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What is Bounded Rationality

Chapter 9
Handbook of Research on Global Competitive Advantage through Innovation and Entrepreneurship
Rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
Published in Chapter:
Understanding Actual Socio-Economic Behavior as a Source of Competitive Advantage: The Role of Experimental-Behavioral Economics in Innovation
P. Hernandez (University of Valencia, Spain), V. Martínez-Molés (University of Valencia, Spain), and J. Vila (University of Valencia, Spain)
Copyright: © 2015 |Pages: 23
DOI: 10.4018/978-1-4666-8348-8.ch009
Abstract
This chapter illustrates the potentiality of the application of experimental-behavioral methods to gain global competitive advantages based in the anticipated measurement of how consumers and citizens would behave when exposed to specific innovation actions to be implemented by an organization. To this end, the chapter presents a brief background of the experimental-behavioral economics approach as an application of the experimental-scientific paradigm to study socio-economic behavior, highlighting its main differential features (use of economic monetary incentives, non-deception, and anonymity). After a discussion of the internal and external validity of this methodology and its ethical implications, the chapter presents specific examples of its application in both industry (framing management and measurement of the added value generated by alternative designs of an innovative product) and government (optimal design of new public programs and policies).
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Chapter 121
Organizational Attention
According to Simon (1947) , the limited attentional capability of humans resulting in their bounded capacity to be rational.
Published in Chapter: Organizational Attention; From: Encyclopedia of Knowledge Management, Second Edition
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Chapter 581
Political Context Elements in Public Policy of Radio Frequency Information Technology and Electromagnetic Fields
The cognitive limitations of decision-makers and the arbitrary underpinning of the advocacy coalition approach.
Published in Chapter: Political Context Elements in Public Policy of Radio Frequency Information Technology and Electromagnetic Fields; From: Encyclopedia of Information Science and Technology, Fourth Edition
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Chapter 129
Neurostrategy
Paradigm that explains agents’ strategic decision-making based on the imperfect information available to them and the expectations they have that dictate whether they will view the results as satisfactory. It leads on to the idea of adaptive learning and trial-and-error processes.
Published in Chapter: Neurostrategy; From: Encyclopedia of Organizational Knowledge, Administration, and Technology
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Chapter 9
Behavioral Strategies to Achieve Financial Stability in Uncertain Times
A concept that explains behavior that diverges from the standard assumption of a fully rational economic agent. It occurs due to limitations of cognitive ability and access to information for decision making.
Published in Chapter: Behavioral Strategies to Achieve Financial Stability in Uncertain Times; From: Maintaining Financial Stability in Times of Risk and Uncertainty
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Chapter 105
Understanding the Legacy of Herbert Simon to Decision Support Systems
Bounded rationality was proposed by Herbert Simon as a way to represent how real managers make decisions in real organisations. It is the rationality that takes into account the limitations of the decision maker in terms of information, cognitive capacity, and attention as opposed to substantive rationality, which is not limited to satisficing, but rather aims at fully optimized solutions.
Published in Chapter: Understanding the Legacy of Herbert Simon to Decision Support Systems; From: Encyclopedia of Decision Making and Decision Support Technologies
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Chapter 19
Dynamic Specifications for Norm-Governed Systems
A term for the phenomenon that cognitive blinders prevent people from seeing, seeking, using, or sharing relevant, accessible, and perceivable information during decision-making. The bounded rationality phenomenon challenges traditional rationalist perspectives and suggests that the rationality of actual human and company behavior is always partial, or ‘bounded’ by human limitations. This concept recognizes that decision making takes place within an environment of incomplete information and uncertainty. Herbert Simon pointed out that most people are only partly rational, and are in fact emotional and irrational in the remaining part of their actions. They experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information (Companion to Organizations, J. Baum Eds., Oxford Blackwell, UK, 2002).
Published in Chapter: Dynamic Specifications for Norm-Governed Systems; From: Handbook of Research on Multi-Agent Systems: Semantics and Dynamics of Organizational Models
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Chapter 6
Why “Race Neutral” Policy Fails Black Small Business Owners: Lessons Learned From the Paycheck Protection Program and Mapping an Equitable Path Forward
A theory that argues that rationality is limited when individuals make decisions because of factors such as constraints of time, budget, and mental bandwidth and cognitive ability. Decision makers see to arrive at a decision that is good enough rather than optimal.
Published in Chapter: Why “Race Neutral” Policy Fails Black Small Business Owners: Lessons Learned From the Paycheck Protection Program and Mapping an Equitable Path Forward; From: Sustainability and the Future of Work and Entrepreneurship for the Underserved
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Chapter 22
The History and Development of Purchasing Management and Its Theoretical Framework: A Review of Transaction Cost Economics
Individuals are limited by the information they have in order to make a decision in the decision-making process due to the limitation of rationality of individuals.
Published in Chapter: The History and Development of Purchasing Management and Its Theoretical Framework: A Review of Transaction Cost Economics; From: Handbook of Research on Global Supply Chain Management
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Chapter 618
Risk Regulation Regimes of Radio Frequency Information Technology
The cognitive limitations of decision-makers and the arbitrary underpinning of the advocacy coalition approach.
Published in Chapter: Risk Regulation Regimes of Radio Frequency Information Technology; From: Encyclopedia of Information Science and Technology, Third Edition
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Chapter 16
Developing an Interdisciplinary Approach to the Evaluation of E-Government Implementation
Conceptual model that assumes individuals are intentionally rational, i.e. they try to maximize their decisions. However, this ideal model is almost impossible to apply in practice: actions and decisions are taken and performed by individuals whose knowledge of the alternatives and the consequences is incomplete; in addition, preferences are subject to change and are not always clearly orderable.
Published in Chapter: Developing an Interdisciplinary Approach to the Evaluation of E-Government Implementation; From: Handbook of Research on ICT-Enabled Transformational Government: A Global Perspective
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Chapter 82
The Role of Individual Trust in E-Collaboration
The limits faced by individuals in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information.
Published in Chapter: The Role of Individual Trust in E-Collaboration; From: Encyclopedia of E-Collaboration
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Chapter 2
Leisure and Entertainment as a Creative Space-Time Manifold in a Post-Modern World
It is the concept introduced by H. Simon as an alternative basis for the economical and mathematical modeling of human choice: in the real decision making mechanism, the individuals’ reasoning is limited by the available information, the cognitive capabilities of their minds, and the finite amount of time ( Simon, 1957 ). In reality, the individuals are not able to find an optimal choice, and instead they simplify the choices available, satisfying and not optimizing the decision – seeking a satisfactory solution rather than the optimal one.
Published in Chapter: Leisure and Entertainment as a Creative Space-Time Manifold in a Post-Modern World; From: Handbook of Research on the Impact of Culture and Society on the Entertainment Industry
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Chapter 1
From Old Institutional Economics to New Institutional Economics: A Short History
Unlike neoclassical mind, NIE believes that people act restricted knowledge in their economics action.
Published in Chapter: From Old Institutional Economics to New Institutional Economics: A Short History; From: Comparative Approaches to Old and New Institutional Economics
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Chapter 21
Peace in Economic Equilibrium: A Micro-Perspective
Bounded rationality means rationality within limits or bounds set by incomplete information, cognitive limitations of mind and limited time available for taking the decision.
Published in Chapter: Peace in Economic Equilibrium: A Micro-Perspective; From: Handbook of Research on Promoting Peace Through Practice, Academia, and the Arts
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Chapter 1
Thinking Critically About the Fourth Industrial Revolution as a Wicked Problem
The idea that decision making deviates from rationality due to such inherently human factors as limitations in cognitive capacity and willpower, and situational constraints.
Published in Chapter: Thinking Critically About the Fourth Industrial Revolution as a Wicked Problem; From: Handbook of Research on Using Global Collective Intelligence and Creativity to Solve Wicked Problems
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Chapter 17
Agent-Based Modelnig with Boundedly Rational Agents
A decision theory that rests on the assumptions that human cognitive capabilities are limited and that these limitations are adaptive with respect to the decision environments humans frequently encounter. Decision are thought to be made usually without elaborate calculations, but instead by using fast and frugal heuristics. These heuristics certainly have the advantage of speed and simplicity, but if they are well matched to a decision environment, they can even outperform maximizing calculations with respect to accuracy. The reason for this is that many decision environments are characterized by incomplete information and noise. The information we do have is usually structured in a specific way that clever heuristics can exploit (see Gigerenzer and Selten, 2001 ).
Published in Chapter: Agent-Based Modelnig with Boundedly Rational Agents; From: Handbook of Research on Nature-Inspired Computing for Economics and Management
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