Bounded Rationality
Bounded rationality is a concept that suggests individuals' decision-making abilities are constrained by various factors, including limited information, time constraints, and cognitive limitations. This theory, primarily utilized in economics and social sciences, posits that instead of making optimal decisions that yield the best possible outcomes, people tend to make satisfactory decisions that are "good enough" given their circumstances. The term was coined by economist Herbert Simon, who argued that due to the complexities of real-world decisions, individuals often rely on past experiences and established habits to simplify their choices.
While bounded rationality implies limitations in human reasoning, it does not equate to irrationality; most individuals strive to make positive decisions despite potential imperfections in their outcomes. For instance, a person may choose a car brand based on a favorable past experience rather than exhaustively researching all possible options. This approach allows for efficient decision-making without becoming paralyzed by analysis. The implications of bounded rationality are significant, as they challenge traditional economic assumptions about human decision-making, emphasizing the need to understand the practical constraints people face in their choices.
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Bounded Rationality
Bounded rationality is the idea that an individual’s decision-making abilities are limited by factors beyond the person’s intelligence and control. Bounded rationality says that people are limited in their decision-making because they have incomplete information about outcomes and alternatives to decisions, a short span of time to make decisions, and imperfect cognitive abilities. The concept of bounded rationality is used primarily in economics and several related social sciences. The idea of bounded rationality is important because it implies that people tend to make satisfactory (adequate) decisions rather than optimal (best) decisions.
Overview
The idea of bounded rationality is especially important when complicated decisions are involved—these are decisions with many factors in play. Theorists say that it is mostly impossible for anyone to possess all the information about a complex decision or understand all the possible outcomes and ramifications of a tough choice. Economists find bounded rationality to be an important idea in their discipline because most economic decisions are complicated, and people often make poor choices.
People who make decisions want to produce the best possible result. A fully rational being—one who has every piece of information and knows the results of all related calculations—could make choices with optimal results. However, because of limited time, resources, and cognitive ability, people instead tend to make decisions that give them satisfactory rather than optimal results. Theorists say this type of decision-making is necessary because otherwise, individuals would spend all of their time suspended in analysis and never actually make any decisions, or they would spend too much time on decisions that should be of no moment.
People develop techniques for resolving important decisions. For example, they might rely on their personal habits and past experiences. This reliance can reduce the amount of information that must be gathered before every individual decision. They can cut down the time and energy needed to think about and analyze what they want to do. For example, a person walking along a hallway in their home does not generally make a conscious decision to take each step. They are in the habit of walking down the hallway; therefore, they do not need to make a choice every step of the way. This use of habit saves the individual time and thinking capacity. Likewise, a person who is buying an automobile might base their choice on her past experience with a particular manufacturer; they might decide that their good experience in the past will be repeated in the future.
Although bounded rationality shows a limit to human rationality, it is not the same as irrationality. People are not generally irrational, or lacking in the ability to reason or act logically. Most people attempt to make decisions with positive outcomes, which means they are sufficiently rational, even if their consequences are less than perfect.
Of course, at times, people do make irrational decisions because they allow their emotional state to override their knowledge or ability to reason. For example, a person who is involved in an abusive relationship most likely understands that the relationship is problematic and should be ended. However, the person’s emotions override this type of rational thinking, and the relationship continues.
Origins
Herbert Simon (1916-2001) was an economist who first developed the idea of bounded rationality. Simon was interested in rationality and decision-making, especially as related to economic choices. Through his studies of human behavior, Simon concluded that people do not make the best decisions because their cognitive functioning does not equip them to analyze every option. Also, they would not have time to analyze every individual option, and they would not have every piece of information that could help them make a choice. Simon used the term satisfice, which was a mixture of "satisfy" and "suffice," to explain his idea. He claimed that people made satisficing decisions rather than optimal ones.
Simon applied his theory in business, too. He believed that managers in industry made business decisions that were sufficient but not the best. Simon believed that, because business leaders made satisficing decisions, they could develop solutions that they could apply to multiple different situations.
In 1978, Simon won the Nobel Prize in economics for his work. His ideas about decision-making and bounded rationality were important because they challenged conventional notions about the way people go about making decisions. Before Simon's work, many economists assumed that people made economic choices from a completely rational point of view. Simon's ideas called that assumption into question.
Example
One example of bounded rationality is a conservation group that wants to make a positive impact on the environment. The group members want to make one change with the greatest possible impact. This is a complicated decision in part because humans affect the environment in countless ways. So much information about this topic exists that the group could conceivably research the topic for many years before drawing a conclusion. This lengthy time spent in research could delay the decision past a point where it would have any impact on the environment at all. Furthermore, the group’s final decision may have unintended consequences that its members could not foresee because they do not have the cognitive ability to guess every possible outcome.
For these reasons, a group or individual faced with this type of choice should choose the satisfactory solution after completing a reasonable amount of research. Even though the end result may not be optimal, the group can be sufficiently confident that it will be satisfactory and have some positive impact.
Bibliography
Bendor, Jonathan B. Bounded Rationality and Politics. University of California Press, 2010.
"Bounded Rationality." Cambridge Dictionary, dictionary.cambridge.org/us/dictionary/english/bounded-rationality. Accessed 12 Dec. 2024.
"Herbert Simon." The Economist, 20 Mar. 2009, www.economist.com/node/13350892. Accessed 12 Dec. 2024.
Webster, Thomas. “A Note on the Ultimatum Paradox, Bounded Rationality, and Uncertainty.” International Advances in Economic Research, vol. 19, no. 1, Feb. 2013, pp. 1–10. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=f6h&AN=85765216&site=ehost-live. Accessed 12 Dec. 2024.
Wheeler, Gregory. “Bounded Rationality.” Stanford Encyclopedia of Philosophy, 30 Nov. 2018, plato.stanford.edu/entries/bounded-rationality. Accessed 12 Dec. 2024.
“Who Was Herbert A. Simon? Bounded Rationality and AI Theorist.” Investopedia, 12 Aug. 2024, www.investopedia.com/terms/h/herbert-a-simon.asp. Accessed 12 Dec. 2024.