BOUNDED RATIONALITY

Risk Management and Decision Making Glossary

Risk Management and Decision Making — Bounded Rationality

 

 

 

 

 

 

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Information on Bounded Rationality

Bounded rationality is based on behavioural notions and upon observations of the ways in which decisions are actually taken in practice. Criticism of classical rationality led Nobel laureate Herbert Simon (1972) to propose the notion of bounded rationality. Bounded rationality assumes human rationality has its limits, especially when operating in conditions of considerable uncertainty. Bounded rationality has two interlocking components:
    

  • Limitations of the human mind. Models of human judgement and decision making have to take into account known limitations about the mind’s capacities. Because of the mind’s limitations, humans "must use approximate methods to handle most tasks" (Simon, 1990: 6). These methods include recognition processes that largely obviate the need for further information search, heuristics (mental shortcuts) that guide search and determine when it should end, and simple decision rules that make use of the information found.

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  • Structure within which the mind operates. Environmental structure is of crucial importance because it can explain when and why simple heuristics perform well: if the structure of the heuristic is adapted to that environment. A heuristic is said to be ecologically rational to the degree that it is adapted to the structure of an environment.

    •      For further explanations of bounded rationality terms, see Gigerenzer et al., 1999.


    Other topics in our resources on Risk Management and Decision Making related to Bounded Rationality include: 
     
  • satisficing
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  • ecological validity

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