Human cognition is limited and imperfect: even if we managed to get all the information available around a problem to be solved, our reasoning errors would prevent us from making the optimal decision.
This is the main proposition of the theory of bounded rationality proposed by Herbert Simon. His model had important applications in economics and organizational psychology, and to a large extent is still in force today.
Herbert A. Simon, the author
Herbert Simon was born in Pennsylvania in 1916. He studied social sciences and mathematics at the University of Chicago; in 1943 he obtained his doctorate in political science.
later Simon he was professor of psychology, political science and computer science at UC Berkeley and Carnegie Mellon, where he worked until his death in 2001.
He titled “Administrative Behavior” in his first book, which appeared in 1947 and will become his most famous work. It was in this work that he first raised the theory of bounded rationality.
His model of human behavior had a fundamental influence on the social sciences in general and in the economy in particular. Simon’s ideas have been applied particularly frequently in the field of organizations.
The bounded rationality model
Herbert Simon’s theory of bounded rationality suggests that people we make decisions in a partially irrational way due to our cognitive, information and time constraints.
This model emerged as a reaction to the theories of rationality, very popular in political and economic science, which propose that humans are rational beings who decide what is the optimal solution to each problem using all available information.
However, according to Simon and his successors, it is very difficult to make totally rational decisions because our information processing resources are limited, especially when the problems are complex, as is often the case in everyday life. Against the classic idea of ”the economic man”, Simon promoted that of “the administrative man”, incapable of grasping the complexity of the world and the interdependence of its elements.
The bounded rationality model states that people use heuristics to find solutions. Heuristics are defined as general and simple rules that we use to solve problems; although they can be useful in many cases, in others they produce cognitive biases, that is, systematic deviations in reasoning.
The availability heuristic, for example, refers to the fact that people tend to pay more attention to the most recent and frequent information because we can access it more easily. So if we’ve been in a car accident recently, we’re more likely to overestimate the likelihood of another.
The decision making process
According to Simon, rational decision-making is about solving problems by choosing the most appropriate alternative from those available. The more correct the decision, the more likely it is to achieve the desired effect and the more effective it will be.
He is the author divide the rational decision-making process into three stages. First, all possible alternatives are identified; then the results that would be obtained with each are analyzed. Finally, the most appropriate solution is chosen by comparing the effectiveness and efficiency of each of the available options.
However, we will never be able to apply this procedure in an optimal way because it is impossible to determine all the possible solutions to a problem, as well as to foresee its consequences well.
In his works, Simon said that in administrative behavior and in the organizational sphere effectiveness must take priority over adequacy by adopting solutions. On the other hand, in private decisions, this is not so important as they do not affect the functioning and performance of an organization as a whole.
Developments of this theory
Herbert Simon’s model has been modified and extended by various economists, psychologists and computer scientists. Below we will mention the developments and most important applications of bounded rationality theory.
1. Ariel Rubinstein
This Israeli economist and mathematician discussed the need to determine the most appropriate decision-making procedures in his book “Modeling bounded rationality” (1998). The purpose of his contributions to the bounded rationality model is that the principles provided by it can be applied in different fields.
2. Edward Tsang
Tsang, a graduate in business administration and a doctorate in computer science, says organizations or agents that use the best heuristics and algorithms make more rational decisions.
For Tsang, these aspects correspond to computational intelligence, a concept used to refer to the ability of computers to learn from data obtained through observation and experimentation.
3. Huw Dixon
British economist Huw Dixon proposed a general formula for decision-making based on Simon’s model. According to Dixon, assuming people will opt for near-optimal solutions doesn’t require a deep analysis of decision-making under bounded rationality.
4. Gerd Gigerenzer
Gigerenzer is a German psychologist interested in decision making, in particular bounded rationality and heuristics. According to this author, heuristics are in many cases more efficient than optimal decision-making procedures, As they are not as irrational as other theorists pose and allow problems to be solved very effectively.
5. Daniel Kahneman
The Israeli Kahneman is a psychologist famous for having a Nobel Prize in Economics. His most important contributions concern the description of heuristics and cognitive biases, carried out jointly with Amos Tversky.
Kahneman believes that the bounded rationality model can be very useful in overcoming the limitations of economic theories on rational decision making.