Figure – Poker final hand rankings. Poker is a typical example of bounded rationality in our daily lives. Without having all the information available, you still have to make a decision. In one of his works, Herbert Simon states: “boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information“.
[…] Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. It was proposed by Herbert Simon as an alternative basis for the mathematical modelling of decision making, as used in economics and related disciplines; it complements rationality as optimization, which views decision making as a fully rational process of finding an optimal choice given the information available. Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisfier, one seeking a satisfactory solution rather than the optimal one. Simon used the analogy of a pair of scissors, where one blade is the “cognitive limitations” of actual humans and the other the “structures of the environment”; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment. Some models of human behaviour in the social sciences assume that humans can be reasonably approximated or described as “rational” entities (see for example rational choice theory). Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them. […] In Wikipedia, (link).
Book cover – Herbert A. Simon. Models of Bounded Rationality, Volume 1, Economic Analysis and Public Policy, MIT Press 1984. The Nobel Prize in Economics was awarded to Herbert Simon in 1978. At Carnegie-Mellon University he holds the title of Professor of Computer Science and Psychology. These two facts together delineate the range and uniqueness of his contributions in creating meaningful interactions among fields that developed in isolation but that are all concerned with human decision-making and problem-solving processes. In particular, Simon has brought the insights of decision theory, organization theory (especially as it applies to the business firm), behavior modeling, cognitive psychology, and the study of artificial intelligence to bear on economic questions. This has led not only to new conceptual dimensions for theoretical constructions, but also to a new humanizing realism in economics, a way of taking into account and dealing with human behavior and interactions that lie at the root of all economic activity. The sixty papers and essays contained in these two volumes are grouped under eight sections, each with a brief introductory essay. These are: Some Questions of Public Policy, Dynamic Programming Under Uncertainty; Technological Change; The Structure of Economic Systems; The Business Firm as an Organization; The Economics of Information Processing; Economics and Psychology; and Substantive and Procedural Reality. Most of Simon’s papers on classical and neoclassical economic theory are contained in volume one. The second volume collects his papers on behavioral theory, with some overlap between the two volumes. (from MIT).