bounded rationality



Concept that decision makers (irrespective of their level of intelligence) have to work under three unavoidable constraints: (1) only limited, often unreliable, information is available regarding possible alternatives and their consequences, (2) human mind has only limited capacity to evaluate and process the information that is available, and (3) only a limited amount of time is available to make a decision. Therefore even individuals who intend to make rational choices are bound to make satisficing (rather than maximizing or optimizing) choices in complex situations. These limits (bounds) on rationality also make it nearly impossible to draw up contracts that cover every contingency, necessitating reliance on rules of thumb. Proposed by the US Nobel-laureate economist Herbert Simon (1916-2001) in his 1982 book 'Models Of Bounded Rationality And Other Topics In Economics.' Compare with perfect rationality.

Use bounded rationality in a sentence

  • You must be able to use bounded rationality when trying to come up with new and creative ways to market yourself.

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  • You need to figure out what the bounded rationality of a decision is and turn it to your favor for the future.

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  • The bounded rationality these managers were operating under clearly has them confined to a situational understanding that they have incomplete information.

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