Bounded rationality model

Definition

The bounded rationality model is a concept in decision-making that suggests individuals are limited in their ability to process information, leading them to make decisions that are rational within the constraints of their cognitive limitations. This model recognizes that people often rely on heuristics or rules of thumb to simplify complex choices, resulting in satisfactory rather than optimal outcomes.

5 Must Know Facts For Your Next Test

1. The bounded rationality model was introduced by Herbert Simon, emphasizing that people operate under constraints of time, information, and cognitive resources.
2. Individuals often choose the first option that meets their criteria for adequacy rather than exhaustively analyzing all possible alternatives.
3. This model contrasts with the classical view of decision-making, which assumes individuals are fully rational and possess perfect information.
4. Bounded rationality acknowledges the role of emotions and social influences in shaping decisions, highlighting that choices are not purely logical.
5. In real-world scenarios, the bounded rationality model helps explain why people often make suboptimal decisions, as they navigate through complex environments.

Review Questions

• How does the bounded rationality model differ from the classical view of decision-making?
  • The bounded rationality model differs from the classical view by acknowledging that individuals have cognitive limitations and operate under constraints such as time and incomplete information. While the classical view assumes that decision-makers are fully rational and have access to all relevant information to make optimal choices, the bounded rationality model recognizes that people often settle for satisfactory solutions due to these limitations. This shift in perspective highlights the importance of understanding human behavior in real-world contexts.
• In what ways do heuristics play a role in the bounded rationality model?
  • Heuristics are central to the bounded rationality model as they serve as mental shortcuts that individuals use when faced with complex decisions. These cognitive tools simplify the decision-making process by allowing people to rely on past experiences or rules of thumb instead of evaluating every piece of information. While heuristics can facilitate quicker decisions, they may also lead to biases and errors, reinforcing the notion that our rationality is bounded by our cognitive capacities.
• Evaluate how satisficing illustrates the principles of the bounded rationality model in everyday decision-making.
  • Satisficing illustrates the principles of the bounded rationality model by showing how individuals prioritize finding an acceptable solution over seeking the best possible one. In everyday situations, such as choosing a restaurant or making a purchase, people often opt for options that meet their minimum requirements rather than exhaustively searching for the ideal choice. This behavior reflects cognitive limitations and time constraints, showcasing how satisficing serves as a practical strategy within the framework of bounded rationality.

Related terms

Heuristics:

Mental shortcuts or rules of thumb that simplify decision-making by reducing the complexity of information processing.

Satisficing: A decision-making strategy where individuals seek a solution that meets acceptable criteria rather than the optimal one, often due to limited time or information.

Decision Fatigue: The deteriorating quality of decisions made by an individual after a long session of decision-making, which can lead to poor choices.