Bounded rationality
Encyclopedia
Bounded rationality is the idea that in decision making, 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. It was proposed by Herbert Simon
as an alternative basis for the mathematical modeling of decision making, as used in economics
and related disciplines; it complements rationality as optimization, which views decision making as a fully rational process of finding an optimal choice given the information available. Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one. Simon used the analogy of a pair of scissors, where one blade is the "cognitive limitations" of actual humans and the other the "structures of the environment"; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.
Some models of human behavior
in the social sciences
assume that humans can be reasonably approximated or described as "rational
" entities (see for example rational choice theory
). Many economics
models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preference
s. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them.
. In Models of Man, Simon points out that most people are only partly rational, and are emotional/irrational in the remaining part of their actions. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information
" (Williamson
, p. 553, citing Simon). Simon describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:
Simon suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other concurrent economic activities also requiring decisions.
Daniel Kahneman
proposes bounded rationality as a model to overcome some of the limitations of the rational-agent models in economic literature.
As decision makers have to make decisions about how and when to decide, Ariel Rubinstein
proposed to model bounded rationality by explicitly specifying decision-making procedures. This puts the study of decision procedures on the research agenda.
Gerd Gigerenzer
argues that most decision theorists who have discussed bounded rationality have not really followed Simon's ideas about it. Rather, they have either considered how people's decisions might be made sub-optimal by the limitations of human rationality, or have constructed elaborate optimising models of how people might cope with their inability to optimize. Gigerenzer instead proposes to examine simple alternatives to a full rationality analysis as a mechanism for decision making, and he and his colleagues have shown that such simple heuristic
s frequently lead to better decisions than the theoretically optimal procedure.
From a computational point of view, decision procedures can be encoded in algorithms and heuristics.
Edward Tsang
argues that the effective rationality of an agent is determined by its computational intelligence
. Everything else being equal,
an agent that has better algorithms and heuristics could make "more rational" (more optimal) decisions than one that has poorer heuristics and algorithms.
Herbert Simon
Herbert Alexander Simon was an American political scientist, economist, sociologist, and psychologist, and professor—most notably at Carnegie Mellon University—whose research ranged across the fields of cognitive psychology, cognitive science, computer science, public administration, economics,...
as an alternative basis for the mathematical modeling of decision making, as used in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and related disciplines; it complements rationality as optimization, which views decision making as a fully rational process of finding an optimal choice given the information available. Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one. Simon used the analogy of a pair of scissors, where one blade is the "cognitive limitations" of actual humans and the other the "structures of the environment"; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.
Some models of human behavior
Human behavior
Human behavior refers to the range of behaviors exhibited by humans and which are influenced by culture, attitudes, emotions, values, ethics, authority, rapport, hypnosis, persuasion, coercion and/or genetics....
in the social sciences
Social sciences
Social science is the field of study concerned with society. "Social science" is commonly used as an umbrella term to refer to a plurality of fields outside of the natural sciences usually exclusive of the administrative or managerial sciences...
assume that humans can be reasonably approximated or described as "rational
Rationality
In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...
" entities (see for example rational choice theory
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...
). Many economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preference
Preference
-Definitions in different disciplines:The term “preferences” is used in a variety of related, but not identical, ways in the scientific literature. This makes it necessary to make explicit the sense in which the term is used in different social sciences....
s. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them.
Models of bounded rationality
The term is thought to have been coined by Herbert SimonHerbert Simon
Herbert Alexander Simon was an American political scientist, economist, sociologist, and psychologist, and professor—most notably at Carnegie Mellon University—whose research ranged across the fields of cognitive psychology, cognitive science, computer science, public administration, economics,...
. In Models of Man, Simon points out that most people are only partly rational, and are emotional/irrational in the remaining part of their actions. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information
Information
Information in its most restricted technical sense is a message or collection of messages that consists of an ordered sequence of symbols, or it is the meaning that can be interpreted from such a message or collection of messages. Information can be recorded or transmitted. It can be recorded as...
" (Williamson
Oliver E. Williamson
Oliver Eaton Williamson is an American economist, professor at the University of California, Berkeley and recipient of the Nobel Memorial Prize in Economic Sciences....
, p. 553, citing Simon). Simon describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:
- limiting what sorts of utilityUtilityIn economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
functions there might be. - recognizing the costs of gathering and processing information.
- the possibility of having a "vector" or "multi-valued" utility function.
Simon suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other concurrent economic activities also requiring decisions.
Daniel Kahneman
Daniel Kahneman is an Israeli-American psychologist and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, behavioral economics and hedonic psychology....
proposes bounded rationality as a model to overcome some of the limitations of the rational-agent models in economic literature.
As decision makers have to make decisions about how and when to decide, Ariel Rubinstein
Ariel Rubinstein
Ariel Rubinstein is an Israeli economist who works in game theory. He was educated at the Hebrew University of Jerusalem, 1972–1979, in both mathematics and economics...
proposed to model bounded rationality by explicitly specifying decision-making procedures. This puts the study of decision procedures on the research agenda.
Gerd Gigerenzer
Gerd Gigerenzer
Gerd Gigerenzer is a German psychologist who has studied the use of bounded rationality and heuristics in decision making, especially in medicine...
argues that most decision theorists who have discussed bounded rationality have not really followed Simon's ideas about it. Rather, they have either considered how people's decisions might be made sub-optimal by the limitations of human rationality, or have constructed elaborate optimising models of how people might cope with their inability to optimize. Gigerenzer instead proposes to examine simple alternatives to a full rationality analysis as a mechanism for decision making, and he and his colleagues have shown that such simple heuristic
Heuristic
Heuristic refers to experience-based techniques for problem solving, learning, and discovery. Heuristic methods are used to speed up the process of finding a satisfactory solution, where an exhaustive search is impractical...
s frequently lead to better decisions than the theoretically optimal procedure.
From a computational point of view, decision procedures can be encoded in algorithms and heuristics.
Edward Tsang
Edward Tsang
Edward Tsang is a Computer Science professor at the University of Essex. He holds a first degree in Business Administration from the Chinese University of Hong Kong , and an MSc and PhD in Computer Science from the University of Essex...
argues that the effective rationality of an agent is determined by its computational intelligence
Computational intelligence
Computational intelligence is a set of Nature-inspired computational methodologies and approaches to address complex problems of the real world applications to which traditional methodologies and approaches are ineffective or infeasible. It primarily includes Fuzzy logic systems, Neural Networks...
. Everything else being equal,
an agent that has better algorithms and heuristics could make "more rational" (more optimal) decisions than one that has poorer heuristics and algorithms.
See also
- AltruismAltruismAltruism is a concern for the welfare of others. It is a traditional virtue in many cultures, and a core aspect of various religious traditions, though the concept of 'others' toward whom concern should be directed can vary among cultures and religions. Altruism is the opposite of...
- Analysis paralysisAnalysis paralysisThe term "analysis paralysis" or "paralysis of analysis" refers to over-analyzing a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than...
- Behavioral economics
- Cognitive biasCognitive biasA cognitive bias is a pattern of deviation in judgment that occurs in particular situations. Implicit in the concept of a "pattern of deviation" is a standard of comparison; this may be the judgment of people outside those particular situations, or may be a set of independently verifiable...
- Homo economicusHomo economicusHomo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
- Neoclassical economicsNeoclassical economicsNeoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
- PsychohistoryPsychohistoryPsychohistory is the study of the psychological motivations of historical events. It attempts to combine the insights of psychotherapy with the research methodology of the social sciences to understand the emotional origin of the social and political behavior of groups and nations, past and present...
- Parametric determinismParametric determinismParametric determinism refers to a Marxist interpretation of the course of history formulated by Prof. Ernest Mandel, and it could be viewed as one variant of Karl Marx's historical materialism or as a philosophy of history....
- Rational ignoranceRational ignoranceRational ignorance occurs when the cost of educating oneself on an issue exceeds the potential benefit that the knowledge would provide.Ignorance about an issue is said to be "rational" when the cost of educating oneself about the issue sufficiently to make an informed decision can outweigh any...
- Carnegie SchoolCarnegie SchoolThe "Carnegie School" was a so-called "Freshwater" economics intellectual movement in the 1950s and 1960s based at Carnegie Mellon University and led by Herbert Simon, James March, and Richard Cyert....
- Utility maximization problemUtility maximization problemIn microeconomics, the utility maximization problem is the problem consumers face: "how should I spend my money in order to maximize my utility?" It is a type of optimal decision problem.-Basic setup:...
- Transaction costTransaction costIn economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
- Subjective theory of valueSubjective theory of valueThe subjective theory of value is an economic theory of value that identifies worth as being based on the wants and needs of the members of a society, as opposed to value being inherent to an object....
- Prospect theoryProspect theoryProspect theory is a theory that describes decisions between alternatives that involve risk i.e. where the probabilities of outcomes are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.-Model:...