Bounded Rationality

What is Bounded Rationality?

Bounded rationality is a concept that suggests that while people aim to make rational decisions, their cognitive limitations, time constraints, and available information prevent them from doing so. Instead of being perfectly rational, people often use shortcuts or heuristics to make decisions that are “good enough” rather than optimal. This theory, developed by Herbert Simon, challenges the idea of complete rationality in decision-making.

Key Concepts of Bounded Rationality

Cognitive Limitations
- 🧠 People cannot process all available information perfectly due to mental limitations, leading them to make simplified decisions.
- Example: When comparing different phone plans, you may only focus on a few key features rather than fully analyzing all the options.

Time Constraints
- ⏳ Time pressure forces individuals to make decisions more quickly, often leading to less-than-optimal choices.
- Example: Choosing a restaurant at the last minute by picking the first option that seems acceptable rather than the best one.

Satisficing
- ✅ Instead of seeking the best possible outcome, people settle for a decision that is “good enough.”
- Example: You might buy the first coat that fits reasonably well and is within budget, even though there could be better options available.

How Does Bounded Rationality Influence Decisions?

Step 1: Encounter a decision-making situation with cognitive limitations.
- 🧠 You cannot analyze all the options perfectly, so you focus on the most salient information.

Step 2: Time constraints limit how much time you can dedicate to the decision.
- ⏳ Time pressure pushes you to settle for a decision more quickly.

Step 3: You engage in satisficing, choosing an option that’s “good enough.”
- ✅ Rather than the best option, you pick the one that meets basic criteria.

Cognitive Limitations
- 🧠 People simplify decisions due to mental constraints.

Time Constraints
- ⏳ People make quicker decisions when under time pressure.

Satisficing
- ✅ Settling for “good enough” instead of the optimal choice.