Bounded rationality is the idea that rationality is limited when individuals make decisions: by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision. Decision-makers, in this view, act as satisficers, seeking a satisfactory solution rather than an optimal one.
Herbert A. Simon proposed bounded rationality as an alternative basis for the mathematical modeling of decision-making, as used in economics, political science 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. Simon used the analogy of a pair of scissors, where one blade represents “cognitive limitations” of actual humans and the other the “structures of the environment”, illustrating how minds compensate for limited resources by exploiting known structural regularity in the environment. Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice because of the intractability of natural decision problems and the finite computational resources available for making them.
Bounded rationality is the idea that we make decisions that are rational, but within the limits of the information available to us and our mental capabilities. Economists who think of us as ‘boundedly rational’ don’t see us as an ‘economic superman’, or homo economicus that spends his life optimizing the happiness created by every decision. Instead, they see us as satisficers — as people who choose the option that will satisfy their needs and wants without putting too much effort into making sure they’ve considering every single possibility.
Decision makers (irrespective of their level of intelligence) have to work under three unavoidable constraints:
(1) only limited, often unreliable, information is available regarding possible alternatives and their consequences,
(2) human mind has only limited capacity to evaluate and process the information that is available, and
(3) only a limited amount of time is available to make a decision. Therefore even individuals who intend to make rational choices are bound to make satisficing (rather than maximizing or optimizing) choices in complex situations. These limits (bounds) on rationality also make it nearly impossible to draw up contracts that cover every contingency, necessitating reliance on rules of thumb.