Bounded Rationality and Satisficing (Behavioral Decision-Making Model)

The last few decades have witnessed greatly enhanced interest in behavioral decision theory. Unlike traditional decision theory, which is normative or prescriptive and seeks to find an optimal solution, behavioral decision theory (while it yields important practical implications) is inherently descriptive, seeking to understand how people actually make decisions. Long considered to be a fringe discipline, and perhaps simply a pesky nuisance to those advocating “economic decision making,” behavioral decision theory has emerged as an important and promising domain of research and practice. Two behavioral decision theorists—Herbert Simon and Daniel Kahneman—neither of them economists—won the Nobel Prize in Economics for their work. Further, Cass Sunstein, a leading writer on behavioral decision theory and an advocate of using “paternalistic intervention” to influence decision making, was appointed by President Obama to serve as administrator of the White House Office of Information and Regulatory Affairs. In that role, his views have drawn both applause and condemnation. Popular books such as Thaler and Sunstein’s Nudge, Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions and Kahneman’s Thinking, Fast and Slow have introduced these issues to a broader audience. Behavioral decision theory has been used to offer novel insights into disparate issues such as terrorism futures, road rage, whether to punt, bullet selection, divorce, and organ donation, as well as many management topics. This entry considers (a) rationality and its limits; (b) consequences of such bounds on rationality; (c) the roles of automatic information processing; (d) the relative merits of clinical, actuarial, and clinical synthesis approaches to decision making; (e) controversies relating to paternalistic intervention; and (f) the prospects of statistical groups and prediction markets.