Bounded rationality is a concept in behavioral economics and cognitive psychology that describes how people make decisions within the limitations of their:
Cognitive abilities (limited memory and processing power),
Available information, and Time constraints.
Origin:
The term was introduced by Herbert A. Simon in the 1950s. He argued that humans are not fully rational decision-makers because we can’t process all possible information or outcomes.
Key Ideas:
Satisficing:
Instead of finding the optimal solution, people settle for a “good enough” option that meets their minimum criteria.
Limited search and knowledge:
People don’t explore every alternative or foresee all consequences — they stop when they find an acceptable answer.
Heuristics:
To cope with complexity, people use mental shortcuts (like availability heuristic or anchoring) that simplify decision-making.
Example:
A person shopping for a laptop might not compare every model on the market. Instead, they pick the first one that fits their budget and has decent reviews — this is bounded rationality, not perfect rationality.
Why It Matters:
It explains:
Why real-world decisions differ from ideal economic models, and
Why people often make predictable “irrational” choices.
Shervan K Shahhian
LIBERTY PSYCHOLOGICAL ASSOCIATION 