- Key People:
- Richard Thaler
- Related Topics:
- Rationality
- Reason
bounded rationality
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What is bounded rationality?
Bounded rationality is the idea that behavior can go against a rational principle or not meet a standard of ideal rationality, but still align with pursuing a suitable set of goals. American social scientist Herbert A. Simon, who coined the term satisficing to describe finding the first satisfactory solution rather than a fully optimized one, characterized the limited reasoning capacities of the human mind as "bounded rationality".
Humans sometimes make irrational decisions because rationality is limited by time, data, and computational power. Instead, people often rely on rules of thumb.
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How does bounded rationality differ from perfect rationality?
Bounded rationality and perfect rationality are two concepts describing decision-making, but they differ in their assumptions about the decision-maker's capabilities.
Perfect Rationality: Assumes decision-makers have complete information, unlimited cognitive resources, and can perfectly optimize to make the best choice.
Bounded Rationality: Acknowledges that decision-makers have limited information, cognitive constraints, and time. They "satisfice" by making a "good enough" decision rather than striving for the absolute best. It recognizes that real-world decisions are often made under constraints, leading to choices that may not be optimal but are still rational given the circumstances.
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Why do people have limits on their decision-making abilities?
People have limits on their decision-making abilities because of bounded rationality, a concept where behavior deviates from ideal rationality but aligns with goals. This happens because individuals make decisions with imperfect information and don't assess all options due to the high costs of gathering information.
Instead, people choose the first satisfactory alternative, a process called "satisficing". Human decision-making is boundedly rational, influenced by available information and the decision-maker's perspective. Organizations can also influence decisions by shaping the premises on which they are made, filtering information, and emphasizing specific facts.
Another reason is cognitive bias, which are systematic errors in reasoning caused by subjective views of reality. These biases stem from mental shortcuts or heuristics that help the brain process information quickly.
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What are some examples of bounded rationality in everyday life?
Bounded rationality recognizes that decisions might not always follow ideal rationality due to various constraints, yet remain consistent with specific goals.
Examples of bounded rationality in daily life:
* When buying shoes needed for an event today, purchasing a slightly larger size instead of visiting multiple stores for a perfect fit is boundedly rational, given the time constraint and limited knowledge.
* In school voucher programs, parents may choose schools based on friends' opinions (logic of appropriateness) rather than expert evaluations, or they may not act at all if routines are uninterrupted.
* In another instance, people judge the frequency of events based on how easily they recall them (availability heuristic). For example, someone may think that words starting with the letter "r" are more common than words with "r" as the third letter, because it's easier to recall words by their first letter.3 Britannica SourcesCreated from Britannica articles using AI. AI can make mistakes, so verify using Britannica articles. -
How do people make choices when they can't examine every option?
When individuals can't explore every option, they often use heuristics, which are mental shortcuts that allow for quick, satisfactory decisions without needing to consider all available information. This approach acknowledges the concept of bounded rationality, where decisions are made in line with goals but may not always follow ideal rationality due to limitations. People make thousands of choices daily, mostly unconsciously using these heuristics. System 1 relies on observations and unconscious processing for effortless conclusions, while System 2 involves slow, conscious evaluation.
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How has the idea of bounded rationality influenced the study of economics and psychology?
The idea of bounded rationality has significantly shaped both economics and psychology. Economist Herbert A. Simon, who coined the term, argued that decision-makers often satisfice, seeking satisfactory rather than optimal solutions due to limited reasoning capacities. This concept challenges the classical economic theory that assumes humans are fully rational actors making decisions based on complete information.
Richard Thaler, who won the Nobel Prize in Economics in 2017, explored how cognitive limitations and biases influence economic behavior, demonstrating that people don't always act rationally. Daniel Kahneman and Amos Tversky's work on heuristics further supported this, impacting economics, law, and political science by outlining mental shortcuts in decision-making.
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bounded rationality, the notion that a behaviour can violate a rational precept or fail to conform to a norm of ideal rationality but nevertheless be consistent with the pursuit of an appropriate set of goals or objectives. This definition is, of course, not entirely satisfactory, in that it specifies neither the precept being violated nor conditions under which a set of goals may be considered appropriate. But the concept of bounded rationality has always been somewhat ill-defined in just these respects.
Some examples may help clarify these ideas. When the precept being violated is to “buy footwear that fits one’s feet” (an admonition that will no doubt find wide acceptance), the consumer’s action might be to purchase a pair of shoes that is instead one-half size too large. This behaviour would be considered boundedly rational if the shoes being purchased were needed for a wedding this afternoon and if a perfectly fitting pair could be obtained for certain only by visiting each of 10 geographically dispersed shoe shops. In this instance, thinking of the decision maker simply as an optimizer of comfort would lead to puzzlement at his selection, but the purchase of poorly fitting shoes looks reasonable enough when the consumer’s limited knowledge of the retail environment is considered.
Alternatively, when the precept being violated is to “draw electoral boundaries in such a way as to equalize the populations within the voting districts created,” the planner’s action might be to try to ensure merely that no two populations differ by more than 1 percent. This behaviour would be considered boundedly rational if the costs of computing an acceptable boundary configuration were to increase with the level of accuracy required, because it would then be appropriate to tolerate small inequalities in district populations to save significant computational costs.
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In each of the two previous examples, an action that is undoubtedly suboptimal in a certain narrowly defined choice problem (among pairs of shoes or electoral partitions) can be “rationalized” by considering the totality of the decision-making environment. In the first case, purchasing a pair of shoes that is one-half size too large does not appear inappropriate given the consumer’s time constraint and ignorance of exactly where a better-fitting pair can be found. Similarly, creating voting districts with populations that are approximately but not exactly equal seems sensible given that improving the partitioning could be computationally expensive. This general phenomenon—that boundedly rational behaviour can be made to look fully rational by broadening the scope of the choice problem to which it is seen as a response—has led some commentators to suggest that models of optimal decision making are adequate for social scientific purposes as long as the environment in which an agent chooses is always described “comprehensively.” But even if this is true in principle (which is by no means obvious), for the claim to have any practical significance, one must be willing both to declare a particular description of the agent’s environment to be comprehensive and to commit to a new, more general rationality precept such as, in the electoral partition example, to “minimize 1,000 times the maximum absolute difference between district populations in percentage terms minus the cost of computation in dollars.” If the planner fails to consistently obey any rule of this sort or if repeated broadenings of scope are needed to preserve the appearance of optimal decision making, a good case can be made for restricting attention to the simple problem of creating voting districts (without reference to computational costs) and for imagining the planner to be boundedly rational.
The American social scientist Herbert A. Simon, an influential proponent of the concept of bounded rationality, used the terms “substantive” and “procedural” to distinguish between the notions of rational behaviour commonly adopted in, respectively, economics and psychology. According to this usage, an agent is substantively rational if he has a clear criterion for success and is never satisfied with anything less than the best achievable outcome with respect to this criterion. For an agent to be procedurally rational, on the other hand, it is necessary only that his decisions result from an appropriate process of deliberation, the duration and intensity of which are free to vary according to the perceived importance of the choice problem that presents itself. The concepts of “procedural” and “bounded” rationality are thus roughly the same, and both are closely related to the idea of “satisficing,” also promoted by Simon.
Of the numerous attempts to introduce boundedly rational decision making into the social sciences, most fall into one of two categories. The first of these encompasses the work of economic theorists and others who begin with models of optimal behaviour and proceed by imposing new kinds of constraints on the decision maker. For example, boundedly rational agents have been developed who do not always remember the past nor adequately consider the future nor understand the logical consequences of facts that they know. Other theories of this sort add costs of computation to otherwise standard models, and still others allow the decision maker’s cognitive capabilities to depend on the complexity of the choice problem at hand.
The second category of contributions to the literature on bounded rationality contains work that dispenses with optimal decision making entirely and seeks to construct new models on alternative principles. Writers in this vein speak the languages of neuroscience and evolutionary psychology; stress the impact on human behaviour of emotions, heuristics, and norms; and maintain an especially close dialogue with experimentalists.
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