chapter  10
8 Pages

Herbert Simon and the concept of bounded rationality

Simon introduced the concept of “bounded rationality” (BR) as a general

alternative to optimization. Against the idea of perfect rationality of neo-

classical economics, it is assumed that agents have incomplete information

and limited computational capacity. Thus, agents adapt to a changing

environment, seeking only satisfactory solutions, according to his

renowned Satisficing Principle. Models of BR had a variety of applications. The first application, the one at which Simon was aiming at since

1969, is behavioural economics and artificial intelligence. The second

application, also initially approved by Simon himself was made in transac-

tion costs theory. Oliver Williamson (1985), adopts a semi strong form of

rationality combining BR and opportunism: agents have “limited cognitive

competence and seek self-interest with guile”. Some game theorists also use extensively the concept of BR. Finally, the concept of BR is applied

into macroeconomic modelling as alternative behavioural assumption to

maximization.