What is bounded rationality?

What is bounded rationality?

Bounded rationality is a concept introduced by economist Herbert Simon to describe the limitations of human decision-making in situations where optimal solutions are hindered by the finite cognitive capabilities of the decision-maker and the inherent complexities of the environment.

This concept contrasts with the traditional economic theory of rationality, which assumes that individuals have unlimited cognitive resources and access to all relevant information, allowing them to make the best possible choices.

In reality, individuals often rely on simplified models of the world to make decisions. These simplifications occur because people have limited time, information, and computational capacities.

As a result, rather than seeking the optimal solution, individuals aim for a satisficing solution—one that meets an acceptable level of satisfaction but may not be the best possible outcome. Bounded rationality acknowledges that while humans strive to make rational decisions, their judgments are constrained by various cognitive, informational, and temporal limitations.