Theory of Bounded Rationality (MPP)

Herbert Simon's
Decision Making
Theory
Theory of Bounded Rationality
CONTENTS
01 02 03 04
About Herbert Introduction Classical Model Criticisms of
Simon of Decision Classical Model
Making
05 06 07 08
Decision The Rational Perspective of Concludings
Making Process model of Rational Model
Decision Making
About Herbert Simon
• Herbert Simon was American economist, Computer scientist, Political Scientist and
Cognitive Psychologist.
• Simon was associated with several Public organizations and Professional Bodies.
• Herbert Simon's contribution has been particularly significant in the field of Decision
Making.
• From 1949 to 2001, Simon was faculty member at Carnegie Mellon University in
Pittsburgh, Pennsylvania. In 1949, Simon became a professor of administration and
chairman of the Department of Industrial Management at Carnegie Institute of Technology
("Carnegie Tech"), which, in 1967, became Carnegie-Mellon University. Simon later also
taught psychology and computer science in the same university.
• He received the Nobel Memorial Prize in Economic Sciences in 1978 and the Turing Award
in computer science in 1975. His research was noted for its interdisciplinary nature and
spanned across the fields of cognitive science, computer science, public administration,
management, and political science.
• His Pioneering study on Decision Making Led him to develop a theory of Bounded
Rationality.
Introduction
In an Organization decision making is one of the most central process at all levels.However , a
large number of studies on human behaviour proved that most people in an organization are
much poor at decision making. Therefore, people began to pay more attention to understand
how to make suitable decision in given situation. According to Rollinson, Decision making is
the process of producing a solution to recognized problems. There are three basic activities
“Identifying problems, evaluating alternatives and selecting one alternative.”All the all
decisions are made based on these three main activities, not all decisions are same. During
the whole process, people are making best choice from among several options based on
current situation. Good Decision making skill is essential for Career success,effective
entrepreneurship and leadership.
“Broadly stated, the task is to replace the global rationality of economic man with the kind of
rational behavior that is compatible with the access to information and the computational
capacities that are actually possessed by organisms, including man, in the kinds of
environments in which such organisms exist.” (Simon 1955a: 99)
Classical Model of Decision Making
As per Classical Theories of Decision Making, Economic Agent must be perfectly rational
agents. This means that there were carrying out full cost benefit analysis with all the options
available. When the behavioral economists and psychologists tested the predictions of
perfect rationality theory they found out that the behaviour of economic agents is
systematically different than what is expected by rational agent view.
Classical Theory is based on the several assumptions that Classical decision theory vies the
decision maker as acting in the world of complete certainty. As per theory decision makers are
objective, have complete information and consider all possible alternatives and their
consequences before selecting the optimal solution.
According to the research by Robbins, he considered that Classical model of decision making
could not fully represent how people make decisions in Organization. Because people do not
know how accurate data is used to make decisions, how reliable are the estimates of
probability and useful data is related to the event. In short in this environment and Information
age one cannot be analyse all possible alternatives and all information related to event.
Simon's’ Criticism of Classical Model of Decision Making
Herbert Simon strongly Criticized the view of Classical Model of Decision making. The view of
Perfect rationality was completely rejected instead he agreed that humans have bounded
rationality.
1. He calls principles of Classical theory are contradictory in pairs and they are scientifically
invalid.
2. Principles of Classical theory of Decision making do not have universal relevance.
3. He pointed out the gap between principles and practices. (e.g. Decision makers are objective
and they have all information of situation and assess all possible alternatives.)
4. Missing factor according to him is optimum rational choice between alternative course of
actions.
In Short, in terms of people’s abilities, it is impracticable to collect all information due to many
external and internal factors around the organization (Complexities and Nature of Business
environment). Making Practical Decision is not just collect as much as information which is
impractical to estimate many of the consequences considered. It is considered that most people
are not aware that the approaches they used are limited within their awareness.
Bounded Rationality
• Herbert Simon suggested that the complexity and pace of changing in environment and
limitations of humans cognitive systems it is impossible in real life decision making
situations. In real life people do not evaluate all available option and do not carry out full
cost benefit analysis. People Choose most suitable and satisfactory alternative available
first. Selected alternative depends upon the context of the situations, Level of expertise of
the decision maker, the characteristics of the environment and Information available.
• This theory of bounded rationality says that decisions can be made with reasonable amount
of calculations and inomplete information. Relatively good decisions can be made without
analysing all the alternatives, which in most situation is impossible.
Assumptions of theory of Bounded Rationality

1. Decisions are not performed by the agents with perfect rationality
2. Quality of Decisions may vary as per functions and expertise of Decision Makers
3. To Understand the decision Making it is necessary to understand cognitive process
involved only analysis based on the performance is not enough.
Rational Model of Decision Making
Managers who weigh their Options and Calculate Optimal Levels of risk are using the Rational
Model of Decision Making. This Model is useful for non programmed decision making. A four
step process that helps managers weigh alternatives and choose the alternative with best
chance of success.
The Rational Model of Decision Making
1. Investigate the 2. Develop

Situation Alternatives
> Define Problem
> Seek Creartive Alternatives
> Diagnose Causes
>Identify Decision Objectives
4. Implement and 3. Evaluate

Monitor alternatives and
> Plan and Implementation of selected
Select the Best
Alternative
Available one
> Evaluate Alternatives
> Monitor Implementation and Make
> Select best Alternatives
Necessary Adjustments
Approaches of Rational Model
• Managers must make decisions within limited time and incomplete or less
information than they would like to have. Three concepts emerged over the years
in percpective
1. Bounded rationality and satisficing
2. Heuristics
3. Biases
• These concepts helps us to keep in mind that we human being do have limit as we
use our minds to confront the world. Neither this concepts are good nor bad.
Bounded Rationality and Satisficing
• In theory of bounded rationality Herbert simon pointed out

that decision maker must cope up with inadequate
information and insufficient monetory resouces to compile
complete information and also limits of their own
intelligence. Instead of searching for the perfect and ideal
decision managers frequently settle for one that will
adequately serve their purposes. In simon’s term they
satisfice or accept the first satisfactory decision. Decision
Maker Learns to do satisfice with a clear sense of goals for
organization in mind.
Heuristics
• Research by Amos Tversky and Daniel Kahneman has extended Simon’s idea on
Bounded rationality. They have demonstrated that Poeple rely on heuristics
principles or Rule of thumb to simplify decision making. Three heuristic show up
repeatedly in human decision Making.
1. Availability : People Judge the events by testing it against their memories. Events
that are readiliy available and vivid result in memory affect the decision making.
2. Representativeness : People also tends to assess of an occurrence by trying to
match it with pre existing category. Each problem represent some pre exsting
category and based on that it is judged.
3. Anchoring and Adjustments : People do not pull decisions out of thin air. they
start with some initial values and make adjustments to that values in order to arrive
at final decision. Diferrent initial values leads to different decisions.
Criticisms of Herbert Simon’s Theory
• Critics of this theory objected that only efficiency is not

important goal of administrative organization.Satisfaction
of various interest, mobilising resources and using rational
techniques are also important objectives.
• Critics have objected that the exclusion of values which are
essential part is ignored and uses logical positivists.
Inmanagerial field suitable decision making is important. As per F
Taylor there is a group of people who takes decision in an Organization
which determines that wether it is going to prosper or eventually
decline. so faulty decisions can lead to wrong developing direction.
Simon’s Fact based theory is relevant to business administration
which opened new frontiers for administrators and Managers. Herbert
Simon’s Theory is major breakthrough in evolution of administrative
theory. This theory tells how decisions are made efficiently and
effictively with scarce resources and provides deep insight of
Administrative behaviour. This theory helps managers in decision
making.
THANK YOU
FOR YOUR ATTENTION

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Herbert Simon's

Assumptions of theory of Bounded Rationality

1. Investigate the 2. Develop

4. Implement and 3. Evaluate

• In theory of bounded rationality Herbert simon pointed out

• Critics of this theory objected that only efficiency is not

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