Overview
This lecture introduces Herbert Simon's concepts of bounded rationality and satisficing, explaining how they provide a realistic model for decision-making under constraints.
Herbert Simon and His Contributions
- Herbert Simon was an American economist, political scientist, and cognitive psychologist.
- He contributed major theories in decision-making, organizational behavior, and artificial intelligence.
- Simon is best known for his work on bounded rationality, challenging the traditional assumption of perfect rationality in economics.
Perfect vs. Bounded Rationality
- Perfect rationality assumes decision-makers have access to all information, unlimited cognitive ability, and time to make optimal choices.
- Bounded rationality recognizes that real-world decisions are limited by incomplete information, limited cognitive abilities, and time pressure.
- People often seek satisfactory ("good enough") solutions instead of perfect ones—this process is called satisficing.
Applications of Bounded Rationality
- In economics, bounded rationality explains why firms and individuals do not always maximize profits due to information and time constraints.
- In psychology, it describes how people use mental shortcuts (heuristics) to make everyday decisions and why they make errors or biases.
- In organizational behavior, it helps analyze why organizations sometimes make suboptimal decisions due to communication issues, groupthink, or decision fatigue.
- In artificial intelligence, bounded rationality guides the design of systems that make effective decisions with limited data and time using methods like machine learning.
- Bounded rationality is foundational to behavioral economics, integrating psychological insights to explain decisions that deviate from classical rational models.
Criticisms and Limitations
- Critics argue bounded rationality may oversimplify human cognitive abilities and adaptability.
- The concept of satisficing is criticized as vague and difficult to define or measure consistently.
- There are questions about how well bounded rationality applies in expert or specialized domains.
Key Terms & Definitions
- Bounded Rationality — the idea that decision-making is limited by available information, cognitive capacity, and time constraints.
- Satisficing — choosing a solution that meets minimum requirements rather than searching for the optimal one.
- Perfect Rationality — an idealized decision-making approach with complete information and unlimited ability to choose the best option.
Action Items / Next Steps
- Review homework or readings on Herbert Simon and bounded rationality.
- Consider examples in your field where satisficing may apply.
- Prepare questions or comments on the application and limits of Simon’s theories for discussion.