Simon Says Bounded Rationality

“The most insubordinate obstacle you will encounter is your own limited thinking.”

~Bryant H. McGill (American activist)

This quote highlights one of the most important factors of decision making, not only in economics but in other subjects like finance and psychology as well- Bounded Rationality.

Bounded Rationality is a concept given by Herbert Simon, much contradictory to the idea of homo economicus. This concept forms the psychological basis of Behavioral Economics and is used as an important assumption in thinking models and heuristics.

In our everyday life, we might often feel that we are missing out on information, like not knowing about what are the current trends in the fashion sector, about a new cafe in town or simply not knowing about the Wednesday discounts at the fried chicken and pizza store. But, in reality, we all are overloaded with information, so much information, that our brain is not able to process and capture all of it, so, it simply remembers the easier, essential, or the parts which are extremely suited to our own personal needs and interests. Everyday, we are overloaded with information from advertisements, social media, friends and family etc.

A famous example can be taken from our pre-COVID lives when we all used to flock to the theatres to see the latest movie. Before actually going to the theatre itself, we subjected to a lot much information about the movie through various platforms mentioned above such as the genre, the star cast, language used, etc. But we make up our minds based primarily only on the piece of information which suits our interest well. Say, I would go for a murder mystery over a sci-fi without even considering the star cast or the price of the ticket. Neither, I would spend time to compare my choice with all the currently running movies.

When we are on information overload, and due to computational inadequacies we don’t want to spend much time in this research or comparison work to find the “best” alternative or to make a rational decision. We simply choose, what seems to be “good enough” may or may not be the best.

The definition of bounded rationality depends on rationality and vice versa.

Simon Said- Rationality or irrationality, but Bounded Rationality.

In economist Herbert Simon’s views, people are not inclined towards getting all the information needed to make the optimal decision due to a limited thinking capacity and limited time.

To buy a soap, people won’t search through many ads or won’t ask many people as to the advantages or disadvantages of a particular brand. Not only people are incapable of getting all the information, if they got each and every detail about all the brands, still they won’t be able to digest all of that and would collect only those which meet one or two standards or expectations.

While for a bar of soap at a supermarket, most of us would find it tiring enough to compare two soap brands as well let alone compare all of them. If we like a minty fragrance to a bar of soap, it means that one criterion would be that itself. We would instantly pic the one which would say- mint cool in the most prominent way without even comparing the rest of its ingredients with the other. We might check the price with the next best alternative, but not with all the alternatives. So, we would buy that soap brand thinking it to be our best choice.

But how can it be best if we haven’t compared it to the rest?

Decisional attributes of Bounded Rationality

The decisional attributes of bounded rationality can be summarised under 8 different categories: -

(The example of choosing a pizza with the problem of a given budget constraint is being taken.)

                                                     

·       SIMPLE MINDED SOLUTIONS

As humans have a limited cognitive ability and inadequate computational ability to rationally analyze amongst all the alternatives available in the market, the solutions or the choices they make are simply “good enough” suiting to their most prominent need or desire.

 

(we choose for a pizza having the lowest cost but not the healthiest ingredients as it simply easily fit into our budget)

 ·       LOCAL DECISION MAKING

The choice or the solution opted for emerges out either from the currently existing pattern of the solution or is exactly the same choice made earlier in the past.

 

(since we opted for a regular Margherita the previous time we had a tight budget, we would suffice our self with ordering it this time without wasting time on scrolling through the entire menu)

 ·       MOTIVATED BY GOALS

The search for a new solution or a better solution is only started when our previous solutions are incapable of solving our current problem or our goals are not being met that is when it is necessary to do so.

 

(we would search for an onion and capsicum pizza rather than our chicken overload pizza due to budget constraints)

 ·       SEQUENTIAL

Alternatives are considered one by one rather than comparing all of them at the time due to a time constraint and limited cognitive ability.

 

(we compare an onion double cheese pizza to capsicum and mushroom pizza and then compare the better of these two to a chicken pizza)

 · SATISFISCING BEHAVIOUR IS PORTRAYED.

The search is terminated as soon as we find a good enough and the rest is ignored and not even considered.

 

(we choose Margherita thinking it to be the cheapest. But then, we see a chicken and paneer regular pizza also fits into our budget. We immediately order this without even searching for a chicken overload or paneer max pizza.)     

•  ASPIRATIONS

As per Simon, goals are pre-determined by experiences of oneself. The aspirations are fixed.

 

(Margherita was ordered previously. But it did not completely suffice our hunger. So, this time, a pizza with toppings will only be chosen)

•         SEARCH STRATEGIES

Search strategies based on our previous experience might seem adequate or inadequate depending on the problem we are facing. If the problem is modified, then the previous strategy would be altered rather than formulating a completely different strategy.

 

(the last time we had not eaten lunch and the entire dinner had to be fulfilled by a single pizza. So, we looked for a non-veg medium pizza. But, since we have a budget constraint on top of our hunger this time, we will look only for a medium but veg pizza)       

• SUITED TO THE ENVIRONMENT.

As to what would constitute the relevant and important information to a person, also depends on the cases of success and failures among the people living around him.

 

(last time our friend had ordered a keema pizza due to a budget constraint, but the topping was very inadequate. While making a choice now, we will eliminate this option completely and looking for sufficient toppings will constitute our basis to gather information)

The Psychology of the Satisficer

A satisficer a being contradictory to the traditional idea of a perfectly rational homo economicus. Homo economicus is found to be rare and is often deemed to be hypothetical. Satisficers are us. Satisficers are very often not good at decision making or at calculating the consequences of their decisions. They make decisions not by calculating self-interest purely, but also considering cultural norms, ethics, love, fairness, etc. Satisficers, often, do not have complete information nor that they bother to learn it due to time constraint and fatigue arising out of limited cognitive ability. While not most of us resemble the homo economicus, the majority of us are satisficers which make our decisions hard to predict due to the pervasiveness of human behavior.

                                                                                                                                                                      

                                                     SATISFICERS  

                                                      

                                                HOMO ECONOMICUS

Conclusion

This blog serves merely as an introduction to the concept of bounded rationality. Bounded rationality, being an important assumption in many fields of study, is a vast concept with diverse topics and renditions. This was my attempt to just give a glance at this important assumption. Do follow my blogs for more insights.