Name: What is bounded rationality?
Uploaded: 2024-07-19T21:48:38.000Z
Duration: 1 min
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Relative clauses (Restrictive vs. nonrestrictive)

Bounded rationality is a concept introduced by economist Herbert Simon to describe the limitation of human decision-making in situations where optimal solutions are hindered by the finite cognitive capability of the decision-maker and the inherent complexity of the environment. The concept contrasts with the traditional economic theories for rationality, which assume 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.

 This simplification occurs because people have limited time, information, and computational capacities. As a result, rather than seeking the optimal solution, individuals aim for a satisfying 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.