Human cognition is limited and imperfect: even if we managed to obtain all the available information about a problem we must solve, our reasoning failures would prevent us from making the optimal decision.
This is the main proposal of the theory of bounded rationality proposed by Herbert Simon His model has had important applications in economics and organizational psychology, and to a large extent remains valid today.
Herbert Alexander Simon was born in Pennsylvania in 1916. He studied social sciences and mathematics at the University of Chicago; In 1943 he earned a doctorate in political science.
Later Simon He was a professor of psychology, political and computer sciences at the University of Berkeley and at Carnegie Mellon, where he worked until his death in 2001.
He titled his first book “Administrative Behavior,” which appeared in 1947 and would become his most famous work. It was in this work where he first proposed the theory of limited rationality.
His model of human behavior had a fundamental influence on the social sciences in general and in the economy in particular. Simon’s ideas have been applied with special frequency in the field of organizations.
The limited rationality model
Herbert Simon’s theory of bounded rationality suggests that people we make decisions partially irrational because of our cognitive, information and time limitations.
This model emerged as a reaction to theories of rationality, very popular in political and economic sciences, which propose that humans are rational beings who decide what the optimal solution is for each problem using all the available information.
However, according to Simon and his successors, it is very difficult to make completely rational decisions because our resources for processing information are limited, especially when problems are complex, as is often the case in everyday life. Against the classic idea of the “economic man” Simon promoted that of the ‘administrative man’, incapable of grasping the complexity of the world and the interrelationship between its elements.
The limited rationality model states that people use heuristics when finding solutions. Heuristics are defined as general and simple rules what we use to solve problems; Although they can be useful in many cases, in others they produce cognitive biases, that is, systematic deviations in reasoning.
The availability heuristic, for example, refers to the fact that people tend to take more into account the most recent and frequent information because we can access it more easily. Thus, if we have recently had a traffic accident, we are more likely to overestimate the probability of suffering another one.
The process of decision making
According to Simon, rational decision making consists of solving problems by choosing the most appropriate alternative among those available. The decision will be more correct the more likely it is to achieve the desired effect and the more efficient it is.
This author divided the rational decision-making process into three steps First, all possible alternatives are identified; Then the results that would be obtained with each one are analyzed. Finally, the most appropriate solution is chosen by comparing the effectiveness and efficiency of each of the available options.
However, we will never be able to optimally apply this procedure because it is impossible to determine all possible solutions to a problem, as well as adequately predict its consequences.
In his works, Simon stated that in administrative behavior and in the organizational field It is advisable to prioritize efficiency over adequacy when adopting solutions. On the other hand, in private decisions this is not so important since they do not affect the functioning and performance of an organization as a whole.
Developments of this theory
Herbert Simon’s model has been modified and extended by different economists, psychologists and computer scientists. Below we will mention the developments and most important applications of the theory of bounded rationality
1. Ariel Rubinstein
This Israeli economist and mathematician raised the need to determine which are the most appropriate decision-making procedures in his book “Modeling Bounded Rationality” (1998). The objective of his contributions to the model of limited rationality is that the principles provided by it can be applied in different areas.
2. Edward Tsang
Tsang, a graduate in business administration and a doctorate in computer science, says that the organisms or agents that use better heuristics and algorithms make more rational decisions.
For Tsang, these aspects are equivalent to computational intelligence, a concept used to refer to the learning capacity of computers from data obtained through observation and experimentation.
3. Huw Dixon
British economist Huw Dixon proposed a general decision-making formula based on Simon’s model. According to Dixon, if it is assumed that people will opt for solutions close to the optimal one, a deep analysis of decision-making within the framework of limited rationality is not required.
Gigerenzer is a German psychologist interested in decision making, specifically bounded rationality and heuristics. According to this author, heuristics are in many cases more effective than optimal decision-making procedures since they are not as irrational as other theorists propose and allow them to solve problems very efficiently.
5. Daniel Kahneman
The Israeli Kahneman is a psychologist famous for having obtained a Nobel Prize in economics His most important contributions have to do with the description of heuristics and cognitive biases, carried out jointly with Amos Tversky.
Kahneman believes that the bounded rationality model can be very useful in overcoming the limitations of economic theories on rational decision making.
