BOUNDED RATIONALITY
Bounded Rationality
The bounded rationality model was developed to explain making rational choices
under time constraints and other pressures. We are faced with decision making
every day. Rational decision making is when individuals use analytics, facts and a
precise step-by-step process to come to a fact-based decision. Although this might
sound like the fairest way to do things, it's not always a realistic choice for
organizations.
Herbert A. Simon (Models of Man) created the bounded rationality model to explain
why limits exist to how rational a decision maker can actually be within a decisionmaking environment. His model earned him a Nobel Prize in 1978 and is also known
as the administrative man theory. The main thrust of his model is that there exist
specific constraints that force a decision maker to be less than rational. There are
four assumptions to his model:
1. People select the first alternative that is satisfactory.
2. People recognize that their conception of the world is simple.
3. People are comfortable making decisions without determining all the
alternatives.
4. People make decisions by rules of thumb or heuristics.
The first assumption of the bounded rationality model deals with the term satisfice
(which is the words 'satisfy' and 'suffice' combined). It means that managers select
the first alternative that is good enough due to the fact that costs in time and effort
to look further are too great. For example, if Simon has to quickly decide who to lay
off within his department, he will select the first candidate that comes to mind who
isn't performing well. The first alternative is the easiest to recommend for the layoff,
and he does not have time to spend a week analysing work performance reports to
solidify a perfect decision.
Because of those same time constraints, managers also view the world as simple
and usually try to make decisions based on the simplest process of determination;
the multiple levels of steps that are included as part of the rational decision-making
process can be too complicated and time-consuming for some managers. Or a
manager might just dread the layoff decision and want to make the simplest and
easiest choice without making it into a complex analysis. This is why managers are
satisfied making choices without determining all of the alternatives. This supports
the theory of the third assumption.
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BOUNDED RATIONALITY
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The concept of bounded rationality in relation to decision making suggests that
individuals do not employ optimal decision-making approaches as a result of human
limitations in the ability to comprehend and manage complex information as well as
a result of challenges associated with limitations in information availability. Rather,
the concept suggests that individuals adopt approaches that are more limited and
which rely upon heuristics to ultimately make the decision-making process
manageable, which includes the process of generating and evaluating alternatives
for possible action.
The marketers must strive to understand better how and to what extent consumer
decision making is characterized by bounded rationality in decision-making
processes involved in their evaluations and, potentially, adoption of the firms
products or services.
Bounded Rationality in Product Buying Decision
A classic example of bounded rationality in consumer buying behaviour is the
purchase of a cell phone online. When we are trying to buy a phone online, the
specifications of phone are given which include the brand, model name, memory
limit, camera specs, battery life, display, OS, connectivity and many more. For
instance, although the Navigation Technology is mentioned as GLONASS, or Wifi is
mentioned as 802.11, this is still a limited information available, as we do not
exactly know what this information means. We might only be aware of the latest
versions, and will make buying decision based on the availability of latest version of
these technologies.
Another user can be more tech savvy and would be interested in collecting the
relevant information from web and then make an informed decision, whereas
someone might just look at the very basic specs like screen size, camera megapixel
etc. and make the decision.
The decision could also be affected by the amount of time available for making the
decision. A tech savvy user, if required to make decision within the bounds of time,
could decide based on the readily available information even though he has the
cognitive power to process more information.
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BOUNDED RATIONALITY
Thus, the bounds in the term bounded rationality are not just the limits on the
information available but also the limits of our own cognitive processing power and
the limits on our available time. Even if you removed the boundaries on the
information available (e.g. by online search of information through google etc.),
those limits to cognition and time would remain.
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