Ecological Rationality: Fast-and-Frugal Heuristics for Managerial Decision Making under Uncertainty

Abstract

Heuristics are often viewed as inferior to "rational" strategies that exhaustively search and process information. Introducing the theoretical perspective of ecological rationality, we challenge this view and argue that, under conditions of uncertainty common to managerial decision making, managers can actually make better decisions using fast-and-frugal heuristics. Within the context of personnel selection, we show that a heuristic called D-inference can more accurately predict which of two job applicants would perform better in the future than can logistic regression, a prototypical rational strategy. Using data from 236 applicants at an airline company, we demonstrate, in Study 1, that, despite searching less than half of the cues, D-inference leads to more accurate selection decisions than logistic regression. After this existence proof, we examine, in Study 2, the ecological conditions under which the heuristic predicts more accurately than logistic regression using 1,728 simulated task environments. Finally, in Study 3, we show in an experiment that participants adapted their strategies to the characteristics of a task-and increasingly so the greater their previous experience in selection decisions. The aim of this article is to propose ecological rationality as an alternative to current views about the nature of heuristics in managerial decisions.

Rational Heuristics? Expectations and Behaviors in Evolving Economies With Heterogeneous Interacting Agents

“…Our results support the ecological rationality of heuristics: in complex, evolving economies characterized by pervasive uncertainty and perpetual structural change, heuristics may provide a more accurate and robust tool for inference and action than more sophisticated forecasting techniques; changing expectation formation processes changes the system dynamics; more sophisticated heuristics may result in systemically less accurate forecasts (Luan, Reb, and Gigerenzer ; Todd and Gigerenzer ). Of course the agents with an infinite amount of data and highly sophisticated learning techniques might possibly do better.…”

“…The use of heuristics in decision‐making under uncertainty is largely documented in the psychology literature, see in particular applications to exchange rate forecasts by banks using an adaptive heuristic in Gigerenzer () and other management and economic decisions in Luan, Reb, and Gigerenzer () and Boneva et al (). See also Dosi, Faillo, and Marengo () for a more general review on bounded rationality.…”

Pandemic Response as Border Politics

“…36. This phrase comes from management decision making under uncertainty by pairwise comparison(Luan, Reb, and Gigerenzer 2019), but seems an appropriate description in this context as well.37. For a discussion relating to migration, seeAlmond 2016.…”

Effectiveness of Leadership Decision-Making in Complex Systems

“…Some writers, for example Eisenhardt [69] and Bartkus, et al [70], have argued that, in order to make quick decisions, one needs to use fewer sources of information. Luan, et al [71] reprised the well-recognized concept of fast-and-frugal heuristics, first popularized by Gigerenzer, for example [40,72], which indicate that, contrary to what might be expected, using less information can actually result in a better outcome. Having power centralized in one person could also enable more rapid decision-making [73].…”