Annu.Rev.Polit.Sci.1999.2:297-321 Copyright 1999 by Anmual Reviews.All rights reserved BOUNDED RATIONALITY Ajuo asn Bryan D.Jones Department of Political Science,University of Washington,Seattle,Washington 98195;e-mail:bdjones@u.washington.edu KEY WORDS:decision making,behavioral organization theory,behavioral decision theory, political psychology ABSTRACT Findings from behavioral organization theory,behavioral decision theory, survey research,and experimental economics leave no doubt about the fail- ure of rational choice as a descriptive model of human behavior.But this does not mean that people and their politics are irrational.Bounded rational- ity asserts that decision makers are intendedly rational;that is,they are goal- oriented and adaptive,but because of human cognitive and emotional archi- tecture,they sometimes fail,occasionally in important decisions.Limits on rational adaptation are of two types:procedural limits,which limit how we go about making decisions,and substantive limits,which affect particular choices directly.Rational analysis in institutional contexts can serve as a standard for adaptive,goal-oriented human behavior.In relatively fixed task environments,such as asset markets or elections,we should be able to divide behavior into adaptive,goal-oriented behavior(that is,rational action)and behavior that is a consequence of processing limits,and we should then be able to measure the deviation.The extent of deviation is an empirical issue. These classes are mutually exclusive and exhaustive,and they may be exam- ined empirically in situations in which actors make repeated similar choices. INTRODUCTION Do people make rational decisions in politics and economics?Not if by "rational"we mean that they demonstrate conformity to the classic expected- utility model.There is no longer any doubt about the weight of the scientific evidence;the expected-utility model of economic and political decision mak- 3 ing is not sustainable empirically.From the laboratory comes failure after failure of rational expected utility to account for human behavior.From sys- tematic observation in organizational settings,scant evidence of behavior based on the expected-utility model emerges. 297 1094-2939/99/0616-0297S08.00
1094-2939/99/0616-0297$08.00 297 Annu. Rev. Polit. Sci. 1999. 2:297–321 Copyright © 1999 by Annual Reviews. All rights reserved BOUNDED RATIONALITY Bryan D. Jones Department of Political Science, University of Washington, Seattle, Washington 98195; e-mail: bdjones@u.washington.edu KEY WORDS: decision making, behavioral organization theory, behavioral decision theory, political psychology ABSTRACT Findings from behavioral organization theory, behavioral decision theory, survey research, and experimental economics leave no doubt about the failure of rational choice as a descriptive model of human behavior. But this does not mean that people and their politics are irrational. Bounded rationality asserts that decision makers are intendedly rational; that is, they are goaloriented and adaptive, but because of human cognitive and emotional architecture, they sometimes fail, occasionally in important decisions. Limits on rational adaptation are of two types: procedural limits, which limit how we go about making decisions, and substantive limits, which affect particular choices directly. Rational analysis in institutional contexts can serve as a standard for adaptive, goal-oriented human behavior. In relatively fixed task environments, such as asset markets or elections, we should be able to divide behavior into adaptive, goal-oriented behavior (that is, rational action) and behavior that is a consequence of processing limits, and we should then be able to measure the deviation. The extent of deviation is an empirical issue. These classes are mutually exclusive and exhaustive, and they may be examined empirically in situations in which actors make repeated similar choices. INTRODUCTION Do people make rational decisions in politics and economics? Not if by “rational” we mean that they demonstrate conformity to the classic expectedutility model. There is no longer any doubt about the weight of the scientific evidence; the expected-utility model of economic and political decision making is not sustainable empirically. From the laboratory comes failure after failure of rational expected utility to account for human behavior. From systematic observation in organizational settings, scant evidence of behavior based on the expected-utility model emerges. Annu. Rev. Polit. Sci. 1999.2:297-321. Downloaded from arjournals.annualreviews.org by UNIVERSITY OF WASHINGTON - HEALTH SCIENCES LIBRARIES on 09/25/06. For personal use only
298 JONES Does this mean that people (and therefore their politics)are irrational? Not at all.People making choices are intendedly rational.They want to make rational decisions,but they cannot always do so. The implication for politics is that rational responses to the environment characterize decision making generally,but at points-often important points-rationality fails,and as a consequence there is a mismatch between the decision-making environment and the choices of the decision maker.We refer to this mismatch as "bounded rationality showing through"(Simon 1996b). asn This conception has an important implication.In structured situations,at euosjad least,we may conceive of any decision as having two components:environ- mental demands(seen by the individual as incentives,positive or negative) 豆 and bounds on adaptability in the given decision-making situation.Ideally,an analysis based on rational choice should be able to specify what the environ- 9086000 mental incentives are and to predict decisions based on those incentives.What cannot be explained is either random error (even the most rational of us may make an occasional mistake,but these are not systematic)or bounded rationality showing through.Standard statistical techniques give us the tools to distinguish systematic from random factors,so in principle it should be possi- ble to distinguish the rational,adaptive portion of a decision from bounds on rationality. popeojuo One may think ofany decision as arising from two sources.One is the exter- nal environment-how we respond to the incentives facing us.The other is the internal environment-those parts of our internal make-ups that cause us to 125-76 deviate from the demands of the external environment(Simon 1996b). We are not,however,thrown into a situation in which all residual system- atic deviations from rational choices are treated prima facie as bounded ra- 26661 tionality.A very limited set of facets of human cognitive architecture accounts for a very large proportion of the deviations from adaptation.These may be placed into two classes:procedural limits,which limit how we go about mak- ing decisions,and substantive limits,which affect particular choices directly. Of procedural limits,I cite two as being extraordinarily important in struc- 台 tured,institutional settings (such as voting in mass publics or in legislative bodies),attention and emotion.Of substantive limits,I cite but one-the ten- dency of humans to "overcooperate,"that is,to cooperate more than strict adherence to rationality would dictate. The primary argument in this essay is that most behavior in politics is B adaptive and intendedly rational but that limits on adaptive behavior,imposed by human cognitive/emotional architecture,may be detected in even the most stable of environments.I advocate a research strategy that explicitly divides political action into the two categories of intended rationality and deviations from(or bounds on)intended rationality and explores empirically the implica- tions for the outputs of institutions and the institutional processes responsible
Does this mean that people (and therefore their politics) are irrational? Not at all. People making choices are intendedly rational. They want to make rational decisions, but they cannot always do so. The implication for politics is that rational responses to the environment characterize decision making generally, but at points—often important points—rationality fails, and as a consequence there is a mismatch between the decision-making environment and the choices of the decision maker. We refer to this mismatch as “bounded rationality showing through” (Simon 1996b). This conception has an important implication. In structured situations, at least, we may conceive of any decision as having two components: environmental demands (seen by the individual as incentives, positive or negative) and bounds on adaptability in the given decision-making situation. Ideally, an analysis based on rational choice should be able to specify what the environmental incentives are and to predict decisions based on those incentives. What cannot be explained is either random error (even the most rational of us may make an occasional mistake, but these are not systematic) or bounded rationality showing through. Standard statistical techniques give us the tools to distinguish systematic from random factors, so in principle it should be possible to distinguish the rational, adaptive portion of a decision from bounds on rationality. One may think of any decision as arising from two sources. One is the external environment—how we respond to the incentives facing us. The other is the internal environment—those parts of our internal make-ups that cause us to deviate from the demands of the external environment (Simon 1996b). We are not, however, thrown into a situation in which all residual systematic deviations from rational choices are treated prima facie as bounded rationality. A very limited set of facets of human cognitive architecture accounts for a very large proportion of the deviations from adaptation. These may be placed into two classes: procedural limits, which limit how we go about making decisions, and substantive limits, which affect particular choices directly. Of procedural limits, I cite two as being extraordinarily important in structured, institutional settings (such as voting in mass publics or in legislative bodies), attention and emotion. Of substantive limits, I cite but one—the tendency of humans to “overcooperate,” that is, to cooperate more than strict adherence to rationality would dictate. The primary argument in this essay is that most behavior in politics is adaptive and intendedly rational but that limits on adaptive behavior, imposed by human cognitive/emotional architecture, may be detected in even the most stable of environments. I advocate a research strategy that explicitly divides political action into the two categories of intended rationality and deviations from (or bounds on) intended rationality and explores empirically the implications for the outputs of institutions and the institutional processes responsible 298 JONES Annu. Rev. Polit. Sci. 1999.2:297-321. Downloaded from arjournals.annualreviews.org by UNIVERSITY OF WASHINGTON - HEALTH SCIENCES LIBRARIES on 09/25/06. For personal use only
BOUNDED RATIONALITY 299 for those outcomes.[The analysis presented here is further developed in my Traces of Eve:Adaptive Behavior and Its Limits in Political and Economic In- stitutions (manuscript in preparation).] BOUNDED RATIONALITY:BIRTH AND DEVELOPMENT Ajuo Bounded rationality is a school of thought about decision making that de- asn veloped from dissatisfaction with the "comprehensively rational"economic and decision theory models of choice.Those models assume that preferences JO'SMOl euosjad are defined over outcomes,that those outcomes are known and fixed,and that decision makers maximize their net benefits,or utilities,by choosing the 2 alternative that yields the highest level of benefits(discounted by costs).The subjective expected-utility variant of rational choice integrates risk and uncer- Aorenuue's]eumofre woy 9086000 tainty into the model by associating a probability distribution,estimated by the decision maker,with outcomes.The decision maker maximizes expected utility.Choices among competing goals are handled by indifference curves- generally postulated to be smooth(twice differentiable)-that specify substi- tutability among goals. A major implication of the approach is that behavior is determined by the popeojuo mix of incentives facing the decision maker.A second implication is that adjustment to these incentives is instantaneous;true maximizers have no learn- ing curves. Like comprehensive rationality,bounded rationality assumes that actors 125-76 are goal-oriented,but bounded rationality takes into account the cognitive limitations of decision makers in attempting to achieve those goals.Its scien- 26661 tific approach is different;rather than making assumptions about decision making and modeling the implications mathematically for aggregate behavior (as in markets or legislatures),bounded rationality adopts an explicitly behav- ioral stance.The behavior of decision makers must be examined,whether in the laboratory or in the field. The Birth of Bounded Rationality ALISHAINO Simon(1999;see also Simon 1996a)reminds political scientists that the no- tion of bounded rationality and many ofits ramifications originated in political science.Over his long career,Simon made major contributions not only to 3 political science (as the founder of the behavioral study of organizations)but also to economics(as a Nobelist),psychology(as a founding father of cogni- tive psychology),and computer science(as an initiator of the field of artificial intelligence). In the 1940s and 1950s,Simon developed a model of choice intended as a challenge to the comprehensive rationality assumptions used in economics
for those outcomes. [The analysis presented here is further developed in my Traces of Eve: Adaptive Behavior and Its Limits in Political and Economic Institutions (manuscript in preparation).] BOUNDED RATIONALITY: BIRTH AND DEVELOPMENT Bounded rationality is a school of thought about decision making that developed from dissatisfaction with the “comprehensively rational” economic and decision theory models of choice. Those models assume that preferences are defined over outcomes, that those outcomes are known and fixed, and that decision makers maximize their net benefits, or utilities, by choosing the alternative that yields the highest level of benefits (discounted by costs). The subjective expected-utility variant of rational choice integrates risk and uncertainty into the model by associating a probability distribution, estimated by the decision maker, with outcomes. The decision maker maximizes expected utility. Choices among competing goals are handled by indifference curves— generally postulated to be smooth (twice differentiable)—that specify substitutability among goals. A major implication of the approach is that behavior is determined by the mix of incentives facing the decision maker. A second implication is that adjustment to these incentives is instantaneous; true maximizers have no learning curves. Like comprehensive rationality, bounded rationality assumes that actors are goal-oriented, but bounded rationality takes into account the cognitive limitations of decision makers in attempting to achieve those goals. Its scientific approach is different; rather than making assumptions about decision making and modeling the implications mathematically for aggregate behavior (as in markets or legislatures), bounded rationality adopts an explicitly behavioral stance. The behavior of decision makers must be examined, whether in the laboratory or in the field. The Birth of Bounded Rationality Simon (1999; see also Simon 1996a) reminds political scientists that the notion of bounded rationality and many of its ramifications originated in political science. Over his long career, Simon made major contributions not only to political science (as the founder of the behavioral study of organizations) but also to economics (as a Nobelist), psychology (as a founding father of cognitive psychology), and computer science (as an initiator of the field of artificial intelligence). In the 1940s and 1950s, Simon developed a model of choice intended as a challenge to the comprehensive rationality assumptions used in economics. BOUNDED RATIONALITY 299 Annu. Rev. Polit. Sci. 1999.2:297-321. Downloaded from arjournals.annualreviews.org by UNIVERSITY OF WASHINGTON - HEALTH SCIENCES LIBRARIES on 09/25/06. For personal use only
300 JONES The model first appeared in print in Administrative Behavior (1947),which critiqued existing theories of public administration and proposed a new ap- proach for the study of organizational decision making.Simon gave great credit for the initiation of his innovative work to the behavioral revolution in political science at the University of Chicago,where he studied for all of his academic degrees.Although most political scientists are aware of Simon's contributions,many fail to appreciate that bounded rationality was the first, and because of its ripple effects in so many disciplines,the most important idea asn (even academic school of thought)that political science has ever exported.I A briefretelling of the tale is in order.As an undergraduate at the University of Chicago,Simon returned to his native Milwaukee in 1935 to observe budg- eting in the city's recreation department.He wrote: I came as a gift-bearing Greek,fresh from an intermediate price theory course taught by the grandfather of Chicago-School neoclassical laissez- faire economics,Henry Simons....My economics training showed me how to budget rationally.Simply compare the marginal utility of a proposed expen- diture with its marginal cost,and approve it only if the utility exceeds the cost.However,what I saw in Milwaukee didn't seem to be an application of this rule.I saw a lot of bargaining,of reference back to last year's budget,and incremental changes in it.If the word"marginal"was ever spoken,I missed it.Moreover,which participants would support which items was quite predictable....I could see a clear connection between people's positions on budget matters and the values and beliefs that prevailed in their sub- organizations. I brought back to my friends and teachers in economics two gifts,which I 129-562:c6661 ultimately called "organizational identification"and "bounded rationality." (Simon 1999) In his autobiography,Simon noted the importance of these two notions for his later contributions to organization theory,economics,psychology,and computer science."I would not object to having my whole scientific output described as largely a gloss-a rather elaborate gloss,to be sure-[on these two ideas]"(Simon 1996a:88). Bounded rationality and organizational identification (now considered a consequence of bounded rationality)won ready acceptance in political sci- ence,with its emerging empiricist orientation,but they were largely ignored in the more theoretical discipline of economics.Or,as Simon (1999)puts it, ITwo recent incidents convinced me of the need to remind political scientists that Simon's "tribal allegiance"(1999)is to our discipline.A well-regarded political scientist recently commented,"I didn't know that Simon was a political scientist."In a written review,a cognitive psychologist somewhat haughtily informed me that Simon's work on organizations,and in particular March Simon's Organizations(1958),was intended to extend his work on problem solving to organizational behavior.Of course,the intellectual path was the other way around
The model first appeared in print in Administrative Behavior (1947), which critiqued existing theories of public administration and proposed a new approach for the study of organizational decision making. Simon gave great credit for the initiation of his innovative work to the behavioral revolution in political science at the University of Chicago, where he studied for all of his academic degrees. Although most political scientists are aware of Simon’s contributions, many fail to appreciate that bounded rationality was the first, and because of its ripple effects in so many disciplines, the most important idea (even academic school of thought) that political science has ever exported.1 A brief retelling of the tale is in order. As an undergraduate at the University of Chicago, Simon returned to his native Milwaukee in 1935 to observe budgeting in the city’s recreation department. He wrote: I came as a gift-bearing Greek, fresh from an intermediate price theory course taught by the grandfather of Chicago-School neoclassical laissezfaire economics, Henry Simons.... My economics training showed me how to budget rationally. Simply compare the marginal utility of a proposed expenditure with its marginal cost, and approve it only if the utility exceeds the cost. However, what I saw in Milwaukee didn’t seem to be an application of this rule. I saw a lot of bargaining, of reference back to last year’s budget, and incremental changes in it. If the word “marginal” was ever spoken, I missed it. Moreover, which participants would support which items was quite predictable.... I could see a clear connection between people’s positions on budget matters and the values and beliefs that prevailed in their suborganizations. I brought back to my friends and teachers in economics two gifts, which I ultimately called “organizational identification” and “bounded rationality.” (Simon 1999) In his autobiography, Simon noted the importance of these two notions for his later contributions to organization theory, economics, psychology, and computer science. “I would not object to having my whole scientific output described as largely a gloss—a rather elaborate gloss, to be sure—[on these two ideas]” (Simon 1996a:88). Bounded rationality and organizational identification (now considered a consequence of bounded rationality) won ready acceptance in political science, with its emerging empiricist orientation, but they were largely ignored in the more theoretical discipline of economics. Or, as Simon (1999) puts it, 300 JONES 1 1Two recent incidents convinced me of the need to remind political scientists that Simon’s “tribal allegiance” (1999) is to our discipline. A well-regarded political scientist recently commented, “I didn’t know that Simon was a political scientist.” In a written review, a cognitive psychologist somewhat haughtily informed me that Simon’s work on organizations, and in particular March & Simon’s Organizations (1958), was intended to extend his work on problem solving to organizational behavior. Of course, the intellectual path was the other way around. Annu. Rev. Polit. Sci. 1999.2:297-321. Downloaded from arjournals.annualreviews.org by UNIVERSITY OF WASHINGTON - HEALTH SCIENCES LIBRARIES on 09/25/06. For personal use only
BOUNDED RATIONALITY 301 economists "mostly ignored [bounded rationality]and went on counting the angels on the heads of neoclassical pins." Procedural Rationality Simon spent a great deal of time and energy attacking the abstract and rarefied economic decision-making models.Much of his attack was negative-show- ing how the model did not comport with how people really made decisions. asn But Simon also developed what he termed a procedural model of rationality, based on the psychological process ofreasoning-in particular his explanation of how people conduct incomplete searches and make tradeoffs between values. Since the organism,like those of the real world,has neither the senses nor the wits to discover an"optimal"path-even assuming the concept of optimal to be clearly defined-we are concerned only with finding a choice mechanism that will lead it to pursue a"satisficing"path that will permit satisfaction at some specified level of all of its needs.(Simon 1957:270-71) Simon elaborated on his "satisficing"organism over the years,but its fundamental characteristics did not change.They include the following: 1.Limitation on the organism's ability to plan long behavior sequences,a limitation imposed by the bounded cognitive ability of the organism as well as the complexity of the environment in which it operates. -129-562:26661 2.The tendency to set aspiration levels for each of the multiple goals that the organism faces. 3.The tendency to operate on goals sequentially rather than simultaneously because of the"bottleneck of short-term memory." 4.Satisficing rather than optimizing search behavior. An alternative satisfices if it meets aspirations along all dimensions (attrib- utes).If no such alternative is found,a search is undertaken for new alterna- tives. ALISHAINn Meanwhile,aspirations along one or more dimensions drift down gradually until a satisfactory new alternative is found or some existing alternative satis- fices(Simon 1996b:30). B In detailing the general requirements of an organism operating under bounded(as contrasted with comprehensive)rationality,Simon(1983:20-22; see also Simon 1995)notes the following requisites:(a)"Some way of focus- ing attention,”(b)“a mechanism for generating alternatives,”(c)“a capacity for acquiring facts about the environment,"and (d)"a modest capacity for drawing inferences from these facts
economists “mostly ignored [bounded rationality] and went on counting the angels on the heads of neoclassical pins.” Procedural Rationality Simon spent a great deal of time and energy attacking the abstract and rarefied economic decision-making models. Much of his attack was negative—showing how the model did not comport with how people really made decisions. But Simon also developed what he termed a procedural model of rationality, based on the psychological process of reasoning—in particular his explanation of how people conduct incomplete searches and make tradeoffs between values. Since the organism, like those of the real world, has neither the senses nor the wits to discover an “optimal” path—even assuming the concept of optimal to be clearly defined—we are concerned only with finding a choice mechanism that will lead it to pursue a “satisficing” path that will permit satisfaction at some specified level of all of its needs. (Simon 1957:270–71) Simon elaborated on his “satisficing” organism over the years, but its fundamental characteristics did not change. They include the following: 1. Limitation on the organism’s ability to plan long behavior sequences, a limitation imposed by the bounded cognitive ability of the organism as well as the complexity of the environment in which it operates. 2. The tendency to set aspiration levels for each of the multiple goals that the organism faces. 3. The tendency to operate on goals sequentially rather than simultaneously because of the “bottleneck of short-term memory.” 4. Satisficing rather than optimizing search behavior. An alternative satisfices if it meets aspirations along all dimensions (attributes). If no such alternative is found, a search is undertaken for new alternatives. Meanwhile, aspirations along one or more dimensions drift down gradually until a satisfactory new alternative is found or some existing alternative satisfices (Simon 1996b:30). In detailing the general requirements of an organism operating under bounded (as contrasted with comprehensive) rationality, Simon (1983:20–22; see also Simon 1995) notes the following requisites: (a) “Some way of focusing attention,” (b) “a mechanism for generating alternatives,” (c) “a capacity for acquiring facts about the environment,” and (d) “a modest capacity for drawing inferences from these facts.” BOUNDED RATIONALITY 301 Annu. Rev. Polit. Sci. 1999.2:297-321. Downloaded from arjournals.annualreviews.org by UNIVERSITY OF WASHINGTON - HEALTH SCIENCES LIBRARIES on 09/25/06. For personal use only