Bounded Rationality

1.

Jillene Walker posted Jul 13, 2017 9:01 AM

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Bounded rationality was a concept developed by an economist named Herbert Simon as a decision-making theory. It is interesting to note how the developer viewed this theory, which can be seen in how he described the concept. He called bounded rationality by another name, “satisficing” which is a word made up of “satisfy” and “suffice”. This really speaks to the core of what his theory entails. It point to the fact that humans are cognitively unable to gather and process all the information necessary to determine maximum benefit on a course of action. According to Simon, we seek to find something that is “good enough” with the information we have in order to satisfy the requirements of a given task (“Herbert Simon”, 2009).

The idea of bounded rationality puts forth the need to cope with the complexities we deal with in every day life. IN order to do so, our cognitive minds develop habits, standard operation procedures, and techniques to help us make even the simplest decisions.

Take for example the following:

Habits – routine behaviors built upon repetition and reinforcement. Example: brushing your teeth everyday

Technique: a method to deal with situations. Example: conducting research (such as family/friend recommendations, magazines, Consumer Reports) before buying an item.

Standard operating procedures: "group think” and/or rules for decisions in specified situations. 

For Case 3, we have to examine the Sunshine Floor Barn’s sales performance of 5 product lines across 5 regions and 18 stores for the past 3 quarters. It is virtually impossible for an individual or even a company to have a full understanding of each aspect of this analysis.  We are only given the sales performance, and we do know that there are many, many factors that can affect sales on just one product line at one location, under one management, but to determine a rational evaluation of the entire Sunshine Floor Barn’s sales would be impossible. Ultimately, there is a risk that our recommendation could be incorrect, could lead to detrimental effects, or not point to the root of any issues as we are limited by our cognitive ability to analyze a certain amount of data with limited outside information.

In the SLP3 assignment, we are asked to choose a restaurant location utilizing six criteria. Bounded rationality would state that, again, we are limited by the amount of information that can be considered by the human mind, limited by the amount of information we can accumulate for consideration, and that outlier information will not be considered.

Both situations ask us to make complex decisions based upon a large amount of information and factors. All we can do is to “satisfice”, come up with the “best fit” recommendation for the situations, knowing that there will always be information we did not know or consider and that comes with certain risk.

References

Herbert Simon. (2009, March). Retrieved from The Economist website at: http://www.economist.com/node/13350892

Michigan State University. (1996). Bounded rationality. Retrieved from https://msu.edu/course/aec/810/bond-rat.htm

2.

Module 3 Discussion

Derek Schleiden posted Jul 12, 2017 7:01 AM

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After a quick online search for a definition I found “bounded rationality recognizes that it is impossible to comprehend and analyze all of the potentially relevant information in making choices”.  Furthermore it basically states that the possibly way to cope with the complexity of the world is to develop techniques, habits and standard operation procedures to facilitate a decision making process (n.d., 2017).  To me this exemplified in the military because we have systems and processes in place to aid in decision making as leaders, as well as for those leaders to be good stewards of tax payer dollars by following regulations, laws, and published instructions through all acquisition processes. 

This applies to SLP 3 because as the Vice President of Franchise Services for the Lucky restaurant chain you are provided only some of the variables when making a decision on where to establish a new restaurant. While some of the information is provided, as bounded rationality says, it is impossible to take into account all of the information.  Therefore, the most critical pieces of information need to be used to make the decision.

In Case 3, working for the Diligent Consultant Group analyzing Sunshine Floor Barn sales performance of multiple regions and many store locations.  With only three quarters of the year’s data the information is not entirely accessible.  There are many intricacies of each store location operating within the region, and different variables between the regions.  This type of work supports the concepts of bounded rationality because there are so many factors that cannot be comprehended and incorporated in the analysis.

There are similarities between these two scenarios because they incorporate a decision making process in order to come to a conclusion when there is an overload of information. Even with great detail, there are always ways to find more information to make a decision and in both of these scenarios assumptions will need to be made to come to a decision and not constantly further the analysis.

Derek

References

(n.d.). Retrieved July 12, 2017, from https://msu.edu/course/aec/810/bond-rat.htm