major decisions, which could be very frustrating. Nonetheless, I was ready to invest more time to make sure my decisions were right.

At present, I tend to believe that the bounded rationality paradigm is more efficient in the current VUCA environment. Various factors having an impact on the situation exist and it is impossible to take into account all of them (Stringham 2012). I also understand I will have to be the master contributor and agile high performer to be an efficient leader (Rowland 2016). This involves being knowledgeable, able to adapt and inspire others to change. I will also have to make sure that I do not simply supervise employees but empower them. The development of effective networks will also be one of my primary goals.

The action plan for my development will involve the following steps. The implementation of the research on bounded rationality paradigm and effective leadership as well as organisational change. I will be able to utilise this knowledge when working. I will also try to develop a collaborative environment with minimal hierarchy.

Reference List

Eppler, MJ & Kernbach, S 2016, ‘Dynagrams: Enhancing design thinking through dynamic diagrams’, in W Brenner & Uebernickel (eds), Design thinking for innovation: research and practice, Springer, New York, NY, pp. 85-103.

Mack, O & Jungen, M 2015, ‘Program management in VUCA environments: theoretical and pragmatical thoughts on a systemic management of projects and programs’, in O Mack, A Khare, A Kramer & T Burgartz (eds), Managing in a VUCA world, Springer, New York, NY, pp. 41-59.

Mack, O & Khare, A 2015, ‘Perspectives on a VUCA world’, in O Mack, A Khare, A Kramer & T Burgartz (eds), Managing in a VUCA world, Springer, New York, NY, pp. 3-21.

Our culture. 2016. Web.

Our strategy. 2016. Web.

Rowland, C 2016, ‘Leadership and management: the challenge of performance’, in P Stokes, N Moore, SM Smith, C Rowland & P Scott (eds), Organisational management: approaches and solutions, Kogan Page Publishers, Philadelphia, PA, pp. 71-95.

Rosanas, JM 2011, ‘A humanistic approach to organisations and organisational decision-making’, in J Canals (ed), The future of leadership development: corporate needs and the role of business schools, Palgrave Macmillan, New York, NY, pp. 143-177.

Stringham, S 2012, Strategic leadership and strategic management: Leading and managing change on the edge of chaos, iUniverse, Bloomington, IN.

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IvyPanda. (2020, September 11). General Equilibrium Theory and Bounded Rationality. Retrieved from https://ivypanda.com/essays/general-equilibrium-theory-and-bounded-rationality/

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"General Equilibrium Theory and Bounded Rationality." IvyPanda, 11 Sept. 2020, ivypanda.com/essays/general-equilibrium-theory-and-bounded-rationality/.

1. IvyPanda. "General Equilibrium Theory and Bounded Rationality." September 11, 2020. https://ivypanda.com/essays/general-equilibrium-theory-and-bounded-rationality/.


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IvyPanda. "General Equilibrium Theory and Bounded Rationality." September 11, 2020. https://ivypanda.com/essays/general-equilibrium-theory-and-bounded-rationality/.

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IvyPanda. 2020. "General Equilibrium Theory and Bounded Rationality." September 11, 2020. https://ivypanda.com/essays/general-equilibrium-theory-and-bounded-rationality/.

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IvyPanda. (2020) 'General Equilibrium Theory and Bounded Rationality'. 11 September.

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