Category: Behavioral Economics.

Humans are primarily rational, and we want to believe that we make decisions based on logic and reason. But the truth is that we are often irrational creatures driven by emotions and prejudices, and this is what psychologists call “bounded rationality.”

Bounded rationality occurs when we make decisions based on limited information. It may lead to suboptimal decisions as it only considers some available options.

The bounded rationality model is a way of thinking about decision-making that considers the limits of our rationality.

There are many examples of bounded rationality in everyday life.

For example, when choosing what to wear in the morning, we only consider some outfits we can select—only a few viable options due to time and resource considerations.

Bounded rationality also plays a role in psychology. For example, we often think only of the most accessible information when remembering something, which can lead to forgetting important details.

Many factors can cause bounded rationality. One is time pressure. When under time pressure, you have to make decisions quickly and only have time to consider some of your options. Another factor is cognitive bias, and we base our judgments on personal beliefs and preferences, not objective facts.

Ask yourself the next time you make a decision. Are you considering all options, or does reason limit you?

What is Bounded rationality?

Boundary rationality is a theory in psychology and economics that suggests that people don’t always make perfectly rational decisions. Instead, use simplified decision-making forms. This means that we often make suboptimal choices.


I never made one of my discoveries through the process of rational thinking

Albert Einstein

Where does it occur?

Bounded Rationality has been found to occur in a variety of situations, including:

  • When people are facing complex problems, they need to consider many factors
  • When people are unable to collect all relevant information due to time pressure or other constraints
  • When people are making decisions based on inaccurate or incomplete information
  • When a person is influenced by emotions or other prejudices that distort judgment

Bounded rationality model

One model of bounded rationality is the satisfaction model put forward by Nobel Prize-winning economist Herbert Simon. In this model, humans have limited information and cognitive capacity, so they make “good enough” rather than optimal decisions.

Satisfaction models are accurate in some situations, such as when people are under time pressure or facing complex problems. This model helps explain why people often make suboptimal decisions, even when better decisions are possible.

The satisfaction model is one of his ways of explaining bounded rationality, but it is not the only one. Economists and psychologists have proposed different models to explain this phenomenon.

Bounded rationality is a decision-making approach in which humans make decisions based on limited information and cognitive abilities. Even when better decisions are possible, they often lead to suboptimal decisions.

Bounded rationality examples

One example of bounded rationality is when people use heuristics. Heuristics are mental shortcuts that humans use to make decisions quickly, and these shortcuts often lead to suboptimal decisions because they do not need to consider all available information.

Another example of bounded rationality is when emotions and other prejudices influence people. For example, people are likely to take more risks when they are happy and less likely to take risks when they are frightened. This can lead to suboptimal decisions, as people make decisions based on emotion rather than facts and logic.

A third example of bounded rationality is when people face complex problems. For example, consider the problem of choosing the optimal investment strategy. There is much information to consider, and making the best decisions can be challenging. As a result, people often need more complex decision-making strategies, leading to suboptimal decisions.

These are just some situations in which limited Rationality can lead to suboptimal decisions. In general, when humans make decisions based on little information or cognitive abilities, they risk not making the best possible decisions.


Bounded rationality psychology

Boundary rationality psychology studies how humans make suboptimal decisions due to cognitive limitations. Heuristics, emotions, and complex issues can all lead to suboptimal decisions.

One well-known model of bounded rationality is the satisfaction model. This model assumes that humans make “good enough” rather than optimal decisions due to limited information and cognitive capacity. This model is accurate in some situations.

Bounded rationality is an important heuristic psychological concept that helps explain why humans make suboptimal decisions. By understanding the factors that lead to suboptimal decisions, you can improve your decision-making process and avoid costly mistakes.

What causes bounded rationality?

Several factors can cause bounded rationality, including information processing biases, heuristics, and mental shortcuts. These can all lead us to make suboptimal decisions that may not be in our best interests. Bounded rationality can have several consequences, both positive and negative. Sometimes, it may lead us to make suboptimal choices that negatively affect our health or well-being.

In other cases, it may instruct us to make more creative or innovative decisions that would not have been possible if we had followed a strictly rational approach. Bounded rationality is a critical concept when considering how humans make decisions. It can help us better understand why we sometimes make suboptimal choices and how we can avoid doing so in the future.

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Impact of bounded rationality

There are several potential effects of bounded rationality on both individuals and organizations.

For individuals, it can lead to suboptimal choices in areas such as investments and personal finance. For organizations, it can lead to suboptimal decision-making at the strategic level and in operational areas such as supply chain management.

Bounded rationality can also affect public policy. Assuming that people are perfectly rational beings, policymakers may design policies that are too complex for people to understand or use effectively. This can lead to suboptimal or unintended results.

Countering bounded rationality

There are several ways to combat bounded rationality. One common approach is to use heuristics, or simple rules of thumb, to make decisions. This helps reduce the cognitive load associated with complex decision-making.

Another method is to seek out more information before making a decision. However, this can be difficult as we look for information to support our beliefs, like confirmation bias.

Finally, it is vital to recognize the role of emotions in decision-making. Emotions can sometimes confuse us, but they can also give us valuable insight into our preferences and values. We realize how Learning how to regulate your emotions effectively can help you make better decisions.

How to manage bounded rationality

There are several ways to manage bounded rationality.

One way is to reduce information overload when processing and making decisions. You divide the problem into smaller pieces and consider only the most important information.

Another way to manage bounded rationality is to use heuristics when making decisions. This helps you make more efficient decisions without getting bogged down in unnecessary details.

Finally, it’s important to be aware of cognitive biases and how they influence decision-making. Understanding your own biases can prevent them from affecting your choices. Bounded rationality is an important psychological concept that helps us understand why people make certain decisions. By managing bounded rationality, you can improve your decision-making process and avoid making suboptimal choices.


  1. What is bounded rationality?

    Boundary rationality is an approach to decision-making that considers human Rationality’s limits. Based on the idea that humans are not perfectly rational beings and that decision-making is often limited by cognitive abilities, emotional states, and available information.

  2. Where did the concept of bounded rationality come from?

    Nobel laureate Herbert Simon first proposed the concept of bounded rationality in the 1950s. Simon argued that people cannot always make perfectly rational decisions because of their limited cognitive abilities. This prompted him to develop a more realistic human decision-making model known as bounded rationality.

  3. How has bounded rationality been applied in practice?

    The bounded rationality approach is helpful in several fields, such as economics, psychology, and artificial intelligence. In recent years, political decision-making has also been known to be influenced by Bounded Rationality.

  4. Are there ways to counter bounded rationality?

    There are several ways to combat bounded rationality. One common approach is to use heuristics or simple rules of thumb to make decisions. This can reduce the cognitive load associated with difficult decision-making. Another method is to seek out more information before making a decision. However, this can be difficult because people seek information to support their beliefs (a phenomenon known as confirmation bias).

    Finally, it is crucial to recognize the role of emotions in decision-making. Emotions can sometimes be confusing, but they can also provide valuable information about our preferences and values. If you learn to regulate your emotions effectively, you can use them to make better decisions.

Final thoughts

It’s important to note that bounded rationality is no excuse for bad decisions; instead, it recognizes that humans are limited in their ability to make perfectly rational decisions. By understanding the impact of bounded rationality, we can take steps to mitigate its impact and make better decisions overall.

OKRs can certainly help you prioritize and focus, but it is possible employees can make bad choices, and that includes managers. The top-level management must understand that individuals need not be overwhelmed with decision-making just because he/she is naturally gifted. Book a free demo with our team to learn more about how OKR software can optimize your organization’s performance by improving your decision-making.

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