Definition
Bounded Rationality (pioneered by Herbert Simon) is the principle that human decision-making is limited by three constraints: the information available, the time allowed, and the computational capacity of the mind. Instead of seeking the “optimal” solution (optimizing), humans typically seek a “good enough” solution (satisficing).
Why It Matters
Classical economics often assumes “Rational Man” has infinite information and processing power. Bounded rationality brings the model back to reality. Understanding these bounds is critical for designing effective systems, managing organizations, and recognizing our own cognitive blind spots. It explains why “simple” heuristics often outperform “complex” models in the real world.
Core Concepts
- Satisficing: A portmanteau of “satisfy” and “suffice.” Choosing the first option that meets a minimum threshold of acceptability rather than scanning every possible option.
- Heuristics: Mental “rules of thumb” or shortcuts that reduce the computational load of a decision at the cost of some accuracy.
- Search Costs: The reality that finding more information costs time and energy. At some point, the cost of the search exceeds the potential benefit of a better decision.
- The Information Bottleneck: The physical limit on how much data the brain can process per second.