Bounded Rationality and Unwanted Aggregate Results

• It would be so nice if we as individuals made decisions that add up to the good of the whole. If we did this, then material selfishness would actually be a social virtue. And as a result, there would be no need to think about the good of other people.
• However, the world presents us with multiple examples of people acting rationally in their own best, short-term interests, while producing aggregate results that no one likes.
• This happens because of bounded rationality. Bounded rationality means that people make quite reasonable decisions based on the information they have. But they don’t have perfect information, especially about more distant parts of the system.
• We’re not all-knowing, rational optimizers. Instead, we meet our needs well enough before moving on to the next decision. We make decisions that meet our needs adequately, rather than trying to maximize outcomes in the face of imperfect information.
• We do our best to further our own interests in a rational way. But, we can take into account only what we know. And, we don’t know what others are planning to do until they do it.
• We rarely see the full range of possibilities before us. And we often don’t foresee, or choose to ignore, the impacts of our actions on the whole system.

Consequences of Bounded Rationality

• So, instead of finding a long-term optimum, we discover within our limited awareness a choice we can live with for now, and we stick to it. Then, we change our behavior only when forced to.
• Some people say that we don’t even interpret perfectly the imperfect information that we do have. Instead, we misperceive risk, assuming that some things are much more dangerous than they really are, and others much less.
• We live in an exaggerated present, paying too much attention to recent experience and too little attention to the past. We focus on current events rather than long-term behavior.
• We don’t give all incoming signals their appropriate weights. And, we don’t let in the news that we don’t like, or information that doesn’t fit our mental models.

An Example

• Suppose you’re lifted out of your usual place in society and put in the place of someone whose behavior you’ve never understood.
• For instance, having been a huge critic of government, you suddenly become part of the government. Or, having been a laborer who opposes management, you become management, or vice versa.
• If such transitions happened more often, in all directions, it would broaden everyone’s horizons. In your new position, you experience the information flows, the incentives and disincentives, the goals and discrepancies, and the pressures that go with that position. In other words, you experience the bounded rationality.
• Now, it’s possible that you retain your memory of how things look from the other angle, and that respond with innovations that transform the system. But this is unlikely.
• If you’re a manager, you’ll probably stop seeing labor as a deserving partner in production, and start seeing it as a cost to be minimized. If you’re an investor, you’ll probably overinvest during booms and underinvest during busts, along with other investors.
• However, seeing how individual decisions are rational within the bounds of the information available is not an excuse for narrow-minded behavior. But, it does provide an understanding of why such behavior occurs.
• Within the bounds of what a person in that part of the system can see and know, the behavior is reasonable. So, taking one person out of a position of bounded rationality and putting in another isn’t likely to make much of a difference. And blaming the person rarely creates a more desirable outcome.

Overcoming Bounded Rationality

• Change comes from stepping outside the limited information that can be seen from a single place in the system and getting an overview. Then, with a wider perspective, information flows, goals, incentives, and disincentives can be restructured so that separate, bounded, rational actions do add up to results that everyone wants.
• Behavior change can come with even a slight enlargement of bounded rationality by providing better, timelier, more complete information.
• The bounded rationality of each actor in a system is determined by the information, incentives, disincentives, goals, stresses, and constraints which affect that actor. They may lead to decisions that further the welfare of the whole system, or they may not.
• If they don’t, putting new actors into the same system won’t improve the system’s performance. What makes a difference is redesigning the system to improve the information, goals, incentives, disincentives, stresses, and constraints that have an effect on the specific actors.

This is part twelve of the summary of Thinking in Systems by Donella Meadows. If you’d like to review, here are parts one, two, three, four, five, six, seven, eight, nine, ten, and eleven of the summary.

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