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                        Bounded Rationality

                        Herbert A. Simon

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                        The academic scholar and Nobel Price winner, Herbert A. Simon, was the founder of the term – Bounded Rationality. Herbert A. Simon explored the boundaries of human decision making in oftentimes complex, dynamic and equivocal environments.

                        Due to the complexity, dynamism and equivocality of the present and future environments surrounding decision-making, Herbert A. Simon suggested that humans are not able to always act fully rational, and that the inability will result in a general state of satisficing, in which solutions that may not be optimal are chosen if they meet minimum requirements. This satisficing occurs due to the limited rationality of humans, who are oftentimes not mentality equipped to evaluate all potential consequences of decisions being made.

                        Herbert A. Simon proposed that humans are limited in their rationality due to at least three factors.

                        1. Rationality requires complete knowledge and understanding of the consequences of a given action. Gaining full understanding of future consequences is, of course, a very difficult task, and therefore this complete knowledge is seldom present at the time decisions are made.
                        2. Given that consequences of actions, per definition, will emerge in the future, it is difficult for decision-makers to fully evaluate the future worth of their decisions.
                        3. Rationality requires that all alternative actions are known. In actual decision-making processes, very few alternatives are known, which inhibits humans in making optimum decisions.

                        These three points are therefore the main reasons why humans or organization cannot fully act as a rational economic entity. Decision-makers are therefore inhibited in being rational, since they will primarily base their decisions on readily available data and knowledge, and not be able to incorporate unknown data or knowledge into their decision-making.

                        Since humans are not able to act fully rational, Herbert A. Simon proposes that organizations should develop clear organizational goals for employees to follow. These goals should act as the value premises that underlie daily decision-making. The value premises should communicate what ends are preferred or desirable to the organization, and clearly distinguish between what is acceptable from unacceptable.

                        Formalized control mechanisms like e.g. routinization, specialization, training, standard procedures etc., which are normally found in formalized organizational structures, can also be seen as supporting rational decision making, giving the individual employee the mental capacity to perform more rational decisions.

                        It is therefore important for companies and other organizations to acknowledge that humans cannot act rationally due to limited insights into the effects of given decisions, and that the organization needs to assist decision-making before it can become rational. According to Herbert A. Simon, organizations would benefit from developing and communicating organizational goals, resulting in value premises that will guide the decision-making, and that might guide the development of formalized structures supporting organizational goals.

                        Therefore, Herbert A. Simon criticizes the Scientific Management Approach for relying too much on the rationality of the “economic man”, and criticizes the viewpoint that organizational actors can always make rational decisions based on complete knowledge about alternatives.

                        When organizational members suffer from bounded rationality, managing and organizing is thus a much more difficult task than proposed by e.g. the Scientific Management Approach, and organizations must provide both the formal and informal control mechanisms to make organizational members perform as rationally as possible. 

                        Date Created: 2011-04-16
                        Posted by: Admin
                        Bounded Rationality

                        Related resources:

                        Jay R. Galbraith: Information Processing View
                        What is Contingency Theory?
                        What is Transaction Cost Theory?
                        What is a Simple Organizational Structure?
                        Max Weber’s theory of Bureaucracy
                        Mechanistic vs. Organic Organizational Structure (Contingency Theory)
                        What is a Functional Organizational Structure?
                        What is a Divisional Organizational Structure?
                        What is a Matrix Structure?
                        What is Scientific Management (Frederick Winslow Taylor)
                        Organizations and Organizing: Rational, Natural and Open System Perspectives
                        W. Richard Scott & Gerald F. Davis; (2007), Pearson Prentice Hall

                        MBA, Online MBA, Online MBA Courses, MSC, Online MSC, MSC Courses, Bounded rationality, Herbert A. Simon, Administrative behavior, satisficing, formal control mechanisms, informal control mechanisms, complex, dynamic, equivocal, environment, goal specificity


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