Simon Says, 'Expand the Definition of Bounded Rationality in Management Research'

Abstract

Most mainstream strategy research does not define the concept of bounded rationality as Herbert Simon originally intended. Instead, the major theories in strategy research rely on the simplified operationalization of bounded rationality as the inability to know every possible contingency or outcome. However, Simon’s conceptualization of bounded rationality was much more complex, incorporating all potential cognitive deficits that limit rational behavior, including framing effects, heuristics, influence of prior expectations, and emotions. In this paper, we suggest that the field of strategy could greatly benefit by expanding its definition of bounded rationality to incorporate all of the elements originally specified by Simon. With a more complex definition of bounded rationality, strategy researchers can ask new questions in areas that have already been well explored, thus enhancing our understanding of these topics even further. Additionally, firms that understand how certain elements of bounded rationality predictably impact decisions can build a capability based in decision-making that can positively impact firm performance, as well as intra-firm and inter-firm relationships.

Keywords: bounded rationality, capabilities