Bounded Rationality

Bounded rationality is Herbert Simon’s term for how people actually make decisions, as opposed to how economic models assume they do.

Classical economics assumes people are rational optimizers - they have all the information, can process it perfectly, and always choose what maximizes their utility. Simon pointed out this is obviously wrong. Real people have incomplete information, limited brainpower, and not enough time.

So instead of optimizing, we satisfice - we find something good enough and move on. We use rules of thumb, heuristics, shortcuts. Not because we’re lazy, but because it’s the only way to actually function.

This shows up everywhere:

• You don’t evaluate every possible product before buying, you pick one that seems fine
• Companies don’t analyze every strategic option, they go with what’s worked before or what they can actually model
• Engineers don’t explore the entire solution space, they reach for familiar patterns

The interesting thing isn’t that we’re irrational - it’s that these shortcuts mostly work. Evolution and experience have given us heuristics that are good enough for most situations. The failures are at the edges, when the situation is genuinely novel or when our biases lead us astray.

Useful framing for building systems too. Users won’t read all the options. They’ll pick the first thing that looks right. Design for that.