Session 5A Bounded Rationality Dec 2020

Bounded Rationality
Reasoning & Rationality
 Rationality is a quality of an individual to think or make decisions sensibly or

logically i.e. with a valid reason.
 A good definition for “rationality” is: “the quality or state of being reasonable,
based on facts or reason”.
 Reason is the justification for an action or event.
 Rationality and reason are different because Rationality originates from reason
but reason does not originate from rationality.
 A person who is rational is always reasonable but a person who is reasonable is not
always rational.
How good are you at reasoning?
 Look at these two numbers
10 9.999…
Are these two different numbers? Or
Two different names for the same number?
 Let X = 9.999…
 10X = 99.999…
 -X = -X
 9X = 90
 ÷9 = ÷9
 X = 10
 9.999… = 10
Sam Raj Reena
Married Unmarried
Question- Suppose Sam is looking at Raj and Raj is looking at Reena. In this
situation, Is a married person looking at an unmarried person?
Options
1. Yes
2. No
3. Not sufficient information
Exercise – Visual Illusion
 So think about these two tables. If I asked you what's longer, the vertical line on
the table on the left, or the horizontal line on the table on the right? Which one
seems longer?
 Our intuition is really fooling us in a repeatable, predictable,
consistent way.
Exercise – Visual Illusion
 What do you see the color that

top arrow is pointing to?
 The bottom one?
 Turns out they're identical. Can
anybody see them as identical? Very
very hard.
 But again it's the same story that if we
take the background away, the illusion
comes back.
 Illusion as a metaphor
Are we good at making decisions?
 Vision is one of the best things we do.

 We have a huge part of our brain dedicated to vision -> bigger than dedicated to
anything else. We do more vision more hours of the day than we do anything else.
 Because in visual illusions we can easily demonstrate the mistakes; in cognitive
illusion it's much, much harder to demonstrate to people the mistakes.
 We wake up in the morning and we feel we make decisions.
 We have such a feeling that we are in control, and we are making the decision, that
it's very hard to even accept the idea that we actually have an illusion of making a
decision, rather than an actual decision.
Decision Making??
 The processes involved in making a selection between alternative courses of action.
 Humans generally opt for irrational decisions rather than rational decisions.
 Heuristics in Decision Making
 Heuristics are a problem-solving method that uses shortcuts to produce good-enough
solutions given a limited time frame or deadline.
 Heuristics are a flexibility technique for quick decisions, particularly when working with
complex data.
 Decisions made using an heuristic approach may not necessarily be optimal.
 A Heuristic is a mental shortcut that allows people to solve problems and make judgements
quickly
 Heuristics are helpful in many situations but they can also lead to cognitive biases.
 Examples that employ heuristics include using a rule of thumb, an educated guess, an
intuitive judgment, a guesstimate, profiling, or common sense.
Rationality
 Rationality, simply means that when you make a choice, you will choose the
thing you like best.
 It implies to the conformity of one’s beliefs with one’s reasons to believe, or of
one’s actions with one’s reasons for action.
 That means that the craziest behavior you can think of could be rational, if
you have a reason for it, that you believe in.
 Burning money is a good example. Maybe somebody hates money. Or loves fire.
Or just feels like burning some money. Given any of those interests, burning
money might be perfectly rational.
 Surely that should be irrational, right?
 Rationality accepts that people want what they want, without saying whether
those preferences are good or bad.
 But is rationality always desirable? Or is it subjective? Do emotions play a role
in rational decision making? Is logic/reason always sufficient in making rational
Rational Decision Making Model
 Identify the problem

 Establish the decision making criteria
 Weigh the decision criteria
 Generate alternatives
 Evaluate the alternatives
 Choose the best alternative
 Implement the decision
 Evaluate the decision
Application of rational Thinking
 Your old car has broken down; You decide to buy a new car
 STEP 1- Establish the decision making criteria
 How many passengers - for 5 passengers
 Mileage – 12 km / litre
 Safety concerns
1. Passengers 1. Safety
 Price - 5 lakhs 2. Safety 2. Passengers
3. Price 3. Mileage
 STEP 2 – Weigh the criteria 4. Mileage 4. Price
 STEP 3 – Generate alternatives
1. Mileage 1. Price
 STEP 4 – Evaluate alternatives 2. Price 2. Mileage
3. Safety 3. Passengers
 STEP 5 – Choose the best 4. Passengers 4. Safety
 STEP 6 – Buy the car
 STEP 7 – Evaluate and note the decision
Generating and evaluating alternatives is the most important step in decision
making. Use rational thinking in important decision making
From rationality to bounded rationality…
 Bounded rationality theory sees people as rational, but limited by the
amount of information they have and their ability to quickly process
that information (because of time constraint).
 Bounded rationality gives us a much more realistic view of how humans
actually behave by looking at the ways we don’t (or can’t) act.
 Decision-makers, in this view, act as satisficers, seeking a satisfactory
solution rather than an optimal one.
 Satisfice – to select the first alternative that is “good enough,” because the
costs in time and effort are too great to optimize
 For example, buying a house? Do you go for optimal solution or satisfied
solution?
 For example, a manager wanting to fire people from organization but within
one hour. Will rational decision i.e. taking a step by step process work here?
Bounded Rationality
Consider this scenario…
 You are the manager of a clothing store. The holiday

season is underway, but your sales for the month are down
by 20% from the same time last year. You have new staff
members in the store; the economy is slightly weaker; but
a similar store next to you has seen sales go up by 10%.
What to do?
Herbert Simon’s Model
 Proposed in 1976.
 Decision making is not perfectly rational; it is boundedly
rational:
 Limited information processing (cannot evaluate all
potential alternatives in limited time)
 Satisficing (stop when the solution is “good enough”–
pick radio station)
 Judgmental heuristics
Assumptions of the Rational Model
Factors Influencing Decision Making
 Time Pressure
 Incomplete information
 Limited resources
 Cannot know or
investigate all possible
alternatives
 Conflicting goals;
difficult to find optima
Bounded Rationality - a theory that suggests
Bounded Rationality that there are limits upon how rational a
Model by Herbert Simon decision maker can actually be
Satisfice – to select the first alternative that is “good

enough,” because the costs in time and effort are too
great to optimize
1. Decision makers suggest the first satisfactory alternative
2. Decision makers recognize that their conception of the world is simple
3. Decision makers are comfortable making decisions without

determining all the alternatives
4. Decision makers make decisions by rules of thumb or heuristics
Heuristics – shortcuts in decision

making that save mental activity

Session 5A Bounded Rationality Dec 2020

Uploaded by

Copyright:

Available Formats

Session 5A Bounded Rationality Dec 2020

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Session 5A Bounded Rationality Dec 2020

Uploaded by

Copyright:

Available Formats

Bounded Rationality

Reasoning & Rationality

 Rationality is a quality of an individual to think or make decisions sensibly or

 What do you see the color that

 Vision is one of the best things we do.

 Identify the problem

 You are the manager of a clothing store. The holiday

Satisfice – to select the first alternative that is “good

3. Decision makers are comfortable making decisions without

Heuristics – shortcuts in decision

You might also like