What is bounded rationality in the context of decision-making?

Bounded rationality refers to the constraints on human decision-making that stem from cognitive limitations and the finite amount of information available to individuals. This concept acknowledges that while people strive to make rational decisions, their ability to do so is often hindered by limitations in their cognitive processing, the complexity of the situation, and the time pressures they face.

In practical terms, bounded rationality suggests that when making decisions, individuals do not exhaustively analyze every possible option or outcome. Instead, they operate within a framework of acceptable solutions based on their knowledge, experiences, and resources. This leads to "satisficing," where individuals settle for a solution that is good enough rather than the optimal one. Thus, bounded rationality accurately captures the realistic nature of human decision-making, illustrating that it is often more about finding a satisfactory solution than achieving a perfect one.