Bounded rationality

Bounded rationality is the idea that rationality is limited when individuals make decisions: by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision. Decision-makers, in this view, act as satisficers, seeking a satisfactory solution rather than an optimal one. Bounded rationality is the idea that rationality is limited when individuals make decisions: by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision. Decision-makers, in this view, act as satisficers, seeking a satisfactory solution rather than an optimal one. Herbert A. Simon proposed bounded rationality as an alternative basis for the mathematical modeling of decision-making, as used in economics, political science and related disciplines. It complements 'rationality as optimization', which views decision-making as a fully rational process of finding an optimal choice given the information available. Simon used the analogy of a pair of scissors, where one blade represents 'cognitive limitations' of actual humans and the other the 'structures of the environment', illustrating how minds compensate for limited resources by exploiting known structural regularity in the environment. Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice because of the intractability of natural decision problems and the finite computational resources available for making them. Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as 'rational' entities, as in rational choice theory or Downs Political Agency Models. The term was coined by Herbert A. Simon. In Models of Man, Simon points out that most people are only partly rational, and are irrational in the remaining part of their actions. In another work, he states 'boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information'. Simon describes a number of dimensions along which 'classical' models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include: Simon suggests that economic agents use heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other concurrent economic activities also requiring decisions. As decision-makers have to make decisions about how and when to decide, Ariel Rubinstein proposed to model bounded rationality by explicitly specifying decision-making procedures. This puts the study of decision procedures on the research agenda. Gerd Gigerenzer opines that decision theorists have not really adhered to Simon's original ideas. Rather, they have considered how decisions may be crippled by limitations to rationality, or have modeled how people might cope with their inability to optimize. Gigerenzer proposes and shows that simple heuristics often lead to better decisions than theoretically optimal procedures. Huw Dixon later argues that it may not be necessary to analyze in detail the process of reasoning underlying bounded rationality. If we believe that agents will choose an action that gets them 'close' to the optimum, then we can use the notion of epsilon-optimization, which means we choose our actions so that the payoff is within epsilon of the optimum. If we define the optimum (best possible) payoff as U ∗ {displaystyle U^{*}} , then the set of epsilon-optimizing options S(ε) can be defined as all those options s such that: U ( s ) ≥ U ∗ − ϵ {displaystyle U(s)geq U^{*}-epsilon } .