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Bounded rationality

the idea that rationality is limited by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision

Bounded rationality is the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

CONTENT : A - F, G - L, M - R, S - Z, See also, External links

Quotes

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Quotes are arranged alphabetically by author

A - F

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  • The type of rationality we assume in economics — perfect, logical, deductive rationality — is extremely useful in generating solutions to theoretical problems. But it demands much of human behavior — much more in fact than it can usually deliver. If we were to imagine the vast collection of decision problems economic agents might conceivably deal with as a sea or an ocean, with the easier problems on top and more complicated ones at increasing depth, then deductive rationality would describe human behavior accurately only within a few feet of the surface. For example, the game Tic-Tac-Toe is simple, and we can readily find a perfectly rational, minimax solution to it. But we do not find rational “solutions” at the depth of Checkers; and certainly not at the still modest depths of Chess and Go.
  • There are two basic ways market organization is brought about... Some combination of the two is usual the case:
    1. Strategic structuring, informal or formal, whereby social agents, including the state, establish a rule regime regulating market access and transactions...
    2. Emergent structuring, whereby participants discover or adopt certain similar strategies within bounded rationality and situations with certain opportunity structures and incentive structures. Social network and ecological properties result in relatively well-defined aggregate performance characteristics...
    • Tom R. Burns, The shaping of social organization (1987) p. 127.

G - L

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  • Models of bounded rationality describe how a judgement or decision is reached (that is, the heuristic processes or proximal mechanisms) rather than merely the outcome of the decision, and they describe the class of environments in which these heuristics will succeed or fail.
  • One is forced to assume that ordinary people have the computational capabilities and statistical software of econometricians.
    • Gerd Gigerenzer and Reinhard Selten (2001), in Bounded Rationality. The Adaptive Toolbox, chapters 1 and 2. Cambridge, Massachusetts, quoted in “Bounded Rationality and Macroeconomics”
  • Although contributions of many writers have helped the rise of behavioral economics including psychologists Kahneman and Tversky, I regard the works of George Katona and Herbert Simon instrumental in its rise. While the works of Katona and his colleagues at Michigan University led to the use of survey method in economics and its utilization in measuring the impact of consumer expectations on macroeconomic activity, the work of Simon at Carnegie Tech. (a tremendously stimulating intellectual environment for economic theorizing then) resulted in the important theoretical foundations of behavioral economics, such as the concept of bounded rationality.
    • Hamid Hosseini, "The Arrival of Behavioral Economics: From Michigan, or the Carnegie School in the 1950s and the early 1960s?." The Journal of Socio-Economics 32.4 (2003): 391-409.; abstract
  • Two types of conventions [ in organizational settings] may be distinguished here: (a) conventional rules of behavior demonstrated in the classroom mental experience (first part of the story) and (b) conventional representation of the world revealed in the following discussions with ‘‘experienced” friends (second part).
  • Simon’s conventionalism leads to a decision paradigm, according to which understanding problems of coordination is impossible without taking into consideration individual cognitive limits and social representations of reality.

M - R

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  • Bounded rationality means that people make quite reasonable decisions based on the information they have. But they don't have perfect information, especially about more distant parts of the system. [...] We don't even interpret perfectly the imperfect information that we do have, say behavioral scientists. [...] Which is to say, we don't even make decisions that optimize our own individual good, much less the good of the system as a whole.
  • In a fundamental sense, Alchian's theory of economic organizations is different from those of Coase or Simon. He disavows an explicit model of individual choice... and... offers a system-level explanation of organizational emergence, structure, and survival that is largely independent of decision making at the micro level... Yet it is precisely this independence of a distinct model of choice that ultimately renders it compatible with the individualistic theories of both Coase and Simon....
Whether individuals optimize under uncertainty or satisfice under the more limiting conditions of bounded rationality... , Alchian's logic of natural selection, when grafted onto either approach, provides a powerful means of deriving and integrating expectations about individuals, organizations and systems. The result in either case is an approach that gains in scope and coherence, and that does so by remaining true to its underlying model of individual choice.
  • Terry M. Moe, "The new economics of organization." American journal of political science (1984). p. 746-747;

S - Z

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  • Around 1958, I became aware of H.A. Simon's seminal papers on bounded rationality and was immediately convinced by his arguments. I tried to construct a theory of boundedly rational multi-goal decision making. Together with Heinz Sauermann, I worked out an "aspiration adaptation theory of the firm" which was published as a journal article in 1962... More and more I came to the conclusion that purely speculative approaches like that of our paper of 1962 are of limited value. The structure of boundedly rational economic behavior cannot be invented in the armchair, it must be explored experimentally.
  • The principle of bounded rationality [is] the capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world — or even for a reasonable approximation to such objective rationality.
    • Herbert A. Simon, (1947). Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization. p. 198.
  • Broadly stated, the task is to replace the global rationality of economic man with a kind of rational behavior that is compatible with the access to information and the computational capacities that are actually possessed by organisms, including man, in the kinds of environments in which such organisms exist.
    • Herbert A. Simon (1955) in “A Behavioral Model of Rational Choice”, Quarterly Journal of Economics 69(1), p. 99 quoted in “Bounded Rationality and Macroeconomics”
  • … I shall assume that the concept of ‘economic man’(...) is in need of fairly drastic revision, and shall put forth some suggestions as to the direction the revision might take.
    • Herbert A. Simon (1955) in “A Behavioral Model of Rational Choice”, Quarterly Journal of Economics 69(1), p. 99 quoted in “Bounded Rationality and Macroeconomics”
  • The problem can be approached initially either by inquiring into the properties of the choosing organism, or by inquiring into the environment of choice.
    • Herbert A. Simon (1955) in “A Behavioral Model of Rational Choice”, Quarterly Journal of Economics 69(1), p. 100 quoted in “Bounded Rationality and Macroeconomics”
  • Both from these scanty data and from an examination of the postulates of the economic models it appears probable that, however adaptive the behavior of organisms in learning and choice situations, this adaptiveness falls far short of the ideal of ‘maximizing’ postulated in economic theory. Evidently, organisms adapt well enough to‘satisfice’; theydo not, in general, ‘optimize’.
    • Herbert A. Simon (1956) in “Rational Choice and the Structure of the Environment”, Psychological Review 63(2), p. 129, quoted in “Bounded Rationality and Macroeconomics”
  • A comparative examination of the models of adaptive behavior employed in psychology (e.g., learning theories), and of the models of rational behavior employed in economics, shows that in almost all respects the latter postulate a much greater complexity in the choice mechanisms, and a much larger capacity in the organism for obtaining information and performing computations, than do the former. Moreover, in the limited range of situations where the predictions of the two theories have been compared (...), the learning theories appear to account for the observed behavior rather better than do the theories of rational behavior.
    • Herbert A. Simon (1956) in “Rational Choice and the Structure of the Environment”, Psychological Review 63(2), p. 129, quoted in “Bounded Rationality and Macroeconomics”
  • The first consequence of the principle of bounded rationality is that the intended rationality of an actor requires him to construct a simplified model of the real situation in order to deal with it. He behaves rationally with respect to this model, and such behavior is not even approximately optimal with respect to the real world. To predict his behavior we must understand the way in which this simplified model is constructed, and its construction will certainly be related to his psychological properties as a perceiving, thinking, and learning animal.
  • In Administrative Behavior, bounded rationality is largely characterized as a residual category — rationality is bounded when it falls short of omniscience. And the failures of omniscience are largely failures of knowing all the alternatives, uncertainty about relevant exogenous events, and inability to calculate consequences. There was needed a more positive and formal characterization of the mechanisms of choice under conditions of bounded rationality... Two concepts are central to the characterization: search and satisficing.
    • Herbert A. Simon, "Rational decision making in business organizations", Nobel Memorial Lecture 1978. p. 502.
  • If (...) we accept the proposition that both the knowledge and the computational power of the decision maker are severely limited, then we must distinguish between the real world and the actor’s perception of it and reasoning about it.
  • In the literature of problem solving, the topic I am now taking up is called "problem representation." In the past 30 years, a great deal has been learned about how people solve problems by searching selectively through a problem space defined by a particular problem representation. Much less has been learned about how people acquire a representation for dealing with a new problem—one they haven't previously encountered.
    • Herbert A. Simon, "Bounded rationality and organizational learning." Organization science 2.1 (1991): 125-134.
  • Information impactedness is a derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others.

See also

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