I recently finished reading Herbert A. Simon’s autobiography, Models of My Life. Simon was the 1978 Nobel Prize winner in economics and the father of artificial intelligence. Among economists, he’s best known for his theories of bounded rationality and satisificing.
Mr. Spock vs. Homer Simpson
Rather than man being a completely rational calculator always trying to maximize his utility, similar to Mr. Spock of Star Trek fame, it seems in many areas of life we act more like Homer Simpson of The Simpsons. It’s doubtful a Mr. Spock would need Alcoholics or Gambling Anonymous, or the idea of a self-control credit card that, in advance, voluntarily limits one’s spending in various categories automatically.
Not all economists are convinced by the research that man is not rational, let alone willing to forego their useful assumption of rationality. Ludwig von Mises refused to call bad decision making “irrational.” He stated:
Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses, he is not ‘irrational,’ he is a poor marksman.
David Friedman, in his book Hidden Order (highly recommended by the way), explains the assumption of rationality this way:
…the assumption describes our actions, not our thoughts. If you had to understand something intellectually in order to do it, none of us would be able to walk.
Economics is based on the assumption that people have reasonably simple objectives and choose the correct means to achieve them. Both assumptions are false—but useful.
Suppose someone is rational only half the time. Since there is generally one right way of doing things and many wrong ways, the rational behavior can be predicted but the irrational cannot. If we assume he is rational, we predict his behavior correctly about half the time—far from perfect, but a lot better than nothing. If I could do that well at the racetrack I would be a very rich man.
…rationality is an assumption I make about other people. I know myself well enough to allow for the consequences of my own irrationality. But for the vast mass of my fellow humans, about whom I know very little, rationality is the best predictive assumption available.
In short, I find both assumptions of rationality and irrationality useful. If Friedman is right, then we can predict 50% of human behavior with rationality, and perhaps some portion of the other 50% with irrationality.
And this is where I find Herbert Simon’s bounded rationality and satisficing concepts extremely explanatory. Bounded rationality posits that both elements of irrational and nonrational behavior bound the area of rational behavior.
Coupling the concept of satisficing to bounded rationality is how Simon explains how people really make decisions. Rather than attempting to maximize or optimize, people search for “good enough” actions. Simon writes:
Since my world picture approximates reality only crudely, I cannot aspire to optimize anything; at most, I can aim at satisficing. Searching for the best can only dissipate scarce cognitive resources; the best is the enemy of the good.
[Even Darwin’s] natural selection only predicts that survivors will be fit enough, that is, fitter than their losing competitors; it postulates satisficing, not optimizing.
Could Simon’s satisficing concept explain why so many professional knowledge firms cling to their billable hours and timesheets?
It’s simply good enough, and certainly neither require much cognitive resources. Like driving, it’s an unconscious competence we don’t have to think too hard about.
If satisficing does explain it, then how do you overcome it?
What do you think?