Bounded Rationality in Decision Making: What Is It?
Understanding Bounded Rationality
Concept of Bounded Rationality
Bounded rationality, a term coined by Herbert Simon, refers to the limitations in our ability to understand and make decisions about the world due to insufficient information and cognitive constraints.
The overwhelming amount of information and uncertainty about future events complicates decision-making processes, leading individuals to rely on simpler methods that may not yield optimal choices.
Satisficing as a Decision Strategy
When making decisions, people often engage in "satisficing," which involves selecting alternatives that meet a minimum threshold of acceptability rather than seeking the best possible option.
Generating Alternatives
A critical step in satisficing is generating a set of alternatives. However, searching for these options can be challenging due to limited information and cognitive overload.
Local Information Influence
Individuals tend to focus on local options when making choices; for example, someone might only consider schools within their state due to familiarity and available information.
Practical Implications of Satisficing
Acceptable Solutions Over Optimal Ones
People do not always strive for perfection; instead, they seek adequate solutions that fit their needs without expending excessive time or resources on finding optimal outcomes.
Real-Life Application Example
The speaker illustrates this concept through personal experience with creating YouTube videos, emphasizing the balance between quality and efficiency while producing content quickly.
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I talk about searching for a particular alternatives. There are two ways that we think decision-making might happen. The first way is based on rational decision-making, where we have all of the possible alternatives available and then we rank order the alternatives from best to least. Then, we select the best alternative.
The trouble is is that very few people actually make decisions in this way.
Most make decisions through using simple rules because we are boundedly rational. There is so much that we can learn and know.
One of the ways in which we make decisions is for searching for alternatives. As Levinthal and Knudsen (2007) put it, first we search for alternatives and then we evaluate these alternatives. When we search for alternatives we perform a satisficing algorithm. We look for alternatives that are good enough, rather than the best possible.
I am thinking about this because of Epley and Gilovich’s (2006) paper that suggest we adjust (search) until we find an adequate solution.
This reminded me of my thoughts about searching for solutions to problems. When do we stop searching for solutions? When we find an adequate solution, not a perfect solution. This implies that there are many more problems than solutions to sort through, because we will never find the optimal solution.
What can you do?
1. Search until you find a good enough solution to solve the immediate problem.
2. This will drive additional problems for you to fix in the future.
Epley, N., T. Gilovich. 2006. The anchoring-and-adjustment heuristic: Why the adjustments are insufficient. Psychological Science. 17(4) 311-318.
Knudsen, T., D.A. Levinthal. 2007. Two faces of search: Alternative generation and alternative evaluation. Organization Science. 18(1) 39-54.
Nickerson, J.A., T.R. Zenger. 2004. A knowledge based theory of the firm - The problem-solving perspective. Organization Science. 15(6) 617-632.
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David Maslach is a research professor of entrepreneurship, innovation, and business strategy, I discuss topics, such as behavioral science, strategy, innovation, and entrepreneurship, and apply these to my new peer proofreading and editing platform. Topics include the sharing economy, altruism, investing in technology, starting a business, and bounded rationality. My favorite videos pertain to incentives, goal setting, and learning from failure to drive behaviors such as weight loss, stopping telemarketers, creating novel technologies, and creating new movements.
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