What is Bounded Rationality?
Bounded Rationality is a way of thinking about decisions made by individuals and institutions that incorporates constraints on time, information, and cognitive resources. In a comprehensive rationality model, decision makers' priorities do not change (they have stable preferences), and they seek out as much information as they need to make a decision that yields their most preferred feasible outcome (they “maximize” their utilities). The bounded rationality concept explains individual and organizational behavior consistent with empirical observations of human cognition. In contrast with comprehensive decision making, under bounded rationality, individuals “satisfice” (a coinage blending “satisfy” and “suffice” )— choosing “good enough” solutions that meet their goals ( Simon 1945 ). Bounded rationality describes and predicts behavior and outputs better than comprehensive rationality ( Conlisk 1996; Jones 2003 ).
Bounded Rationality Explained
Herbert A. Simon, an American political scientist, coined the bounded rationality theory. Rationality took the central place in this behavior theory and thus forms the main explaining element. According to Simon, a “decision” is the bridge that connects rationality and behavior, while a “choice” is selecting one from the practical behavioral alternatives. Every behavior involves a practical selection, whether it is conscious or not. The process of arriving at this selection is called a decision. Rationality is a factor in decisions assuming that the agents are inherently rational. It is, otherwise, the relationship of efficacy between predetermined goals and the means to achieve them.
Rationality involves :
- Listing all behavioral alternatives that are available and possible
- Determining the outcomes and consequences that will result from each of these alternatives that a person can adopt in the future. (either in a deterministic manner or in the form of probabilistic distributions)
- And comparing the alternatives with an evaluation done by the sets of consequences that will follow each of them. It should follow predetermined goals such as utility, profit, or any other specified pay-off function.