Bounded Rationality

What is bounded rationality?

Bounded rationality is an approach to decision-making that takes limits on information, time, and computation seriously. A decision procedure can be sensible for the person and situation without finding the best option from every conceivable alternative.

Herbert Simon’s 1955 model of rational choice explains why an account of actual decision-making must describe feasible procedures rather than assume unlimited calculation.

Bounded rationality example: satisficing

One example is satisficing: a person searches until an option meets an acceptable standard. Someone choosing a supplier might set requirements for price, delivery, and quality, then stop when a supplier meets them.

Heuristics and cognitive limits

A heuristic is a shortcut that reduces the work needed to decide. Whether it is useful depends on the problem. Searching every supplier, comparing every feature, and calculating every possible future cost may take more time than the decision is worth.

Criticisms and limits

Bounded rationality is not a synonym for irrationality or a complete explanation of every bias. A claim about loss aversion, confirmation bias, or another specific pattern needs its own evidence. How well a decision rule works depends on the task, the information available, the costs of further search, and the standard used to assess the result.