 Definition Bounded Rationality. Description.
"Bounded Rationality" is a term for the phenomenon that cognitive
blinders prevent people from seeing, seeking, using, or sharing relevant,
accessible, and perceivable information during decision-making. The bounded
rationality phenomenon challenges traditional rationalist perspectives and
suggests that the rationality of actual human and company behavior is always
partial, or ‘bounded’ by human limitations.
This management concept recognizes that decision making takes
place within an environment of incomplete information and uncertainty. Herbert
Simon (also known for Design Thinking) pointed out that most people are only partly rational, and are in fact
emotional and irrational in the remaining part of their actions. They experience
limits in formulating and solving complex problems and in processing (receiving,
storing, retrieving, transmitting) information.
The point of bounded rationality is not only that people might decide differently if they had more or different information. But is also includes that they can't process all the information even if they had it.
Opportunistic Behavior
One major source of bounded rationality is Opportunistic Behavior by other parties. Opportunism can be defined as: self-interest seeking by an agent (an economic or business party) in a deceptive way (with guile). Or more neutrally as: flexibly adapting to changing circumstances to maximize self-interest. A simple example of opportunistic behavior is a person having a travel insurance who claims sunglasses from his insurer while he didn't lose them at all, suspecting the insurance company is unlikely to investigate relatively small claims.
Types of Opportunistic Behavior
We can distinguish a spectrum of opportunism, ranging from very clear forms, such as lying, cheating and stealing, to more subtle forms in which incomplete or (partly) incorrect information is given.
Furthermore, opportunistic behavior can be:
- Ex ante opportunism / upfront (also called adverse selection): exploiting precontractual information asymmetries.
- Ex post opportunism / afterwards (also called moral hazard: exploiting information asymmetries by not bearing the full consequences.
Safeguarding against Opportunistic Behavior. Prevention
A pioneer in the field of opportunistic behavior is O.E. Williamson. In The Economic Institutions of Capitalism (1985), Williamson explains that the problem with opportunistic behavior is not that everybody is continually acting in an opportunistic way, but that it is so costly to ascertain the trustworthiness of individuals ex ante.
Laws, contractual arrangements, certain corporate governance instruments, corporate transparency and risk management are amongst the instruments and safeguards to prevent opportunistic behavior.
Consequences of Opportunistic Behavior
A major consequence of opportunistic behavior is that it prevents business parties from relying on each other as much as they should to achieve maximal efficiency.
Opportunism is a main factor behind the prisoner's dilemma and the free rider problem, in which someone consumes a resource without paying for it in any form (or pays less than the full cost of its production).
|
Bounded Rationality Special Interest Group
|
|
|
|
|
|
 How to Use Intuition in Decision Making Properly?
Matzler, Uzelac and Bauer (2014) have written a ve...
Usage (application): Intuitive Decision Making, Adductive Reasoning, Bounded Rationality, Cognitive Biases, Managerial Decision-making
|
|
|
|
|
| |
|
|
Do Sad or Happy People Make Better Decisions?
There is a common thought that being in a sad mood...
Usage (application): Decision Making, Negotiating
|
|
|
|
|
| |
|
|
How to Use Counterintuition to Fight 5 Frequent Decision Making Errors
Mauboussin describes five mistakes in decision mak...
Usage (application): Strategic Decision Making, Dealing with Complexity, Dealing with Uncertainty, Strategy
|
|
|
|
|
| |
|
|
|
|
 The Influence of Emotions and Moods on Decision-Making and Entrepreneurship
This presentation is about emotions in decision-ma...
Usage (application): Decision Making, Emotional Intelligence, Entrepreneurship, Cognitive Bias
|
|
|
|
| |
|
|
Overview of Behavioral Economics and Bounded Rationality
This presentation is abut behavioral economics (an...
Usage (application): Decision Making, Behavioral Economics, Trainings, Workshops
|
|
|
|
| |
|
|
Heuristics as Biases (defects) or Heuristics as Intelligence (beneficial)?
Presentation that mainly is about Heuristics as Bi...
Usage (application): Heuristics, Biases, Framing
|
|
|
|
| |
|
|
Full List of Cognitive Biases Classified into Four Different Areas
Presentation that classifies Cognitive Biases into...
Usage (application): Decision Making, Human Behaviour, Management, Leadership, Strategy, etc.
|
|
|
|
| |
|
|
Critical Thinking in Decision Making
Presentation about critical thinking for decision ...
Usage (application): Critical Thinking, Testing Assumptions, Avoiding Fallacies, Avoiding Biases, Dealing with Emotions
|
|
|
|
| |
|
|
The Power of Persuasion: 3 Main Principles of Influencing Others
An extensive presentation about persuasion includi...
Usage (application): Persuasion Techniques, Managing Behavior, Cognitive Bias, Bounded Rationality, Resistance to Change
|
|
|
|
| |
|
|
Compare also:
Game Theory |
Analogical Strategic
Reasoning | Cognitive
Bias | Causal
Ambiguity |
Qualitative Investment
Analysis | Feedback
Loops | Lateral
Thinking | TRIZ
| Synectics |
Thinker's Keys | Abilene Paradox |
Paralysis by Analysis
| Tacit Knowledge
|
|
|
|
Special Interest Group Leader
|
|
|
|
|
|
|
|
News about Bounded Rationality
Videos about Bounded Rationality
Books about Bounded Rationality
More about Bounded Rationality