It was Herbert Simon who developed the concept of Bounded Rationality. He was an economist and political scientist interested in decision-making and how we make choices in everyday life. Simon believed that rather than optimizing (as most people thought during past decades) humans tend toward what he called satisficing.

Application Fields

• Marketing: Bounded Rationality is probably one of marketers’ best allies. Consumers do not always act rationally when making a purchase. Consequently, the use of advertising campaigns that stimulate immediate needs is logical, perhaps focusing on the scarcity effect, which produces the implicit feeling that anything rare is of greater value.

• Decision-making: From the buyer’s perspective, however, knowing that not all of our actions are dictated by logical or objective choices might ring a small alarm bell when confronted with a decision-making process. The satisfactory solution will be quicker and cheaper than the best solution, but much less accurate and forward-looking.

• Management: Even senior management must consider the variable represented by Bounded Rationality. Not only customers, in fact, but also their own employees may enact a rushed mindset when making decisions regarding work projects.

Industries

• Bounded Rationality in the educational field
Darwin University, during the 1990s, experienced a major setback of applications in 14 out of 18 departments. In order to explain the loss of students, an analysis based on the Bounded Rationality model was conducted. The research brought to light the problem of an excess of information accompanied by a scarcity in direct communication to potential students. This led to an increase in indecision and a failure in the ability to choose rationally.

• Bounded Rationality and artificial intelligence
At Cornell University, a study was conducted on the relationship between Bounded Rationality and Automated Machine Learning (AutoML). Artificial intelligence works on a complex number of variables and data that a human could never fully consider. Thus, being able to include the unknown related to bounded rationality will be a challenge for researchers of future technologies.

• Bounded Rationality in politics
Limited Rationality makes no exceptions and is not only limited to the world of private individuals, but also to the public realm. According to a University of Washington study, rational limits must be considered in politics, both by administrations and by voters. Indeed, it is plausible that when faced with a lengthy and time-consuming information process leading to the identification of the optimal candidate, voters prefer the alternative that appears for them to be the most satisfactory. A choice that is then reflected in political representation.

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Medical prescription says digital transformation

Business Functions

• Bounded Rationality in support of decision-making
The ability to make weighted or unweighted decisions can be analyzed in the context of U.S. public healthcare. A study published by the National Library of Medicine shows how a decision-making process that is not aimed at optimization is considered a leading cause of death and weighs on more than 80 percent of healthcare expenses. After all, no single model of rationality can be considered adaptable to all medical contexts. What is considered “rational” in one field may not necessarily be considered as such in another.

• Bounded Rationality in support of communication
The exchange between seller and consumer, ideally, is completed when the latter has at his or her disposal a certain amount of information that actually leads him or her to choose and purchase a particular product. The moment traditional channels, such as television, are unable to convey suitable messages, we rely on social media and word of mouth. Indeed, information conveyed by an acquaintance seems to be considered more reliable than information from the seller themselves.

• Bounded Rationality in support of the supply chain
According to a study conducted by Jens Roehrich, professor at the University of Bath, among the different variables that run through a supply chain, sustainability and maintenance costs represent two interesting factors in the study of the limits of rationality. The professor believes that absolute rationality would only think about cost amortization, while the choice dictated by bounded rationality would move toward a balance between the two variables. It is an example of how our mental boundaries can sometimes turn out to be an added value.