Bounded Rationality

Herbert Simon's foundational insight that human decision-makers are NOT the rational optimizers assumed by classical economics—they operate under three constraints that bound their rationality: limited information (you can't know everything relevant), limited cognitive capacity (you can't process even what you do know), and limited time (you can't deliberate indefinitely). Given these bounds, humans don't optimize—they satisfice: searching until they find an option that meets a minimum threshold of acceptability, then stopping. Bounded rationality doesn't mean irrationality; it means rationality operating within realistic constraints, producing decisions that are 'good enough' rather than optimal.

When to use it

When decision processes assume more rationality than humans can deliver; when the pursuit of optimal decisions is producing paralysis or excessive cost; when designing organizational structures and decision rules; when evaluating whether 'good enough' is genuinely acceptable (it usually is).

How it can help

Design decision processes that work WITH bounded rationality rather than against it. Accept that optimization is impossible for most real-world decisions and focus on satisficing well: set clear minimum criteria, search efficiently, and stop when a good-enough option appears. For organizational design: reduce the information processing demands on decision-makers through delegation, specialization, decision rules, and heuristics. The most common mistake: designing decision processes that assume unbounded rationality (exhaustive analysis, complete information) and then blaming people when they can't comply.