How does bounded rationality arise?
Posted: Sun Dec 22, 2024 9:11 am
Bounded rationality arises from three fundamental constraints in our decision-making process:
Cognitive limitations
Our brain has a limited capacity to process information. We can only hold and analyze a certain amount of data at a time. When there is too much information, we become overloaded. You see this, for example, when india mailing list someone stands in a supermarket with 50 different types of pasta - it becomes difficult to carefully compare all the options.
Time pressure and urgency
In many situations, we simply do not have the time to explore all possible options. An entrepreneur who needs to decide quickly on a business opportunity cannot spend weeks on market research. The urgency of the situation forces us to make choices with the information available at the time.
Limited information
We never have access to all relevant information. Some data are:
Not available
Too expensive to obtain
Hidden
Not yet known (future developments)
These three factors interact. For example, even if we had all the information, we often lack the time to process it. Or we do have the time, but miss crucial information. It is this combination of limitations that prevents us from acting fully rationally, but must settle for a "good enough" solution.
This explains why even highly intelligent people and well-organized organizations do not always make optimal decisions - it is not a matter of capacity or commitment, but a natural limitation of how people function.
Cognitive limitations
Our brain has a limited capacity to process information. We can only hold and analyze a certain amount of data at a time. When there is too much information, we become overloaded. You see this, for example, when india mailing list someone stands in a supermarket with 50 different types of pasta - it becomes difficult to carefully compare all the options.
Time pressure and urgency
In many situations, we simply do not have the time to explore all possible options. An entrepreneur who needs to decide quickly on a business opportunity cannot spend weeks on market research. The urgency of the situation forces us to make choices with the information available at the time.
Limited information
We never have access to all relevant information. Some data are:
Not available
Too expensive to obtain
Hidden
Not yet known (future developments)
These three factors interact. For example, even if we had all the information, we often lack the time to process it. Or we do have the time, but miss crucial information. It is this combination of limitations that prevents us from acting fully rationally, but must settle for a "good enough" solution.
This explains why even highly intelligent people and well-organized organizations do not always make optimal decisions - it is not a matter of capacity or commitment, but a natural limitation of how people function.