3 Ways to Overcome Bounded Rationality
Herbert A. Simon was a well known American economist and political scientist who came up with the theory of bounded rationality. According to this theory, individuals seek a good enough course of action instead of trying to maximize their benefit from a particular course of action. This happens because they cannot get access to all the required information to make optimal decisions, and if they could, their minds are bound by cognitive limits making it hard to process it correctly.
Simon applied this theory to organizations and surmised that managers have bounded rationality when faced with organizational decision making. Their rationality is bounded because there are limits to our thinking capacity, available information, and time.
So if all learning happens inside our heads, and if we are bounded in our rationality, then how do organizations learn? According to Simon, there are only two ways an organization learns:
- The learning of its members
- Adding new members who have knowledge the organization didn’t have before.
The latter is very straightforward. The former is far more difficult. However, I’ve found success in overcoming bounded rationality by using the three approaches below.
1. The Beginners Mindset
According to Shunryu Suzuki’s Zen Mind, Beginner’s mind, shoshin in Japanese means beginner’s mind, and it refers to having an open mind without preconceptions when learning something — even if you’re an expert. If we are bounded in our rationality, then beginners’ mind helps us to become boundless.
In the beginner’s mind there are many possibilities; in the expert’s mind there are few. — Shunryu Suzuki
A great example is Steve Jobs who used Beginner’s mind to shape his philosophy around design, products, and business. Watch this video (1 min.) where he demonstrates his beginner’s mind by taking a different view on people.
2. First Principles Thinking
First Principles thinking is another way to understand complex problems and overcome bounded rationality. It entails looking at the fundamental facts of a situation to solve problems rather than following a process.
According to Elon Musk, first principles thinking is about boiling things down to the most fundamental truths as opposed to using analogies. Hear Elon Musk explain first principles thinking in this two minute video:
3. The Scientific Method
Most of the modern day product management methodologies — such as Lean — are essentially variants of the scientific method. The scientific method involves five steps:
- Formulating a question
- Coming up with a hypothesis
- Determining the logical consequences
- Testing to see if the real world behaves as predicted by the hypothesis
- Validate the hypothesis by analyzing the results.
This process repeats like a cycle until you build up evidence to highly specific questions which nest from a single broad question. This timeless technique is an excellent way to overcome bounded rationality.
Learn more about the scientific method from Richard Feynman:
Overcoming Bounded Rationality
Our rationality is bounded because there are limits to our thinking capacity, available information, and time. Organizations learn either through their members or by hiring new members. Adopting a beginner’s mindset, using first principles thinking, and applying scientific method are some ways to open our mind and be more creative.
Understanding these three techniques deeply, and practicing them everyday, can help individuals and organizations create heuristics, playbooks, and simple rules of thumb to overcome bounded rationality and make better decisions.
PS: Here are a few more things I thought were worth sharing this week:
- How Slack Got Ahead in Diversity: Slack achieved this feat without a designated “head of diversity”.
- Jeff Bezos interview on 60 minutes in 1999 (12 minutes): They were comparing Amazon with Sears back then. Amazon has come a long way!
- Great points on building ‘self-serve’ first SaaS products: According to Gokul Rajaram, truly great software companies are self-serve first.
- Inside Nintendo’s Creative Process: Hiring people with focus is a great criteria!
- Scott Galloway (NYU Stern professor): Happiness & the Gorilla: Scott shares 16 life strategies to work toward happiness and success. He calls them the algebra of life. Very insightful!
- My previous article on how to think like Charlie Munger in case you missed.
