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Bounded Rationality – Barriers to Effective Decision Making | Principles of Management

Bounded Rationality

The concept of bounded rationality refers to the way humans make decisions that depart from perfect economic rationality as a result of their limited thinking capacities, the information available to them, and their limited time. Rather than making the ‘best’ choices, we sometimes make choices that are satisfactory. A bounded rationality is the idea that we make rational decisions within the limits of the information at hand and our mental abilities. In rational decision making, the knowledge relating to the choice can be open and specific, so that it supports the decision maker. If you want to make high value decisions that can benefit from tools, processes, or expert knowledge, this can be very important.

Despite our desire to make rational decisions, managers face complex issues that can make this unrealistic. Especially with non-programmed decisions, non-rational decision-making is prevalent. We do not always know what questions to ask or what information to gather when we have never encountered a particular situation before. Even after gathering all the available information, we may not be able to make sense of it all, or to accurately predict the outcome of our choices.

Bounded rationality asserts that we cannot be fully rational when it comes to complex issues since we cannot fully comprehend all the possible outcomes, nor understand all the implications associated with every possible outcome. There are limits to how much information our brains can process. Furthermore, as was discussed earlier , even when managers possess the cognitive skills to process all the relevant information, they often must make decisions before they have time to collect the full set of data.

Bounded Rationality Quiz

Which family business decision-making process will be most affected by bounded rationality?

Which term best characterizes a decision that has bounded rationality?

Which of the following examples are used as evidence favoring the bounded rationality assumption?

Which of the following statements best demonstrates the concept of bounded rationality?



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