Bounded Rationality in Multinational Firms Neo classical economics says consumers have perfect information and they make the most optimal and rational decisions at all times. This is not really true. Ex: You are at a grocery store and you see a bunch of peanut butter, do you look at the nutritional facts and look at prices to compare them. No, no one really does that. What you really do in a rush you get anything. Bounded rationality: The idea is that we don’t necessarily have the cognitive ability or the time to always make the best possible decision. We typically make the decision that is the easiest or most convenient for us at a given time. 2 ways of looking at bounded rationality: cognitive opportunity cost & limited cognition. 1. Cognitive Opportunity Cost: “I just don’t have time to think about what to get (peanut butter example) and make the best possible decision. 2. Limited Cognition: Professors example “I teach management, I know a little about management but there are certain things I will never be able to do.” For example, “I will never be a thesists, I don’t know anything about physics. If a physics professor told me all these great things about physics I would believe him, cause I have no capability to tell if they are right or wrong.” Cognitive opportunity cost in a managerial perspective/firm. If you are a manager and you worked your way from the bottom of the firm chances are that you know how to do all the tasks your subordinate are doing and in fact you can do it better than them. But you don’t de those tasks for them because now you are a manager and so you delegate to those subordinates. You can assume you have 10-12 people working for you and you can train them, give them the tasks and let them do it. Managers have other things to worry about and other people to manage. When you have delegated that degree of authority to your subordinates you don’t necessarily check upon them. You don’t know what they are doing, you hope they match your intent. You rather be talking about strategies to your boss and CEO as supposed to be worrying about the smaller level tactical tasks that your subordinates are doing. Limited cognition, let say you’re a manager of a large retail store and you have an accountant working for you. If you the accountant tells you, the number are wrong, you will probably trust the accountant you may not know much about it so you will take their word for it. That is another issue with management because that accountant may not know what they are doing or they may be wrong but you don’t necessarily have the capability to access that. How does this apply to multinationals? Ex: McDonalds When McDonalds goes oversees to somewhere like France, they assume that the French managers of McDonalds will recreate a McDonalds experience for them. Cognitive opportunity cost, The auditors and the inspectors from McDonalds don’t have time to go from Chicago all the way to France to inspect every single McDonalds in France to make sure it matches McDonalds rugreacy U.S standards. They have to assume they are doing the right thing, the French auditors. Trust they are doing the right thing. Normally everything will go okay, but sometimes when you use contractors or outside groups, they may engage in unethical practices, human rights abuse, etc. Example: Nike delegated some production of soccer balls to a contract in a foreign country and they were using child labor. Nike didn’t have time to check up if everything was going right. As a multinational you have to make sure you train your international partners to the standards that you want but you also have to be aware of the fact that when you delegate that task and when you give them that leeway to execute they may not necessarily do things your standards. Limited Cognition, When McDonalds expands into France, the French manager can say, “You know what would work really well here in McDonalds in Europe and the CEO says no I don’t know.” The CEO of McDonalds at France can say, “We should have better coffee, serve better beer, and have different menu items because this will work better in the French market.” The CEO of McDonalds can say well your French, you probably will know what works for the French Market and they can have a degree of freedom to implement that. Multinationals Cognitive opportunity cost, seen as a degree of abuse because the head quarters of the company cannot necessarily check up on every single international partner. Limited cognition, seen as positive creativity understanding that there are great contributions that can be made from foreign partners.