What does bounded rationality refer to in decision-making?

Bounded rationality is a concept in decision-making that acknowledges the limitations individuals face when processing information. Specifically, it refers to the idea that people operate under constraints such as limited information, cognitive limitations, and time restrictions, which influence their decision-making capabilities.

When someone is making decisions within the framework of bounded rationality, they do not have access to all possible information or alternatives. Instead, they make choices based on the information that is readily available to them, often simplifying complex decisions to manageable terms and selecting what they perceive to be satisfactory solutions rather than optimal ones.

This is in contrast to making decisions based on full information, which would imply that all possible outcomes and factors are taken into account—a scenario seldom achievable in real-world situations. Therefore, recognizing the limitations in information and alternatives is fundamental to understanding how decisions are made in practice, emphasizing the practical realities of human behavior in organizational contexts.