What is Bounded Rationality?

Bounded rationality is the idea that individuals who are faced with decisions must work within certain bounds to make those decisions. In terms of consumers making decisions regarding the purchase of goods and services, this means that it is necessary to base consumer choices on factors such as the information available and the amount of time available to make a decision. The general idea of bounded rationality recognizes that the data available may or may not be completely accurate or reliable, but that in spite of the quality of the information at hand, a decision must be made using the resources currently accessible to the decision maker.

With bounded rationality, it is generally acknowledged that decisions are made with three specific restraints applying. First, the information available to the decision maker is often only partial and may even be unreliable. This reality means that a decision may be made without knowledge of one or more alternative courses of action. Along with limitations on the data available, the limits of the human mind to reason and process the data at hand will also play a role in the decision making process. A third factor that impacts the outcome of the decision-making process is the amount of time available to reach the decision to pursue a course of action.

The basics of bounded rationality can be applied to a number of situations in a business operation as well as in how consumers behave in the market place. For example, the decision to launch a new product will be impacted by the intelligence that the company is able to gather regarding the most likely reaction of consumers to that new product. At the same time, the ability of the company to understand the nuances of those reactions will influence the exact form that the launch takes. Finally, the timing of the launch will be influenced by how long the business owners believe that consumers will be attracted to the product in sufficient numbers to allow it to establish a place within the market that can be maintained.

With consumers, the idea of bounded rationality plays a part in deciding which products to buy and when to buy them. Any number of factors may be involved, based on the information at hand. This means that when making a decision between two products that are very similar in terms of price and performance, a subjective factor such as the perception of the manufacturers’ commitment to environmental issues may sway a consumer one way or another. Here, the subjective theory of value calls upon the ability of the consumer to evaluate the available data within the limits of his or her own mind, and decide what to do. Cost may also be a factor, especially if the item in question is only offered at the sale price for a limited period of time.