Bounded Rationality – Definition

Cite this article as:"Bounded Rationality – Definition," in The Business Professor, updated March 7, 2019, last accessed August 11, 2020, https://thebusinessprofessor.com/lesson/bounded-rationality/.

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Bounded Rationality Definition

Bounded rationality is the theory that when people make decisions, their ability to reason through the problem is limited by:

  • available information
  • cogntitive capacity or ability,
  • time to think about the situation.

A Little More on Bounded Rationality

Decision-makers in this context are seeking a satisfactory solution rather than an optimal solution to the problem. Bounded rationality was proposed by Herbert A. Simon, a mathematical economist, as a method of modeling decision making as applied in economics, political science, and other relative disciplines. It looks at decision making as a fully cognitive process of finding an acceptable option given the available information.

References for Bounded Rationality

Academic Research on Bounded Rationality

  • Bounded rationality in macroeconomics: The Arne Ryde memorial lectures, Sargent, T. J. (1993). OUP Catalogue. This examination of bounded rationality, a theoretical macroeconomic area, is receiving increased attention. The author is a leading macroeconomist who highlights the involved issues while describing used analytic tools and shows their applicability in various models. It gives probable positive theory development together some of its setbacks.
  • Inductive reasoning and bounded rationality, Arthur, W. B. (1994). The American economic review, 84(2), 406-411. The paper states the types of rationality that are assumed in economics to be perfect, logical, deductive rationality which more essential in developing solutions to theoretical challenges but there is more demand to human behaviour for it to be productive. The paper highlights the two reasons for deductive rationality in breaking down under complication. The first reason is that past a specific complexity level, human logical capacity stops coping hence bounding human rationality. The second one is that in complicated interactive situations, agents cannot rely on peer agents they are dealing with to behave under perfect rationality resulting to behaviour guess producing to continuous subjective beliefs and loss of real belief resulting to inapplicability of deductive rationality.
  • Theories of bounded rationality, Simon, H. A. (1972). Decision and organisation, 1(1), 161-176. The paper the intertwinement that has occurred between decision making in economics and rationality on the other side, the notion of rationality has dominated neoclassical literature. The paper outlines the rationality types to be perfect rationality featured by consistency and maximisation hypothesis assumption. Simon questioned the perfect rationality concept, and he brought out different vision suggestion based on the empiric evidence and individual option. The paper emphasizes the Simon’s bounded rationality since it remains a unique characteristic of his theoretical contribution. There is an examination of the economic decision process in the neoclassical theory and the bounded rationality of Simon by the paper followed by model choice rational behavior and finally suggests assessment of bounded rationality concept.
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  • Bounded rationality and organizational learning, Simon, H. A. (1991). Organization Science, 2(1), 125-134. The paper puts focus on ways of information acquisition and transmission from one part of an entity to another. Understanding of mechanisms in allowing an organisation to deviate from the culture in which it operates, in a culturally deviant organisation, there is a comparison between the ways information are acquired and how they are acquired in organisations that grow in a culture of a society that provides it to new members. The discussion also includes obvious assimilation problem or have to be transmitted from one point to another for use.
  • Maps of bounded rationality: Psychology for behavioural economics, Kahneman, D. (2003). Maps of bounded rationality: Psychology for behavioural economics. American economic review, 93(5), 1449-1475. The paper is about the exploration of the psychology of intuitive belief and choices and the bounded rationality that Simon had proposed that decision-makers should be seen as boundedly rational and he offered a model in which satisfaction replaced utility maximization. In the research, they attempted in obtaining a map of bounded responsibility by examining system biases that separate people belief and their choices from optimal beliefs and choices assumed in rational-agent models.
  • Rational decision making in business organizations, Simon, H. A. (1979). The American economic review, 69(4), 493-513. The author states that the behavioural theory predecessor is the tradition of institutionalism. Institutions use a lot of their language based in law that and seek using transaction as their basic unit of behaviour. The book states that if there is rationality in human decision makers as their limited computational abilities and their unsatisfactory information permit them to be then, there will be a close relationship between normative and descriptive decision theory.
  • Bounded rationality, Simon, H. A. (1990). In Utility and probability (pp. 15-18). Palgrave Macmillan, London. The author stated the designation in the used of bounded rationality in the rational choice that puts a cognitive limitation of the decision maker of knowledge and computational capacity into considerations. In a behavioural approach to economics, bounded rationality is of the central topic that is deeply concerned with the ways of which actual decision-making processes impacts the made decisions.
  • Bounded rationality in individual decision making, Camerer, C. (1998). Experimental Economics, 1(2), 163-183. This paper’s main objectives are; provision of the meaningful, opinionated overview on learned ideas regarding bounded rationality in individual decision making from examination economics and psychology, and promising new directions for research which would be included in the final chapter would be included.
  • Judgment in managerial decision making, Bazerman, M. H., & Moore, D. A. (2008). The paper states the considerable development of behavioural decision examination in the past 25 years and provides a significant view of managerial behaviour. Bazerman & Moore’s Judgment in Managerial Decision Making, 7th edition included behavioural examination into the realm of the organisation by examination of judgments in various managerial backgrounds. The book contains information essential for anyone searching for information on improving judgmental and decision making capability. Many hands-on decision activities and examples from the authors’ pervasive executive training experience in improving the quality of managerial judgment.
  • Why bounded rationality?, Conlisk, J. (1996). Journal of economic literature, 34(2), 669-700. The author study states four reasons for including bounded rationality in economic models namely; first, the existence of much empirical evidence that is significant. Second, the bounded rationality has proved themselves in a wide range of compelling work, thirdly, the standard reasoning for bounded rationality assumption is unconvincing gas their reasoning cuts both ways and finally, the deliberations concerning economic activities is a costly undertaking and good economies require all costs entertainment.
  • Fast and frugal heuristics: The tools of bounded rationality, Gigerenzer, G. (2004). Blackwell handbook of judgment and decision making, 62, 88. The paper examines the cognitive heuristics which is how judgments and decisions are made in everyday life without calculation of probabilities and utilities. Heuristic thinking was integral as the analytical thinking for problems that cannot be solved by calculus or probability theory. The uncertainty of not awareness of optimal solutions to most problems and this also holds less for well-structured problems. When optimal solutions are unreachable, there is no paralysis in action to doom, or failure heuristics can be useful in the decision discovery.
  • Designing economic agents that act like human agents: A behavioural approach to bounded rationality, Arthur, W. B. (1991). The American Economic Review, 81(2), 353-359. The paper talks of possibilities of a unique agent creation with the ability to produce different behaviours and an examination of behaviour have been undertaken through an empirical survey which puts consideration on individual differences; it is possible to input different coefficient in the model. There are sophisticated multi-level approaches allowing agent development that can simulate human behaviour by considering individual variations in the model. These multilevel models in existence can describe many details and relationship among constructs in addition to designing dynamics of behaviour.

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