Bounded Rationality: A Simple Summary

Bounded Rationality

The theory of bounded rationality says that due to inherent limitations, individuals will never be able to make fully rational decisions that result in them planning the best possible action or achieving the best possible outcomes.

Given that this is the framework that we operate within, decision makers inevitably satisfice their desired outcomes as opposed to maximizing them. This simply means that when making decisions we tend to end up doing things that are “good enough” rather than perfect.

The limitations that humans face which prevent fully rational decision making are: 1) information that is often incomplete, imperfect or unreliable, 2) a limited cognitive ability to retain and process relevant information, and 3) a limited amount of time in which to make any decision.

The theory of bounded rationality derives from behavioral economics and arose as a challenge to the historic economic assumption that people are perfectly rational utility maximizers. This historic concept of is captured in the phrase “homo-economicus” (economic man) which just means that people make perfect decisions and are always trying to get the best outcomes for themselves.

Making decisions is difficult in part because of the cognitive biases and dual approaches to thinking we all have. Decision making is a contributing factor to our personal effectiveness. You can learn more about personal effectiveness by listening to the below podcast:

Bounded rationality is a very practical concept that encourages focus on the real world as opposed to the perfect worlds that often exist in theory and academia. In essence it just say that you need to make the best decision that you can with the real constraints that your facing regarding to your information, cognitive ability and time. In other words, it’s not possible to make a perfect decision, so instead make one that is good enough.

Of course, in work it’s always possible to seek more information, throw more thinking ability at a problem or seek to extend deadlines. While all these options are often possible, we’re not convinced that they always lead to better decisions being made. In many instances though it’s better to make good decision quickly than it is to make a slightly better decision further in the future.

In words commonly attributed to Voltaire that we heartily agree with, ”perfect is the enemy of good”.

Not only is this true in work, but it’s also very true in many aspects of life. Satisficing is usually a dominant strategy because the marginal benefit of pursuing better decisions is diminishing and, perhaps more importantly, because the effort required in making decisions is draining (leading to ego depletion – which we have yet to write about).

Interestingly, some of the things we’ve been learning around recently point to some of the huge challenges that exist in trying to programme robots or artificial intelligences to be able to determine “relevance” of informaton. It seems to be a very hard thing to do. Perhaps humans are aided in decision making in these areas where we have bounded rationality by our emotions. 

This post is based on original work of Herbert Simon. You can read more in his 1982 book: “Models of bounded rationality”.

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