Does bounded rationality mean people are irrational?

No. It means people try to be rational in pursuing their goals but do so within limits of information and computation, which is distinct from irrationality.

A decision strategy of choosing the first option that meets a preset aspiration level instead of comparing all options to find the best. Simon coined the word from "satisfy" and "suffice."

Bounded Rationality

🧠 Psychology By CampusDown Wiki Editorial Team Last updated October 26, 2026

Bounded rationality holds that people intend to act rationally but, because information, time and computational capacity are limited, they choose a "good enough" option that meets an aspiration level rather than comparing every alternative to find the best.

Contents

1. Simon and satisficing
2. Spread to organization theory and economics
3. Heuristics: bias or adaptation?
4. FAQ
5. References

Simon and satisficing

In Administrative Behavior (1947) Herbert Simon wrote that people in organizations are "intendedly rational, but only limitedly so." Economic models of rational choice assume decision makers know all alternatives and outcomes and maximize expected utility, but Simon (1955, 1956) pointed out that real decision makers face costly information and limited computation. They therefore "satisfice": they examine options one by one and pick the first that exceeds an aspiration level. He likened the problem to a pair of scissors whose two blades are human cognitive capacities and the structure of the environment; behavior can be understood only by looking at both. Simon received the Nobel Prize in economics in 1978.

Spread to organization theory and economics

March and Simon (1958) argued that organizations compensate for individual cognitive limits through standard operating procedures and division of labor, and Cyert and March (1963) built a behavioral theory of the firm in which firms satisfice across multiple goals rather than maximize profit, searching for solutions only when problems arise. Oliver Williamson (1975) made the impossibility of writing complete contracts under bounded rationality a starting point of transaction cost economics. Conlisk (1996) set out why economics should incorporate bounded rationality. Christopher Sims's (2003) theory of "rational inattention" brought the idea into macroeconomics by modeling people with limited information-processing capacity who optimally choose what to attend to.

Heuristics: bias or adaptation?

Tversky and Kahneman (1974) launched the "heuristics and biases" program, showing that simple rules such as availability, representativeness and anchoring and adjustment produce systematic errors; Kahneman (2003) presented this as a map of bounded rationality. The program led to prospect theory and nudge policies. Gerd Gigerenzer and Goldstein (1996), by contrast, stressed Simon's ecological view, arguing that "fast and frugal heuristics" can be more accurate than complex calculation in uncertain environments; Gigerenzer and Selten (2001) called this the "adaptive toolbox." More recently Lieder and Griffiths (2020) proposed "resource-rational" analysis, treating judgment as the best use of limited cognitive resources and bridging the two views.

FAQ

Does bounded rationality mean people are irrational?: No. It means people try to be rational in pursuing their goals but do so within limits of information and computation, which is distinct from irrationality.
What is satisficing?: A decision strategy of choosing the first option that meets a preset aspiration level instead of comparing all options to find the best. Simon coined the word from "satisfy" and "suffice."

Sources reviewed: 2026-10-26

References

Simon, H. A. (1947). Administrative Behavior. New York: Macmillan.
Simon, H. A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69(1), 99–118.
Simon, H. A. (1956). Rational choice and the structure of the environment. Psychological Review, 63(2), 129–138.
March, J. G., & Simon, H. A. (1958). Organizations. New York: Wiley.
Cyert, R. M., & March, J. G. (1963). A Behavioral Theory of the Firm. Englewood Cliffs, NJ: Prentice-Hall.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131.
Williamson, O. E. (1975). Markets and Hierarchies. New York: Free Press.
Conlisk, J. (1996). Why bounded rationality? Journal of Economic Literature, 34(2), 669–700.
Gigerenzer, G., & Goldstein, D. G. (1996). Reasoning the fast and frugal way: Models of bounded rationality. Psychological Review, 103(4), 650–669.
Gigerenzer, G., & Selten, R. (Eds.). (2001). Bounded Rationality: The Adaptive Toolbox. Cambridge, MA: MIT Press.
Kahneman, D. (2003). Maps of bounded rationality: Psychology for behavioral economics. American Economic Review, 93(5), 1449–1475.
Sims, C. A. (2003). Implications of rational inattention. Journal of Monetary Economics, 50(3), 665–690.
Lieder, F., & Griffiths, T. L. (2020). Resource-rational analysis. Behavioral and Brain Sciences, 43, e1.

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Rational Choice TheoryWhat rational choice theory is, its core assumptions, applications to voting, collective action, the family and educational inequality, Coleman's social theory, Simon's bounded rationality, behavioral economics, and Green and Shapiro's critique.👥 Sociology Expected utility theoryWhat expected utility theory says about decisions under uncertainty, Daniel Bernoulli's answer to the St. Petersburg paradox, the von Neumann–Morgenstern axioms and Savage's subjective probability, measures of risk aversion, and the Allais and Ellsberg paradoxes.📈 Economics Availability heuristicWhat is the availability heuristic? The definition, Tversky and Kahneman’s 1973 letter-K experiment, the study of judged frequency of lethal events, everyday examples in news, insurance and investing, how it differs from anchoring, and ways to reduce bias.🧠 Psychology Representativeness heuristicKahneman and Tversky's representativeness heuristic—judging probability by resemblance—illustrated by the Linda problem and conjunction fallacy, base-rate neglect, the gambler's fallacy, stereotyping, and how Bayesian thinking corrects it.🧠 Psychology Anchoring EffectThe anchoring effect: Tversky and Kahneman's 1974 wheel-of-fortune study, the anchoring-and-adjustment heuristic, expert real-estate appraisals, first offers in negotiation, pricing, and ways to reduce the bias.🧠 Psychology Prospect Theory and Loss AversionKahneman and Tversky’s prospect theory explained: reference dependence, the S-shaped value function, loss aversion (losses loom about twice as large), the mug endowment-effect experiment, and examples from investing, shopping and subscriptions.📈 Economics

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This article was last updated on October 26, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.