Bringing Cognition Back In and Moving Forward

Nearly fifty years after Simon's initial work on bounded rationality (Simon, 1955), we still struggle with the implications of the notion of bounded rationality for our models of individuals and organizations. Simon's suggestion to economists in 1955 was to reconsider the basic primitives of their models. Individuals do not optimize over a global set of observable alternatives, but satisfice – stopping their investigation of possible alternatives when a possible action is identified that is " good enough ". It is useful to return to this source document and observe the issues that it highlighted and those that remained in the background, which in turn gives us insight as to the subsequent path-dependent development of evolutionary models in economics and management. Two points are focal in Simon's argument, and they have served as central building blocks of behavioral economics since then. One is that only a subset of the entire space of alternatives is considered in a given choice setting. Furthermore, decision-makers may be confronted with a sequential unfolding of these possible alternatives, even among the limited set considered. Second, he postulated that these alternatives are evaluated by a simple discrete value function that distinguished between satisfactory and unsatisfactory outcomes. In this sense, Simon substituted for the usual objective function of economic theory an additional constraint of what constitutes a feasible solution to the choice problem. The value function becomes no different than the requirement that, say in the context of the decision to purchase a home, the home has the requisite number of bedrooms. What is less salient, though considered in the original discussion, is how actors are to evaluate the proposed solutions or alternatives. How do we know whether the various feasibility constraints are satisfied or not? Simon notes that there may be uncertainty as to whether a particular alternative may yield a state of nature that is in the satisfactory set or not, but the text suggests that this indeterminacy may be resolved by identifying a new alternative that does not suffer this risk. This discussion of the mapping of actions to outcomes (at least a discrete representation of the outcome space) points to an important lacuna in this early expression of behavioral economics and to its subsequent development as well. While ideas of search are central in behavioral theories of the firm, the mechanisms by which these alternatives are evaluated are less clearly developed. Typical models of …