Herbert Simon's Theory of Bounded Rationality

Human cognition is limited and imperfect: even if we managed to obtain all the information available in around a problem that we must solve, our reasoning failures would prevent us from making the decision optimal.

This is the main proposal of the bounded rationality theory proposed by Herbert Simon. His model has had important applications in the economics and psychology of organizations, and to a large extent it is still in force today.

• Related article: "Are we rational or emotional beings?"

Herbert A. Simon, the author

Herbert Alexander Simon was born in Pennsylvania in 1916. He carried out his studies in social sciences and mathematics at the University of Chicago; in 1943 he received his doctorate in political science.

Later Simon he was a professor of psychology, political and computational science at the University of Berkeley and Carnegie Mellon, where he worked until his death in 2001.

He titled "Administrative Behavior" to his first book, which appeared in 1947 and would become his most famous work. It was in this work that he first raised the theory of bounded rationality.

His model of human behavior had a fundamental influence on the social sciences in general and in the economy in particular. Simon's ideas have been applied with particular frequency in the field of organizations.

The bounded rationality model

Herbert Simon's theory of bounded rationality states that people we make decisions in a partially irrational way because of our cognitive, information and time limitations.

This model arose as a reaction to the theories of rationality, very popular in political and economic sciences, which propose that humans are rational beings who decide what is the optimal solution for each problem using all the information available.

However, according to Simon and the authors who succeeded him, it is very difficult to make totally rational decisions because our resources to process information are limited, especially when problems are complex, as is often the case in life everyday. Faced with the classic idea of ​​the "economic man"Simon promoted that of the ‘administrative man’, unable to grasp the complexity of the world and the interrelation between its elements.

The bounded rationality model states that people use heuristics when finding solutions. Heuristics are defined as general and simple rules that we use to solve problems; Although they can be useful in many cases, in others they produce cognitive biases, that is, systematic deviations in reasoning.

The availability heuristic, for example, refers to the fact that people tend to take more into account the most recent and frequent information because we can access it with greater ease. Thus, if we have had a traffic accident recently, it is more likely that we overestimate the probability of suffering another.

• Related article: ""Heuristics": The Mental Shortcuts of Human Thought"

The process of decision making

According to Simon, rational decision-making consists of solving problems by choosing the most suitable alternative from those available. The decision will be more correct the more likely it is to achieve the desired effect and the more efficient it is.

This author divided the rational decision-making process into three steps. First, all possible alternatives are identified; then the results that would be obtained with each one are analyzed. Finally, the most appropriate solution is chosen by comparing the effectiveness and efficiency of each of the available options.

However, we can never optimally apply this procedure because it is impossible to determine all possible solutions to a problem, as well as to adequately predict its consequences.

In his works, Simon affirmed that in administrative behavior and in the organizational sphere Efficiency should be prioritized over adequacy when adopting solutions. In contrast, in private decisions this is not so important since they do not affect the functioning and performance of an organization as a whole.

Developments of this theory

Herbert Simon's model has been modified and extended by various economists, psychologists, and computer scientists. Next we will mention the developments and most important applications of bounded rationality theory.

1. Ariel rubinstein

This Israeli economist and mathematician raised the need to determine the most appropriate decision-making procedures in his book "Modeling Bounded Rationality" (1998). The objective of his contributions to the limited rationality model is that the principles provided by it can be applied in different areas.

2. Edward tsang

Tsang, a business administration graduate with a Ph.D. in computer science, states that the organisms or agents that use better heuristics and algorithms make more rational decisions.

For Tsang, these aspects equate to computational intelligence, a concept used to refer to to the learning capacity of computers from data obtained through observation and experimentation.

3. Huw dixon

The British economist Huw Dixon proposed a general decision-making formula based on the Simon model. According to Dixon, assuming that people will opt for near-optimal solutions does not require an in-depth analysis of decision-making within the framework of bounded rationality.

4. Gerd gigerenzer

Gigerenzer is a German psychologist interested in decision making, specifically bounded rationality and heuristics. According to this author, heuristics are in many cases more effective than optimal decision-making procedures, since they are not as irrational as other theorists propose and allow to solve problems very efficiently.

5. Daniel kahneman

The Israeli Kahneman is a psychologist famous for having obtained a Nobel Prize in economics. His most important contributions have to do with the description of heuristics and cognitive biases, carried out jointly with Amos Tversky.

Kahneman believes that the bounded rationality model can be very useful in overcoming the limitations of economic theories on rational decision making.