Bounded rationality

Bounded rationality describes decision-making under limits of information, time, and cognitive capacity. Rather than optimize across every possibility, people often choose options that meet an acceptable threshold.

Satisficing: A decision strategy that stops searching once an option meets a chosen threshold of acceptability. It is the characteristic alternative to exhaustive optimization under bounded rationality.
Herbert A. Simon: An American social scientist whose work on decision-making, organizations, and artificial intelligence earned the 1978 Nobel Memorial Prize in Economic Sciences. Simon coined and developed bounded rationality across economics and organizational studies.
Organizational decision-making: The processes by which organizations identify problems, evaluate options, and select actions. Organizational routines and limited attention shape the decisions Simon analyzed.
Homo economicus: An idealized model of a person who makes consistent choices to maximize utility with complete relevant knowledge. This ideal sharply contrasts with the informational and cognitive limits in bounded rationality.
Search theory: The study of how people and organizations search for options when information and search opportunities are limited. Search costs help explain when decision-makers stop looking for better options.
Administrative Behavior: Herbert Simon’s 1947 book analyzing decision-making and organizational behavior in public administration. The book introduced key arguments about limited rationality in organizations.
Behavioral economics: The study of how psychological, social, and cognitive factors affect economic decisions. Bounded rationality is a major foundation for behavioral accounts of economic choice.
Expected utility theory: A mathematical theory in which choices under uncertainty are represented by maximizing expected utility. Its formal ideal of consistent choice differs from Simon’s emphasis on limited computation.
Heuristics: Simple rules or strategies that reduce the effort needed to make judgments and decisions. Heuristics economize on the limited attention and computation that bound decisions.
Classical economics: An economic tradition emphasizing markets, production, and rational choice under assumptions that vary across its thinkers. Simon challenged simplified accounts of economic choice that assume comprehensive calculation.

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