bounded rationality


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bounded rationality

a model of human action in which choices are seen as limited and imperfect in terms of knowledge of the situation and expected outcomes; action is therefore never completely rational. The concept originated in the work of March and Simon (1958) and Simon (1957a & b) on DECISION MAKING in organizations. Their work was critical of the model or IDEAL TYPE of perfect rationality presented in economic theories of the firm; in contrast to the assumption of profit maximization in economic theory March and Simon argued that actual behaviour in organizations was SATISFICING rather than ‘optimizing’ in terms of the achievement of goals. This approach to ‘subjective rationality’ has been influential in the sociology of organizations (see ORGANIZATION THEORY) because it demonstrated the way in which organizational structure (DIVISION OF LABOUR, SOCIALIZATION, AUTHORITY) and channels of communication limit the range of solutions considered.
References in periodicals archive ?
Meanwhile, in accordance with bounded rationality theory, the intelligent use of heuristics can be utilized to adapt to the structure of the environment and exploit its resources in a way that favors certain behaviors.
A problem present in the book is the equal sign put between bounded rationality and behavioral economics, a point of view that the author assumes in the text.
Defenders of the economic mainstream can point to late neoclassical approaches which analyze market failures or bounded rationality to show that mainstream economics already is pluralist.
It transforms bounded rationality (Simon, 1947) by tapping into a greater vision of rationality in the unbounded territory of structured and unstructured datasets, from which to draw greater insights for achieving competitive advantage.
A systematic analysis of the advantages and disadvantage of different structures of retirement savings is crucial in an environment where retirement savers are subject to behavioral biases and bounded rationality and where financial intermediaries are subject to agency conflicts.
While this is not necessarily a marketing trick like the previously offered examples, bounded rationality simply states, according to Herbert Simon, that decisions are not always made under optimal conditions and that the environmental influences affect all that we think and do.
They admit that micro-foundations for price stickiness may require a better understanding of bounded rationality, and that information processing is more complex than the time-contingent adjustment assumed in their paper.
The decision to start with basic moves and attempt to weather the financial storm makes sense because of the incremental nature of most budget processes and the bounded rationality that decision makers operate from within (Nelson 2012).
Limiting aspects of bounded rationality and the shortcuts taken to overcome them--generally known as biases and heuristics, respectively--inevitably cause human decisions that appear erroneous when compared with perfectly rational outcomes.
We want to find the set of rules that make us better than rational, but we must do so under the same restrictions of bounded rationality that we seek to overcome.
The seven concepts used in the framework are: (1) internationally transferable (or non-location-bound) firm-specific advantages, (2) non-transferable (or location-bound) firm-specific advantages, (3) location advantages, (4) investment in--and value creation through--recombination, (5) complementary resources of external actors, (6) bounded rationality, (7) bounded reliability.
We explain why family-centered noneconomic goals and bounded rationality decrease the willingness and ability of small- and medium-sized family firms to hire and provide competitive compensation to nonfamily managers even in a labor market composed of stewards rather than agents.