Academic journal article Management Revue

Models of Bounded Rationality: The Approach of Fast and Frugal Heuristics**

Academic journal article Management Revue

Models of Bounded Rationality: The Approach of Fast and Frugal Heuristics**

Article excerpt

In a complex and uncertain world, humans draw inferences and make decisions under the constraints of limited knowledge, resources, and time. Herbert Simon, with his call for models of bounded rationality, can be seen as one of the fathers of the recently initiated research program on "simple heuristics that make us smart" (Gigerenzer/Todd/the ABC Research Group, 1999). These heuristics perform well because they are ecologically rational: they explore the structure of environmental information and are adapted to this structure. The present review paper introduces the key concepts of this research tradition, and provides two examples: (1) The recognition heuristic, which exploits a partial lack of knowledge, and (2) Take The Best, a simple lexicographic strategy that deliberately ignores information although it is available. The paper explains their ecological rationality, provides empirical evidence of their use, and illustrates some of their applications in consumer behaviour and group decision making. Finally, this research program is related to various notions of rationality.

Key words: Bounded Rationality, Ecological Rationality, Simple Heuristics, Recognition Heuristic, Take The Best

In a course on judgment and decision making, one of the present authors confronted the students with the following fictitious scenario: After Thomas P. retired, he took all his savings, went to the roulette table at the nearest casino and placed all his money on the "12." Was this a good decision? The students did not hesitate for a moment to say no. After this they were told the outcome (the "12" won), and they were faced with the question again: Was it a good decision? This time it took them a bit longer to answer, but they did not change their minds. Although the outcome was favourable to Thomas P., his decision to take this risk was not considered to be rational. The lesson was that the rationality of a decision should not be evaluated by taking information into account that was not available to the decision maker when he made the decision.

The present review paper is centred on a question that appears to be quite similar, but is much more provocative: Can it be rational not to use information even when it is available? Common intuition says no. Francis Bacon's thesis that knowledge is power probably reflects what most of us think about this issue, and it is not accidental that these words are written above the entrance to the Deutsches Museum in Munich, a museum that recounts the history of the rise and the success of science and technology after the Renaissance. Having knowledge about the laws of physics or chemistry, for instance, gives one an advantage over those who lack this knowledge. Similarly, it is usually advantageous to have information about one's environment, including information about other people's states of knowledge and their intentions. This is why governments, companies, and individuals spend billions of dollars every year to acquire information. From the assumption that having more knowledge and information is better than having less, it is only a tiny step to the conclusion that using this knowledge and information is better than not using it.

We do not want to question this conclusion in general. However, we want to draw attention to situations in which it is beneficial not to have information in the first place or, if it is available, to deliberately not use it when making decisions. Moreover, we argue that such situations are not as rare as one may think. Note that in what we describe below, not using information is not a goal per se, but the result of using so-called fast and frugal heuristics. The research program on fast and frugal heuristics, often called simple heuristics (Gigerenzer/Todd/the ABC Research Group 1999), has attracted a considerable amount of attention and discussion over the past years (e.g., see the commentaries and the reply following Todd/Gigerenzer 2000). In the present article, we want to give a brief introduction to the core ideas of this program and an overview of some related research. …

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