Herbert Simon was an American economist, political scientist, sociologist, psychologist, computer scientist born in 1916 in Milwaukee, Wisconsin United States. As an economist he was interested in bounded rationality. Bounded rationality is a theory about economic decision-making of individuals. Differently from other economists, Simon considered that individuals do not sick to maximize their benefit from a particular choice or action, simple because they are not able to assimilate and understand all the information required in order to do so. He states that individuals have a limited access to all needed information and also a limited potential for processing it properly. Simon affirms that the human mind necessarily restricts itself and he also calls that “cognitive limits”. Moreover, Simon applied this idea to both organizations and individuals.
Herbert Simon, being one of the most well-known researches in the field of behavioral economics studies, aimed to understand the algorithm of the process that is happening in human decision making. “The first question that comes to mind is:” What is decision making?” According to Herbert A. Simon, decision-making is the optimum rational choice between alternative courses of action.
The main idea of his research is how people organize themselves in various structures of distributed decision making in order to attain a degree of rationality that is higher than the one which can be achieved individually. He believes organizational structures are able to arrange information of its members in such a way that its totality can make a more rational decision on the basis of a larger computational capacity.
As Herbert Simon stated, every decision is based on two premises: a value premise and a factual one. A value premise cannot be proved by measurable means; therefore, it can only be considered as valid. Nevertheless, the factual premises can be measured, meaning that it can be tested empirically to prove its validity.
In this research, Simon specifically focused on hierarchic organizations such as institutions, business firms and governments. The fact that Simon viewed an organization as a structure of decision makers means decision-making process involves the entire organization in all levels.
The birth of the term “bounded rationality” can be dated to 1957 when Herbert Simon published his book Models of man; social and rational. However, even in 1955 the author was critical of classical view on rationality, where agents can compute the payoffs of all alternatives and make decisions. Moreover, those possibilities are given to the agent as he possesses all information. Simon states that this assumption is unrealistic and tried to make the model which should be compatible with real world. Author describes the processes of information gathering and eventual decision making. His arguments are based on the chess game, where the player cannot assess all the possibilities but make the decision on the next move based on aspiration level. In the conclusion Simon aimed to construct the definitions of as he called “approximate” rationality within organizational context (Simon, 1955). This paper was published in The quarterly journal of economics with impact factor of 6.66. This is considered as the highest score in economics category. Article was cited 14364 times according to Google Scholar, which demonstrates its value in the scientific community.
Simon (1972) also presented the chapter’Theories of bounded rationality’ in which he analyzes the intention of structures of theories of rational behavior and whether they are intended to be used in a normative or positive way. He starts by comparing the decision-making process to a chess game, where all possible moves are known to the players. Next, he examines rational decision-making in engineering activities where the alternatives are not known but have to be discovered by the players by gradually building. Simon concludes the article by looking back at technological progress, how decision procedures have matured throughout the years with the amount of information that has been gathered and how these tools make the decision-making of the economic man more manageable. This chapter was published in the book Decision and Organization and has been cited 2251 times according to Google Scholar.
Herbert Simon. (2009, March 20). Retrieved January 15, 2018, from http://www.economist.com/node/13350892
Prize, N. (2017). The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1978.
Simon, H. A. (1955). A behavioural model of rational choice. The quarterly journal of economics, 69(1), 99-118.
Simon, H. A. (1957). Models of man; social and rational.
Simon, H. A. (1972). Theories of bounded rationality. Decision and organization, 1(1), 161-176.