More on satisficing and bounded rationality

So, if you’re a reader of this blog you might have seen me mention satisficing a number of times. This is a concept worth exploring deeper, and when we do, we’ll find ourselves in the midst of fascinating concepts such as bounded rationality, behavioral economics and decision making.

Decision making, as a field of study was recently put in the spotlight by Kahneman’s tremendous achievement “Thinking fast and slow”, which I’m happy to see has reached an unusually widespread audience considering it’s such a demanding read. Yet, Kahneman’s achievements would not have been possible without one of my personal heroes, the grandfather of behavioral economics, the great Herbert A Simon.

Simon, who was awarded the Nobel price in economics in 1978, should also have been presented with an award for “most wonderful book with most remarkably boring title”. The book in question, “Administrative behaviour” (see what I mean?) is perfectly packed with wisdom. It’s a good read. No doubt.

Now, I believe it was in his 1982 book “Models Of Bounded Rationality And Other Topics In Economics” that Simon first introduced the concepts of “satisficing” and “bounded rationality”.

Bounded rationality can be described this way:

Any decision maker face three unsolvable problems when they attempt to make decisions:

  • First, they can only have limited and less than perfect information available to them
  • Second, the human mind has a limited capacity to process the information
  • Third, there’s always a limited amount of time to come to a decision

These three “problems” together create a limit (a bound, see) to how rational our decisions can be, especially when the decision maker’s environment is complex, as I would argue that almost everyone’s environment is these days. In these situations, the only available option is satisficing, i.e choosing a satisfactory option, rather than a perfect one.

The theme of bounded rationality runs like a red thread through the discipline of behavioral economics. The concept of bounded rationality deals with how the decision-making process itself influences decisions. Understanding these limits in yourself and your decision making process can greatly improve the how of decision making in your organization, especially in terms of speed and execution. It’s also a wonderful driver towards a mindset that appreciate and understand how to deal intelligently with complexity and uncertainty, which is nothing short of a core skill in 2014.


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