Bounded Rationality

What Is Bounded Rationality?

Bounded rationality is the idea, introduced by Herbert Simon, that real decision-makers face limits on the information they hold and the computation they can perform, and so cannot behave like the perfectly rational optimizers of standard theory. Rather than identifying the single best option, people typically settle for one that is good enough, a strategy Simon called satisficing. They use rules of thumb and stop searching once an acceptable choice is found. Bounded rationality does not claim people are irrational; it holds that rationality operates within cognitive and practical constraints, so behavior reflects a realistic balance between the effort of deciding and the quality of the decision.

Why It Matters

Bounded rationality reshaped how economists and other social scientists model choice, and it made Herbert Simon an early forerunner of behavioral economics; he won the economics prize in 1978. By taking seriously that attention and calculation are scarce, the concept opened the way for later work on heuristics and biases by Kahneman and Tversky and on the systematic errors that behavioral economics studies. It informs the design of organizations, which structure decisions to cope with human limits, and of policies and choice environments that account for how people actually decide. Satisficing also explains everyday behavior, from how firms set prices to how consumers shop without exhaustively comparing every option.