Human cognition is limited and imperfect: even if we managed to obtain all the information available about a problem we had to solve, our failures of reasoning 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 economy and psychology of organizations, and to a great extent it is still in force today.

Herbert A. Simon, the author

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

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

He entitled his first book, which appeared in 1947 and would become his most famous work, “Administrative Behavior. It was in this work that he first raised the theory of limited rationality.

His model of human behaviour had a fundamental influence on the social sciences in general and on the economy in particular. Simon’s ideas have been applied with special frequency in the field of organizations.

The model of limited rationality

Herbert Simon’s theory of limited rationality states that people 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 political and economic sciences, which propose that humans are rational beings who decide what is the optimal solution to each problem using all available information.

However, according to Simon and the authors who succeeded him, it is very difficult to make totally rational decisions because our resources for processing information are limited, especially when the problems are complex, as is often the case in everyday life. As opposed to the classic idea of the “economic man” , Simon promoted that of the ‘administrative man’, incapable of grasping the complexity of the world and the interrelationship between its elements.

The model of limited rationality states that people use heuristics to find solutions. Heuristics are defined as general and simple rules that we use to solve problems; although they can 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 take more account of the latest and most frequent information because they can access it more easily. Thus, if we have had a recent traffic accident we are more likely to overestimate the likelihood of having another one.

The decision-making process

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

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

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

In his works, Simon stated that in administrative behaviour and in the organisational sphere it is appropriate to prioritise efficiency over adequacy when adopting solutions. In contrast, 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

Herbert Simon’s model has been modified and extended by various economists, psychologists and computer scientists. Below we will mention the most important developments and applications of the theory of limited rationality .

1. Ariel Rubinstein

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

2. Edward Tsang

Tsang, a business administration graduate with a PhD in computer science, states that 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 ability of computers to learn from data obtained through observation and experimentation.

3. Huw Dixon

British economist Huw Dixon proposed a general decision-making formula based on Simon’s model. According to Dixon, assuming that people will opt for near-optimal solutions, no in-depth analysis of decision-making within the framework of limited rationality is required.

4. Gerd Gigerenzer

Gigerenzer is a German psychologist interested in decision making, specifically 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 claim and allow for very efficient problem solving.

5. Daniel Kahneman

The Israeli Kahneman is a psychologist famous 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 in overcoming the limitations of economic theories on rational decision-making.