What does bounded rationality entail in the decision-making process?

Bounded rationality is a concept in decision-making that acknowledges the limitations of human cognition when faced with complex problems. This concept is based on the idea that individuals cannot possibly consider all alternatives or information due to constraints such as limited knowledge, time, and cognitive processing power. Instead, in the context of bounded rationality, decision-makers rely on simplified models that distill complex realities into more manageable terms.

By using these simplified models, individuals can make quicker decisions that are sufficiently good rather than optimal. This approach allows for practical decision-making in a world where comprehensive assessments of every possible alternative are often impractical. It reflects how people often focus on a few key aspects of a problem, leading to decisions that, while not perfectly rational, are made within a realistic framework of constraints and limited resources. Therefore, recognizing the role of bounded rationality helps to explain why decisions can be effective even when they do not stem from an exhaustive evaluation of every conceivable option.