Bounded Rationality

Note to future self…

I spend a lot of time thinking about how to make good decisions and developing an environment and a set of mental models that are conducive to good decisions. Today’s note is about a concept (bounded rationality) that helps encapsulate this idea that our decision making ability is bounded by a set of constraints (time, information, cognitive processing speed, etc.) under which we make a decision.

The implications of this are profound. In everyday life (not just economics) we assume that humans are rational individual that will make the most rational decision ever. Even if we take personal preference out of the equation, there are several other factors that affect our decisions and how “rational” these are.

For context, here’s an adapted definition of the term:

Bounded rationality is the notion that rationality is limited, when individuals make decisions, by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision. Decision-makers, in this view, act as , seeking a satisfactory solution rather than an optimal one. In other words, people try to answer the question what’s the best solution to this problem given the current constraints rather than what’s the best solution period.

So what? How is this applicable?

Here are three potential sources of constraint that can affect our decision making:

Time: could the act of waiting reduce my level of uncertainty?

Data: is there some piece of information that I am missing that could help me make a better decision?

Cognitive Capacity: have I had enough time to process this information? do I fully understand and grasp what it means?

Perhaps this is a useful set of questions that we can use to understand if we’re making the best decision possible. It might be the case that one or more factors might consistently hinder our ability to good decisions.

I will continue exploring this concept and see how it relates to other ideas in this space.

That’s it. Now back to work…