Bounded rationality
Bounded rationality is the idea that people make reasonable decisions within the limits of their information, time, and mental capacity.
People are not irrational so much as rational within limits. Bounded rationality is the idea that takes those limits seriously.
Bounded rationality, a concept introduced by Herbert Simon, holds that people make decisions sensibly but within the limits of their information, time, and mental capacity. They do not optimise over all possibilities, as the perfectly rational agent would; they reason as well as they can given constraints that the idealised model ignores.
Rationality with a ceiling
The standard economic agent is unboundedly rational: it knows everything relevant, computes flawlessly, and always selects the optimal choice. Real people cannot. Information is incomplete and costly, attention is scarce, and the mind cannot evaluate every option in a complex world. Bounded rationality keeps the assumption that people are purposeful and reasonable while dropping the impossible assumption that they are omniscient calculators.
Satisficing instead of optimising
A central consequence is that people satisfice rather than optimise: they search until they find an option that is good enough against their aspirations, then stop, rather than exhaustively seeking the very best. This is not laziness but sense, since the cost of continued searching often exceeds the value of a marginally better choice. Much real decision-making is a search for the acceptable, not a computation of the optimal.
Why it matters
Bounded rationality reframes a great deal. It explains why firms use rules of thumb and routines rather than constant optimisation, why markets do not instantly reach textbook equilibria, and why the design of choices, what information is presented and how, matters so much. It is the foundation on which much of behavioural economics and organisational theory rests.
Bounded rationality is a more generous and more accurate view of human reasoning than either the rational-agent caricature or the dismissal of people as simply irrational. People are trying to decide well under real constraints, and understanding the constraints explains far more of their behaviour than assuming either perfect calculation or none at all.