Bounded rationality refers to what concept in decision-making?

Bounded rationality is a concept in decision-making that acknowledges the limitations individuals face when processing information and making choices. This theory, introduced by Herbert Simon, emphasizes that while people strive to make rational decisions, their cognitive limitations, the finite amount of information they can gather, and the complexity of the environment in which they operate often prevent them from achieving optimal outcomes.

The essence of bounded rationality lies in recognizing that decision-makers operate within constraints of knowledge, time, and computational capacity. As a result, rather than evaluating all possible options and outcomes, they often settle for a satisfactory solution that meets their needs, rather than an optimal one. This understanding is crucial in economics and management, as it affects how individuals and organizations approach strategic choices and resource allocation in real-world scenarios.