Herbert Simon

Herbert Simon (1916 – 2001) Researcher in the fields of cognitive psychology, computer science, economics and philosophy. Nobel Prize in economic sciences 1978 Invented terms: bounded rationality and satisficing

Publications Administrative Behavior (1947) Organizations, with J.G. March (1958) The New Science of Management Decisions Reason in Human Affairs Sciences of the Artificial Models of Bounded Rationality

Duality in visions of rationality Traditionally, the main model of rational judgment in an uncertain world has been the probability theory little or no regard for the limitations in time, knowledge, and computational capacities underlying vision of rationality has been termed "unbounded rationality"

More human point of view: "bounded rationality" key difference: concept of limited search (vs. maximization) Satisficing behavior acknowledges the limitations of imperfect information time and cost constraints cognitive limitations environmental influence Attention capacity

Different viewpoints inside the duality visions of rationality Full Information Unlimited capacity for Analysis Supernatural reasoning power Models that assume the human mind operates with only bounded rationality bounded rationality exhibit unbounded rationality unbounded rationality optimize under constraints optimiz. under constraints look for first acceptable alternative satisficing look for best alternative fast & frugal heuristics This figure separates models that assume the human mind has unlimited demonic or supernatural reasoning power from those that assume we operate with only bounded rationality We can distinguish between two species of demons: those that exhibit unbounded rationality & those that optimize under constraints (costs > benefits) We also have two main forms of bounded rationality: satisficing heuristics is used for searching through a sequence of available alternatives until the first acceptable one is found fast and frugal heuristics use little information and computation to make a variety of kinds of decisions, always looking for the best alternative

Bounded rationality in close up satisficing fast & frugal heuristics “Boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Herbert Simon) Some dimensions for improving classical rationality models: limiting what sorts of utility functions recognizing the costs of gathering and processing information. Possible to have a "vector" or "multi-valued" utility function. The basic idea here is that most people are only partly rational, and are in fact emotional/irrational in the remaining part of their actions. He has stated that "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" Simon describes several dimensions for making "classical" models of rationality somewhat more realistic, while still retaining a high level of formalization. These dimensions include: limiting what sorts of utility functions there might be. recognizing the costs of gathering and processing information. Including the possibility of having a "vector" or "multi-valued" utility function.

Satisficing as a part of bounded rationality fast & frugal heuristics Satisficing assumes that… finding the optimal solution could require too much resources the optimal solution might not even exist Takes the shortcut of setting an adjustable aspiration level ending the search as soon as one is encountered that exceeds the aspiration level Makes a choice from a set of alternatives encountered sequentially As an example, think about whether a company is always profit-maximizing or not According to the theory of satisficing, profits are not maximized A critical level of profit must be achieved by firms, thereafter priority is attached to the attainment of other goals

Satisficing in practice bounded rationality Satisficing in practice satisficing fast & frugal heuristics Nature approach: Organisms adapt well enough to ’satisfice’, they do not ’optimze’ To clarify what satisficing is in practice: The issue of satisficing occurs in many different contexts Applies to nature: Organisms do not try to maximize they adapt well enough to ’satisfice’, they do not ’optimze’ applies to humans as well: why bother to optimize, when there an easy & accaptable solution that does fine CS & AI approach (unlimited speed & memory) Computing feasible, but not economical (e.g. scheduling, 3D rendering)  Happy with a ”good enough” solution Too complex problem (e.g. chess)  the provably best decision impossible to reach in practice  Have to accept a ”good enough” solution

Characteristics of business world decision making Small opportunity windows, limited resources, unpredictable markets Usually, there are not fixed objectives and a well-defined sets of alternatives ”Right and sufficient” information for optimal decision making is not always accessible, sometimes it does not even exist  so, there are many boundaries for decision making  but, there is a need to get acceptable decisions fast Markets are characterisized by small opportunity windows, limited resources while they at the same time evolve in an unpredictable manner It is usually impossible to find some fixed objectives and even harder to find a well-defined set of alternatives Optimal decision making would require ”right and sufficient” information, but this is not alway accessible, if it exists at all The conclusion is that we have many boundaries for decision making, but at the same time a need for making acceptable decisions quickly

Bounded rationality and satisficing in business decisions Cognitive limitations Time and cost constraints Imperfect information Managerial experience Competitive information Permeable boundaries Environmental Technical knowledge Satisficing decisions Rational decision maker NEED FOR FAST REACTIONS Empirical evidence does not show conclusively that executives are motivated toward maximizing behavior. A satisficing decision maker is one who is concerned simply with attaining a sought objective. Satisficing behavior acknowledges the limitations of: imperfect information time and cost constraints cognitive limitations environmental influence The decision maker establishes an attainable objective and searches for alternatives until one is found that meets the objective, and a choice is made and implemented. Satisficing behavior is open to the environment, whereas maximizing behavior disregards the environment. The case for satisficing behavior is centered in the concept of bounded rationality. (centered in the figure) Given bounded rationality, the best that a rational decision maker can get is a satisficing choice . BOUNDARIES FOR DECISION MAKING

Satisficing desicion making, positive sides Concerned simply with attaining a sought objective Satisficing behavior acknowledges the limitations of imperfect information time and cost constraints cognitive limitations environmental influence Given bounded rationality, the best that a rational decision maker can get is a satisficing choice We don’t need to find the ultimate solution to our problems, we need only be concerned with achieving a sought objective If we accept the theory of bounded rationality, the best alternative for a rational decision maker is to aim for a satisfying choice

Satisficing desicion making, negative sides Limitations on decision maker’s aspirations The need to specify objectives in advance May choose the first alternative too rapidly Belief that a satisficing choice is a “second-best” decision Focus on short-term results If we decide to only go for an acceptable solution, we get limitations on the decision maker’s aspiration We need to define the objectives we strive for in advance The theory encourages quick decision-making, but we risk choosing the first alternative that comes along, although a longer search would be better We might end up with a belief that the satisficing choice is only a ”second-best” decision The focus in decision making shift to more short-term results, which might have negative long-term effects

Summary: Herbert Simon Invented terms bounded rationality and satisficing Bounded rationality Boundedly rational agents experience limits in formulating and solving complex problems and in processing information Satisficing Satisficing takes the shortcut of setting an adjustable aspiration level and ending the search as soon as one is encountered that exceeds the aspiration level Both of these concepts can clearly seen in business examples