1. Herbert Simon

2. Herbert Simon (1916 – 2001)
Researcher in the fields of cognitive psychology, computer science, economics and philosophy.
Nobel Prize in economic sciences 1978
Invented terms: bounded rationality and satisficing

3. Publications Administrative Behavior (1947)
Organizations, with J.G. March (1958)
The New Science of Management Decisions
Reason in Human Affairs
Sciences of the Artificial
Models of Bounded Rationality

4. Duality in visions of rationality
Traditionally, the main model of rational judgment in an uncertain world has been the probability theory
little or no regard for the limitations in time, knowledge, and computational capacities
underlying vision of rationality has been termed "unbounded rationality"

5. More human point of view: "bounded rationality"
key difference: concept of limited search (vs. maximization)
Satisficing behavior acknowledges the limitations of
imperfect information
time and cost constraints
cognitive limitations
environmental influence
Attention capacity

6. Different viewpoints inside the duality
visions of rationality
Full Information Unlimited capacity for Analysis
Supernatural reasoning power
Models that assume the human mind operates with only bounded rationality
bounded rationality
exhibit unbounded rationality
unbounded
rationality
optimize under constraints
optimiz. under
constraints
look for first acceptable alternative
satisficing
look for best
alternative
fast & frugal
heuristics
This figure separates models that assume the human mind has unlimited demonic or supernatural reasoning power from those that assume we operate with only bounded rationality
We can distinguish between two species of demons: those that exhibit unbounded rationality & those that optimize under constraints (costs > benefits)
We also have two main forms of bounded rationality:
satisficing heuristics is used for searching through a sequence of available alternatives until the first acceptable one is found
fast and frugal heuristics use little information and computation to make a variety of kinds of decisions, always looking for the best alternative

7. Bounded rationality in close up
satisficing
fast & frugal
heuristics
“Boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Herbert Simon)
Some dimensions for improving classical rationality models:
limiting what sorts of utility functions
recognizing the costs of gathering and processing information.
Possible to have a "vector" or "multi-valued" utility function.
The basic idea here is that most people are only partly rational, and are in fact emotional/irrational in the remaining part of their actions.
He has stated that "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information"
Simon describes several dimensions for making "classical" models of rationality somewhat more realistic, while still retaining a high level of formalization.
These dimensions include:
limiting what sorts of utility functions there might be.
recognizing the costs of gathering and processing information.
Including the possibility of having a "vector" or "multi-valued" utility function.

8. Satisficing as a part of bounded rationality
fast & frugal
heuristics
Satisficing assumes that…
finding the optimal solution could require too much resources
the optimal solution might not even exist
Takes the shortcut of
setting an adjustable aspiration level
ending the search as soon as one is encountered that exceeds the aspiration level
Makes a choice from a set of alternatives encountered sequentially
As an example, think about whether a company is always profit-maximizing or not
According to the theory of satisficing, profits are not maximized
A critical level of profit must be achieved by firms, thereafter priority is attached to the attainment of other goals

9. Satisficing in practice
bounded rationality
Satisficing in practice
satisficing
fast & frugal
heuristics
Nature approach:
Organisms adapt well enough to ’satisfice’, they do not ’optimze’
To clarify what satisficing is in practice: The issue of satisficing occurs in many different contexts
Applies to nature:
Organisms do not try to maximize
they adapt well enough to ’satisfice’, they do not ’optimze’
applies to humans as well: why bother to optimize, when there an easy & accaptable solution that does fine
CS & AI approach (unlimited speed & memory)
Computing feasible, but not economical (e.g. scheduling, 3D rendering)
 Happy with a ”good enough” solution
Too complex problem (e.g. chess)
 the provably best decision impossible to reach in practice
 Have to accept a ”good enough” solution

10. Characteristics of business world decision making
Small opportunity windows, limited resources, unpredictable markets
Usually, there are not fixed objectives and a well-defined sets of alternatives
”Right and sufficient” information for optimal decision making is not always accessible, sometimes it does not even exist
 so, there are many boundaries for decision making
 but, there is a need to get acceptable decisions fast
Markets are characterisized by small opportunity windows, limited resources while they at the same time evolve in an unpredictable manner
It is usually impossible to find some fixed objectives and even harder to find a well-defined set of alternatives
Optimal decision making would require ”right and sufficient” information, but this is not alway accessible, if it exists at all
The conclusion is that we have many boundaries for decision making, but at the same time a need for making acceptable decisions quickly

11. Bounded rationality and satisficing in business decisions
Cognitive
limitations
Time and
cost constraints
Imperfect
information
Managerial
experience
Competitive
information
Permeable
boundaries
Environmental
Technical
knowledge
Satisficing
decisions
Rational
decision
maker
NEED FOR FAST
REACTIONS
Empirical evidence does not show conclusively that executives are motivated toward maximizing behavior.
A satisficing decision maker is one who is concerned simply with attaining a sought objective.
Satisficing behavior acknowledges the limitations of:
imperfect information
time and cost constraints
cognitive limitations
environmental influence
The decision maker establishes an attainable objective and searches for alternatives until one is found that meets the objective, and a choice is made and implemented.
Satisficing behavior is open to the environment, whereas maximizing behavior disregards the environment.
The case for satisficing behavior is centered in the concept of bounded rationality. (centered in the figure)
Given bounded rationality, the best that a rational decision maker can get is a satisficing choice .
BOUNDARIES FOR DECISION MAKING

12. Satisficing desicion making, positive sides
Concerned simply with attaining a sought objective
Satisficing behavior acknowledges the limitations of
imperfect information
time and cost constraints
cognitive limitations
environmental influence
Given bounded rationality, the best that a rational decision maker can get is a satisficing choice
We don’t need to find the ultimate solution to our problems, we need only be concerned with achieving a sought objective
If we accept the theory of bounded rationality, the best alternative for a rational decision maker is to aim for a satisfying choice

13. Satisficing desicion making, negative sides
Limitations on decision maker’s aspirations
The need to specify objectives in advance
May choose the first alternative too rapidly
Belief that a satisficing choice is a “second-best” decision
Focus on short-term results
If we decide to only go for an acceptable solution, we get limitations on the decision maker’s aspiration
We need to define the objectives we strive for in advance
The theory encourages quick decision-making, but we risk choosing the first alternative that comes along, although a longer search would be better
We might end up with a belief that the satisficing choice is only a ”second-best” decision
The focus in decision making shift to more short-term results, which might have negative long-term effects

14. Summary: Herbert Simon
Invented terms bounded rationality and satisficing
Bounded rationality
Boundedly rational agents experience limits in formulating and solving complex problems and in processing information
Satisficing
Satisficing takes the shortcut of setting an adjustable aspiration level and ending the search as soon as one is encountered that exceeds the aspiration level
Both of these concepts can clearly seen in business examples