Simon’s Principle of Bounded Rationality

Added on -2020-02-24

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Running head: RATIONAL BEHAVIOR Simon’s principle of Bounded RationalityName of the StudentName of the UniversityAuthor Note
1RATIONAL BEHAVIORPart 1- EssayHerbert Simon who was the US Nobel-laureate economist suggested in this book‘Models of bounded rationality and other topics in economics’ that the concept of boundedrationality is that decision makers regardless of their level of intelligence have to functionunder three inevitable constrains (Harstad & Selten, 2013). However, at times only limitedand unreliable information are available without any possible alternatives and their outcome,humans have only limited capacity in their mind to assess and handle the availableinformation. Lastly, very little time is thus obtainable to make a decision. Moreover,individuals who have plans to make rational choices are having certain limits to their choicesthat are sacrificing in complex situations. However, these limitations in rationality also makeit impossible to pull up contracts that involve every incident that is necessitating reliance onthe rule of thumb. Simon, through his work always wanted to make a theory of humanbehavior (Katsikopoulos, 2014). Humans are never faultless in decision-making. Simon in his work actually stated thatdecisions are limited in the rationality. As far as the framework of bounded rationality isconcerned, human beings always tries to make decisions rationally however, the cognitivelimitations in humans restrict them from being rational fully (Achtziger et al., 2012). Timeand cost restrict the quantity and quality information that is available to the individuals.Humans only keep a comparatively small amount of information in the human functionalmemory. However, the boundaries on intelligence and perceptions forces the ability of brightdecision makers to make the better choice based on the already available information.Simon’s concept of the bounded rationality explains that judgment diverge from rationalitybut it does not clearly explains that how judgment is biased. However, Tversky andkahneman’s research in 1974, helped to identify the particular organized, directional biases
2RATIONAL BEHAVIORthat influence the human judgment (Scheufele & Iyengar, 2012). However, these biases aregenerated by the propensity to short-circuit a rational decision making process by dependingon a number of rationalize strategies, or rules of thumb that is known as Heuristics.Judgment in decision-making however is ability, capacity or faulty to build considerableand effective decisions, reach effective conclusions, understand and distinguish relationships,comprehend the situations and form objective options mostly in those matters that affectactions (Manktelow, 2012).Thus, in the context of decision-making judgment can be outlined as the potential todecide, the thought procedure that is used to decide and lastly, that result of the decision thatcomes from employing judgment (Kaplan, 2013). The judgment and decision makingaccording to the research goal of Simon is all about how to make better decisions. However,both of these concepts are very much interlinked in individual’s daily life. In every situation,individual’s minds are susceptible to make judgments and choose various options and choicesfor decision-making. Thus, the outcome of this human judgment is choice. For every situationor problems, every human mind has different solution that is uniquely thought. These varioussolutions are cognitive evaluations are that is solely based on the reality and confirmation oftheir alternatives and based on which the outcome that is delivered is their judgment. Forinstance, during the senior year in the college on individual applies to a number of doctoralcourses, law and business schools. However, he receives acceptance letters from a majority ofthem. So here, the judgment and decision-making would be applicable. Bazerman and Moore2013 stated that there are six steps so that a rational decision making can be reached and theyare first, to recognize the problem, then to spot the necessary criteria to decide the variousoptions (Basel & Brühl, 2013). Followed by ranking the criteria’s in order to see theimportance, initiate alternatives, rating the alternatives on each of the criterions and lastly,calculate the optimum decision.
3RATIONAL BEHAVIOROverconfidence is the usual habit of overrating the validity of the individualknowledge, their ability and other related fields. Thus, overconfidence is collected of othercognitive failures such that those that is more strenuous to prevent. While overconfidence isnearly continually detrimental as a choice of lifestyle, creating an optimistic overview, whichsatisfies one’s health along with making the making the individual, seems more prosperous.However, this might cause many foolish decisions throughout the lifetime (Hilbert, 2012).Human mind can vary hugely in their awareness of what they know and they do not or theirmetacognitive ability and thus are generally too confident when assessing their performance.However, this very often guides to poor decision making with possibly disastrous outcomes.Overconfidence mainly acts as a bias in decision making when an individual places too muchof belief in their own knowledge and choices. This might lead to a contribution of decision tobe more valuable than it really is. Albert and Raffia first revealed the overconfidence bias in1969 (Paluch, 2012). The theory, which revolves around the cognitive bias in decision-making, can be detected back by Herbert Simon who went against the rational economicthoughts to suggest the judgment, which is fact, bound in its intellect. In overconfidence, the other phenomenon is the overrated of the accuracy of theknowledge that guides managers to become excessively optimistic about the convenientoutcomes. Hilton et al. 2011 considered Moore and Healy’s definitions for theoverconfidence in describing three types of overconfidence (Glaser, Langer & Weber, 2013).However, those are overestimating the accuracy of individual’s knowledge, overrating thequality of individuals performance and overvaluing individual ranking in a group called overprecision, overestimation and overpayment respectively. Overconfidence is an exceedinglyrelevant bias for the leaders in maximum of the industries. It can however, influence behavioron financial markets which is developing the time and budgets to finish projects, andcommon strategic managerial decision-making (Cutler, 2013). However, it is often used to

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