On Rationality: On Bounded Rationality

"The principle of bounded rationality [is] the capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world - or even for a reasonable approximation to such objective rationality." (Herbert A Simon, "Administrative Behavior", 1947)

"The first consequence of the principle of bounded rationality is that the intended rationality of an actor requires him to construct a simplified model of the real situation in order to deal with it. He behaves rationally with respect to this model, and such behavior is not even approximately optimal with respect to the real world. To predict his behavior we must understand the way in which this simplified model is constructed, and its construction will certainly be related to his psychological properties as a perceiving, thinking, and learning animal." (Herbert A Simon, "Models of Man", 1957)

"Bounded rationality simultaneously constrains the complexity of our cognitive maps and our ability to use them to anticipate the system dynamics. Mental models in which the world is seen as a sequence of events and in which feedback, nonlinearity, time delays, and multiple consequences are lacking lead to poor performance when these elements of dynamic complexity are present. Dysfunction in complex systems can arise from the misperception of the feedback structure of the environment. But rich mental models that capture these sources of complexity cannot be used reliably to understand the dynamics. Dysfunction in complex systems can arise from faulty mental simulation-the misperception of feedback dynamics. These two different bounds on rationality must both be overcome for effective learning to occur. Perfect mental models without a simulation capability yield little insight; a calculus for reliable inferences about dynamics yields systematically erroneous results when applied to simplistic models." (John D Sterman, "Business Dynamics: Systems thinking and modeling for a complex world", 2000) 

"Faced with the overwhelming complexity of the real world, time pressure, and limited cognitive capabilities, we are forced to fall back on rote procedures, habits, rules of thumb, and simple mental models to make decisions. Though we sometimes strive to make the best decisions we can, bounded rationality means we often systematically fall short, limiting our ability to learn from experience." (John D Sterman, "Business Dynamics: Systems thinking and modeling for a complex world", 2000)

"The robustness of the misperceptions of feedback and the poor performance they cause are due to two basic and related deficiencies in our mental model. First, our cognitive maps of the causal structure of systems are vastly simplified compared to the complexity of the systems themselves. Second, we are unable to infer correctly the dynamics of all but the simplest causal maps. Both are direct consequences of bounded rationality, that is, the many limitations of attention, memory, recall, information processing capability, and time that constrain human decision making." (John D Sterman, "Business Dynamics: Systems thinking and modeling for a complex world", 2000)

"Models of bounded rationality describe how a judgement or decision is reached (that is, the heuristic processes or proximal mechanisms) rather than merely the outcome of the decision, and they describe the class of environments in which these heuristics will succeed or fail." (Gerd Gigerenzer & Reinhard Selten [Eds., "Bounded Rationality: The Adaptive Toolbox", 2001)

"Bounded rationality [...] 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." (Jean-Charles Pomerol & Frédéric Adam, "Understanding the Legacy of Herbert Simon to Decision Support Systems", 2008)

"[…] our mental models fail to take into account the complications of the real world - at least those ways that one can see from a systems perspective. It is a warning list. Here is where hidden snags lie. You can’t navigate well in an interconnected, feedback-dominated world unless you take your eyes off short-term events and look for long-term behavior and structure; unless you are aware of false boundaries and bounded rationality; unless you take into account limiting factors, nonlinearities and delays. You are likely to mistreat, misdesign, or misread systems if you don’t respect their properties of resilience, self-organization, and hierarchy." (Donella H Meadows, "Thinking in Systems: A Primer", 2008)

"The bounded rationality of each actor in a system may not lead to decisions that further the welfare of the system as a whole." (Donella H Meadows, "Thinking in Systems: A Primer", 2008)

"You can’t navigate well in an interconnected, feedback-dominated world unless you take your eyes off short-term events and look for long term behavior and structure; unless you are aware of false boundaries and bounded rationality; unless you take into account limiting factors, nonlinearities and delays." (Donella H Meadow, "Thinking in Systems: A Primer", 2008)

"The theory that personal rationality is bounded by our ability to process information, our cognitive limitations, and the finite time we have to make a decision. Although our decisions are still rational, they are rational within these constraints and, therefore, may not always appear to be rational or optimal." (Evan Stubbs, "Delivering Business Analytics: Practical Guidelines for Best Practice", 2013)

"Bounded rationality means rationality within limits or bounds set by incomplete information, cognitive limitations of mind and limited time available for taking the decision." (Anubhuti Dwivedi, "Peace in Economic Equilibrium: A Micro-Perspective", 2019)