Bounded rationality


Models of Man: Social and Rational

by
Herbert A. Simon

Citation:

Herbert A. Simon. Models of Man: Social and Rational. New York: John Wiley and Sons, Inc., 1957, 279 pp.

This book summary written by: Conflict Research Consortium Staff.
Models of Man: Social and Rational is, according to the author, a collection of mathematical essays on rational human behaviour in a social setting. The work employs mathematical formulae in support of the authors assertions regarding human behaviour.

Models of Man: Social and Rational will be of interest to those who desire an understanding of the human component of environmental problems and solutions. Simon divides his essays into four sections, each dealing with an overarching topic. The first part is concerned with causation and influence relationships. The author offers a philosophical discussion of the causal relation and examines; causal ordering and identifiability, and spurious correlations. He concludes the first section with notes on the observation and measurement of political power and the bandwagon and under-dog effects of election predictions.

The second section of the book addresses social processes. It begins with the presentation of a formal theory of interaction in social groups. This section considers the mechanisms involved in pressures both; toward uniformity and upon deviate members. The section is concluded with an examination of skew distribution functions. The brief third section is devoted to motivation which is comprised of two essays. The first of these is a comparison of organisation theories. The second essay is a formal theory of the employment relation.

The final section of the book concerns rationality and administrative decision-making. The first three essays offer an economic perspective while the last two offer a psychological perspective. In the former category is the first essay which examines productivity and the urban/rural population balance. The author discusses the application of servomechanism theor to production control. The final essay from an economic perspective is a behaviour model of rational choice. The last essay save one examines rational choice and the structure of the environment. The final essay is a comparison of game theory and learning theory.

Models of Man: Social and Rational combines multiple perspectives, primarily philosophical, economic and psychological, to create a model for rational human behaviour in a social setting.


Administrative Behavior: a Study of Decision-Making Processes in Administrative Organization is a book written by Herbert A. Simon (1916–2001). It asserts that “decision-making is the heart of administration, and that the vocabulary of administrative theory must be derived from the logic and psychology of human choice”, and it attempts to describe administrative organizations “in a way that will provide the basis for scientific analysis”.[1]:xiii-xiv[2]:xlv-xlvi[3]:xlvii-xlviii[4]:xi The first edition was published in 1947; the second, in 1957; the third, in 1976; and the fourth, in 1997. As summarized in a 2001 obituary of Simon, the book “reject[ed] the notion of an omniscient ‘economic man’ capable of making decisions that bring the greatest benefit possible and substitut[ed] instead the idea of ‘administrative man’ who ‘satisfices—looks for a course of action that is satisfactory'”.[5] Administrative Behavior laid the foundation for the economic movement known as the Carnegie School.

The book crosses social science disciplines such as political science and economics.[6] Simon returned to some of the ideas in the book in his later works, such as The Sciences of the Artificial (1969).[6][7] The Royal Swedish Academy of Sciences cited the book as “epoch-making” in awarding the 1978 Nobel Memorial Prize in Economic Sciences to Simon.[8][9] A 1990 article in Public Administration Review named it the “public administration book of the half century” (1940-1990).[10] It was voted the fifth most influential management book of the 20th century in a poll of the Fellows of the Academy of Management


Bounded rationality is the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was proposed by Herbert A. Simon as an alternative basis for the mathematical modeling of decision making, as used in economics and related disciplines; it complements rationality as optimization, which views decision-making as a fully rational process of finding an optimal choice given the information available.[1] Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one.[2] Simon used the analogy of a pair of scissors, where one blade is the “cognitive limitations” of actual humans and the other the “structures of the environment”; minds with limited cognitive resources can thus be successful by exploiting pre-existing structure and regularity in the environment.[1]

Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as “rational” entities (see for example rational choice theory). Many economics models assume that people are on average rational, and can in large enough quantities be approximated to act according to their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice because of the finite computational resources available for making them.

Origins

The term is thought to have been coined by Herbert A. Simon. In Models of Man, Simon points out that most people are only partly rational, and are irrational in the remaining part of their actions. In another work, he states “boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information“.[3] Simon describes a number of dimensions along which “classical” models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:

  • Limiting the types of utility functions
  • Recognizing the costs of gathering and processing information
  • Possibility of having a “vector” or “multi-valued” utility function

Simon suggests that economic agents use heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other concurrent economic activities also requiring decisions.

Model Extensions

As decision makers have to make decisions about how and when to decide, Ariel Rubinstein proposed to model-bounded rationality by explicitly specifying decision-making procedures. This puts the study of decision procedures on the research agenda.

Gerd Gigerenzer opines that decision theorists have not really adhered to Simon’s original ideas. Rather, they have considered how decisions may be crippled by limitations to rationality, or have modeled how people might cope with their inability to optimize. Gigerenzer proposes and shows that simple heuristics often lead to better decisions than theoretically optimal procedures.

Huw Dixon later argues that it may not be necessary to analyze in detail the process of reasoning underlying bounded rationality.[4] If we believe that agents will choose an action that gets them “close” to the optimum, then we can use the notion of epsilon-optimization, that means you choose your actions so that the payoff is within epsilon of the optimum. If we define the optimum (best possible) payoff as  U^* , then the set of epsilon-optimizing options S(ε) can be defined as all those options s such that:

 U(s) \geq U^*-\epsilon.

The notion of strict rationality is then a special case (ε=0). The advantage of this approach is that it avoids having to specify in detail the process of reasoning, but rather simply assumes that whatever the process is, it is good enough to get near to the optimum.

From a computational point of view, decision procedures can be encoded in algorithms and heuristics. Edward Tsang argues that the effective rationality of an agent is determined by its computational intelligence. Everything else being equal, an agent that has better algorithms and heuristics could make “more rational” (more optimal) decisions than one that has poorer heuristics and algorithms.

Maps of Bounded Rationality: Psychology for Behavioral Economics by Daniel Kahneman

Daniel Kahneman – Prize Lecture: Maps of Bounded Rationality

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