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Bounded Rationality

Status
Sprout
Contributors
@Ben Hohner

Description

The theory that most people are only partly rational, and are irrational in the remaining part of their actions.

Human rationality is limited when making decisions by the following factors:

  • Difficulty of the problem
  • Cognitive capability of the mind
  • Time available to make the decision

Bounded rationality was coined by Herbert A. Simon. In Models of Man, Simon argues that most people are only partly rational, and are irrational in the remaining part of their actions.

Satisficing

Satisficing is the decision-making strategy or cognitive heuristic (

) that is applied when making decisions because of bounded-rationality . It entails searching through the available alternatives until an acceptability threshold is met.

"Decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science" – Herbert Simon

Implications

Many people believe they’re fully rational and often don’t realize that

and
🗂️
Heuristics
 factor into their decision-making process. This lack of awareness is prominent in academia and business, where people tend to pride themselves on their rationalism at the cost of awareness of how their emotions unconsciously factor into their decision-making process. Being unaware of how all our internal states factor into a decision can be dangerous because:

  • Unconscious factors can be easier to manipulate
  • Personal belief systems can alter decision making in non-beneficial ways

Examples

Resources