The academic scholar and Nobel Price winner, Herbert A. Simon, was the founder of
the term – Bounded Rationality. Herbert A. Simon explored the boundaries
of human decision making in oftentimes complex, dynamic and equivocal environments.
Due to the complexity, dynamism and equivocality of the present and future
environments surrounding decision-making, Herbert A. Simon suggested that humans are not able to always
act fully rational, and that the inability will result in a general state of satisficing, in which solutions that may not be optimal are chosen
if they meet minimum requirements. This satisficing occurs due to the limited
rationality of humans, who are oftentimes not mentality equipped to evaluate
all potential consequences of decisions being made.
Herbert A. Simon proposed that humans are limited
in their rationality due to at least three factors.
- Rationality requires complete knowledge and understanding of the consequences
of a given action. Gaining full understanding of future consequences is, of
course, a very difficult task, and therefore this complete knowledge is seldom
present at the time decisions are made.
- Given that consequences of actions, per definition, will emerge in the future,
it is difficult for decision-makers to fully evaluate the future worth of
- Rationality requires that all alternative actions are known. In actual decision-making processes, very few alternatives are known, which inhibits humans in
making optimum decisions.
These three points are therefore the main reasons why humans or organization
cannot fully act as a rational economic entity. Decision-makers are therefore
inhibited in being rational, since they will primarily base their decisions
on readily available data and knowledge, and not be able to incorporate unknown
data or knowledge into their decision-making.
Since humans are not able to act fully rational, Herbert A. Simon proposes that
organizations should develop clear organizational goals for employees to follow.
These goals should act as the value premises that underlie daily decision-making.
The value premises should communicate what ends are preferred
or desirable to the organization, and clearly distinguish between what is acceptable from unacceptable.
Formalized control mechanisms like e.g. routinization, specialization, training,
standard procedures etc., which are normally found in formalized organizational structures, can also be seen
as supporting rational decision making, giving the individual employee the mental
capacity to perform more rational decisions.
It is therefore important for companies and other organizations to acknowledge
that humans cannot act rationally due to limited insights into the effects of given decisions, and that the organization needs to assist decision-making
before it can become rational. According to Herbert A. Simon, organizations would benefit from developing and communicating organizational goals, resulting
in value premises that will guide the decision-making, and that might guide
the development of formalized structures supporting organizational goals.
Therefore, Herbert A. Simon criticizes the Scientific
Management Approach for relying too much on the rationality of the
“economic man”, and criticizes the viewpoint that organizational
actors can always make rational decisions based on complete knowledge about
When organizational members suffer from bounded rationality, managing and organizing
is thus a much more difficult task than proposed by e.g. the Scientific Management
Approach, and organizations must provide both the formal and informal control
mechanisms to make organizational members perform as rationally as possible.