Bounded Rationality In Decision-Making: What Is It? Does It Hurt Smart Business Decisions?

I talk about searching for a particular alternatives. There are two ways that we think decision-making might happen. The first way is based on rational decision-making, where we have all of the possible alternatives available and then we rank order the alternatives from best to least. Then, we select the best alternative.

The trouble is is that very few people actually make decisions in this way.

Most make decisions through using simple rules because we are boundedly rational. There is so much that we can learn and know.

One of the ways in which we make decisions is for searching for alternatives. As Levinthal and Knudsen (2007) put it, first we search for alternatives and then we evaluate these alternatives. When we search for alternatives we perform a satisficing algorithm. We look for alternatives that are good enough, rather than the best possible.

I am thinking about this because of Epley and Gilovich’s (2006) paper that suggest we adjust (search) until we find an adequate solution.

This reminded me of my thoughts about searching for solutions to problems. When do we stop searching for solutions? When we find an adequate solution, not a perfect solution. This implies that there are many more problems than solutions to sort through, because we will never find the optimal solution.

What can you do?

1. Search until you find a good enough solution to solve the immediate problem.
2. This will drive additional problems for you to fix in the future.

Epley, N., T. Gilovich. 2006. The anchoring-and-adjustment heuristic: Why the adjustments are insufficient. Psychological Science. 17(4) 311-318.

Knudsen, T., D.A. Levinthal. 2007. Two faces of search: Alternative generation and alternative evaluation. Organization Science. 18(1) 39-54.

Nickerson, J.A., T.R. Zenger. 2004. A knowledge based theory of the firm - The problem-solving perspective. Organization Science. 15(6) 617-632.

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David Maslach is a research professor of entrepreneurship, innovation, and business strategy, I discuss topics, such as behavioral science, strategy, innovation, and entrepreneurship, and apply these to my new peer proofreading and editing platform. Topics include the sharing economy, altruism, investing in technology, starting a business, and bounded rationality. My favorite videos pertain to incentives, goal setting, and learning from failure to drive behaviors such as weight loss, stopping telemarketers, creating novel technologies, and creating new movements.

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[happymanali]

This is a great description of bounded rationality, thanks.