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The theory of limited rationality by Herbert Simon

The theory of limited rationality by Herbert Simon

June 15, 2024

Human cognition is limited and imperfect: even if we managed to obtain all available information about a problem that we must solve, our reasoning failures would prevent us from making the optimal decision.

This is the main proposal of the theory of limited rationality proposed by Herbert Simon . His model has had important applications in the economics and psychology of organizations, and to a large extent still applies today.

  • Related article: "Are we rational or emotional beings?"

Herbert A. Simon, the author

Herbert Alexander Simon was born in Pennsylvania in 1916. He carried out his studies in social sciences and mathematics at the University of Chicago; in 1943 he received his doctorate in political science.

Later Simon He was a professor of psychology, political science and computer science at the University of Berkeley and Carnegie Mellon, where he worked until his death, in 2001.

He titled "Administrative Behavior" to his first book, which appeared in 1947 and became his most famous work. It was in this work that he proposed the theory of limited rationality for the first time.

Your model of human behavior he had a fundamental influence in the social sciences in general and in the economy in particular. Simon's ideas have been applied with special frequency in the field of organizations.

The model of limited rationality

The theory of limited rationality of Herbert Simon suggests that people we make decisions in a partially irrational way because of our cognitive, information and time limitations.

This model emerged as a reaction to the theories of rationality, very popular in the political and economic sciences, which propose that humans are rational beings that decide what is the optimal solution for each problem using all the available information.

However, according to Simon and the authors who succeeded him, it is very difficult to make completely rational decisions because our resources to process information are limited, especially when the problems are complex, as is often the case in everyday life. Facing the classic idea of ​​"economic man" Simon promoted that of the 'administrative man', unable to grasp the complexity of the world and the interrelation between its elements.

The model of limited rationality affirms that people use heuristics when it comes to finding solutions. Heuristics are defined as general and simple rules what we use to solve problems; although they may be useful in many cases, in others they produce cognitive biases, that is, systematic deviations in reasoning.

The availability heuristic, for example, refers to the fact that people tend to have more frequent and frequent information in mind because we can access it more easily. Thus, if we had a traffic accident recently, we are more likely to overestimate the probability of suffering another.

  • Related article: "" Heuristic ": the mental shortcuts of human thought"

The process of decision making

According to Simon, rational decision-making consists of solving problems by choosing the most appropriate alternative from those available. The decision will be more correct the more likely it is to achieve the desired effect and the more efficient it will be.

This author divided the rational decision-making process into three steps . First, all possible alternatives are identified; then the results that would be obtained with each one are analyzed. Finally, the most appropriate solution is chosen, comparing the effectiveness and efficiency of each of the available options.

However, we will never be able to optimally apply this procedure because it is impossible to determine all the possible solutions to a problem, as well as to adequately predict its consequences.

In his works, Simon said that in administrative behavior and in the organizational environment It is advisable to prioritize efficiency over adequacy when adopting solutions. On the other hand, in private decisions this is not so important since they do not affect the functioning and performance of an organization as a whole.

Developments of this theory

The model of Herbert Simon has been modified and extended by different economists, psychologists and computer scientists. Next we will mention the developments and most important applications of the theory of limited rationality .

1. Ariel Rubinstein

This Israeli economist and mathematician raised the need to determine which are the most appropriate decision-making procedures in his book "Modeling Bounded Rationality" (1998). The purpose of their contributions to the model of limited rationality is that the principles provided by it can be applied in different areas.

2. Edward Tsang

Tsang, a graduate in business administration and a doctorate in computer science, says that the organisms or agents that use better heuristics and algorithms make more rational decisions.

For Tsang, these aspects are equivalent to computational intelligence, a concept used to refer to the learning capacity of computers from data obtained through observation and experimentation.

3. Huw Dixon

The British economist Huw Dixon proposed a general formula for decision-making based on Simon's model. According to Dixon, assuming that people will opt for solutions close to the optimum does not require an in-depth analysis of decision making within the framework of limited rationality.

4. Gerd Gigerenzer

Gigerenzer is a German psychologist interested in decision-making, specifically in limited rationality and heuristics. According to this author, heuristics are in many cases more effective than optimal decision-making procedures , since they are not as irrational as other theorists raise and allow to solve problems very efficiently.

5. Daniel Kahneman

The Israeli Kahneman is a famous psychologist for having obtained a Nobel prize in economics . His most important contributions have to do with the description of heuristics and cognitive biases, carried out jointly with Amos Tversky.

Kahneman believes that the model of limited rationality can be very useful to overcome the limitations of economic theories on rational decision making.

Herbert Simon (June 2024).

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