Bounded Rationality

December 1, 2018

“Behavior is purposive in so far as it is guided by general goals or objectives; it is rational in so far as it selects alternatives which are conducive to the achievement of previously selected goals.”

Herbert Simon, Administrative Behavior (1947)

 

 

Human cognition is a resource. It is a scarce resource with many competing demands made upon it. Decision makers, therefore, tend to avoid an exhaustive search for alternative courses of action when a limited search will do. When coordinating our behavior, we form rule-bound organizations which not only create divisions of labor and clear lines of authority but establish standard operating procedures which reduce the need to engage in novel deliberation (and negotiation) in circumstances where a simple rule of thumb will perform reasonably well.

 

In other words, humans exhibit bounded rationality. Think of it as rationality with a budget constraint. Because deliberation taxes our mental energy and time, we rely on mental and operational shortcuts--or heuristics. When seeking a solution to a problem, we tend not to conduct an exhaustive search for an optimal or best solution; rather, we routinely content ourselves with a “good enough” solution and move on to the next problem. Simon refers to this phenomenon as satisficing—a portmanteau combining satisfy and suffice.

 

This has consequences for how we study human decision making and the role of institutions in channeling behavior. As Simon himself put it:

 

"You cannot predict human behavior by setting up an abstract model... and inferring behavior from that. You have to know a tremendous amount about what is inside that person's head... Those are empirical questions."

 

 

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