What is bounded rationality?

 

Bounded rationality

Making rational decisions is the process of choosing the best alternative that gives the maximum value. A rational decision maker would understand all the alternatives available, the steps that should be followed to attain the goal. 

Bounded rationality is the decision-making approach which says that individuals have limited cognitive ability, resource, and time to make a restricted amount of information on which they try to make rational choices in a complexed organizational environment.


Bounded rationality is one of the tools which Herbert A. Simon used to explain the administrative model of decision making. This model portrays how managers face complexed, non-programmed situations by making spontaneous decisions, it also helps to understand human and natural limits on rational decisions of a manager.

Bounded rationality is explained as the logical way of describing how rational decisions are made by managers as rational decisions are made with less than complete information, knowledge, and skills.

Another important tool of administrative model is satisficing. This is the process of choosing the option which fulfills the minimal requirement of a manager. A manager chooses not the best alternative which gives the maximum economic benefits, but decides to choose the first option to solve the issue as the manager cannot afford to bear the cost, is not willing to spend much money on collecting total information.

 


Example:

An operational manager gets to know that there is a shortage for product materials in the organization. He wants it to be supplied with a maximum cost of 50000 rupees, within the next 5 days. He was only able to find a supplier who sells the materials at a price of 60000 rupees, who can supply within 5 days.

The manager had to choose this supplier even though the price was high as he wanted the materials in a short period of time. Time is the constraint of rational decision in this scenario. This decision is not a perfectly rational decision as it does not fulfill the requirements of the manager. Therefore, the manager has behaved in a bounded rationality manner by making this decision.

 

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