Bounded Rationality

When faced with a complex problem, most people respond by reducing the problem to a level at which it can be readily understood. This is because the limited information processing capability of human beings makes it impossible to assimilate and understand all the information necessary to optimize. So people satisfy themselves that is, they seek solutions that are satisfactory and sufficient

Since the capacity’of the human mind for formulating and solving problems is far too small to meet the requirements for full rationality, individuals operate within the confines of bounded rationality. They construct simplified models that extract the essential features from problems without capturing all their complexity. Individuals can then behave rationally within the limits of the simple model.

How does bounded rationality work for the typical individual? Once a problem is identified, the search for criteria and alternatives begins. But the list of criteria is likely to be far from exhaustive. The decision maker will identify a limited list made up of the more conspicuous choices. These are the choices that are easy to find and that tend to be highly visible. In most cases, they will represent familiar criteria and previously tried and tested solutions. Once this limited set of alternative is identified, the decision maker will begin reviewing it. But the review will not be comprehensive.

Not all the alternatives will be carefully evaluated. Instead, the decision maker will begin with alternatives that differ only in a relatively small degree from the choice currently in effect. Following along familiar and well-worn paths, the decision maker proceeds to review alternatives only until he or she identifies an alternative that is “good enough” – One that meets an acceptable level of performance. The first alternative that meets the “good enough” criteria ends the search. So the final solution represents a satisfying choice rather than an optimum one.

One of the more interesting aspects of bounded rationality is that, the order in which alternatives are considered is critical in determining which alternatives is selected. In the fully rational decision-making model, all alternative are considered, the initial order in which they are evaluated is irrelevant. Every potential solution would get a full and complete evaluation. But this isn’t the case with bounded rationality.

Assuming that a problem has more than one potential solution, the satisfying choice will be the first acceptable one the decision maker encounters. Since decision makers use simple and limited models, they typically begin by identifying alternatives that are obvious, ones with which they are familiar and those not too far from the status quo. Those solutions that depart least from the status quo and meet the decision criteria are most likely to be selected. A unique and creative alternative may present an optimizing solution to the problem.

However, it is unlikely to be chosen because an acceptable solution will be identified well before the decision maker is required to search very far beyond the status quo.