What does the concept of bounded rationality acknowledge in decision-making?

The concept of bounded rationality acknowledges that human decision-making is inherently limited by various factors. This includes constraints such as cognitive limitations, time restrictions, and the availability of information. People do not have the capacity to process all possible information and potential consequences when making choices. Instead, they operate within these constraints, leading them to satisfice rather than optimize; that is, they seek a solution that is good enough rather than the absolute best.

This understanding is crucial for fields such as behavioral economics and organizational theory, where recognizing the limitations of human judgment can lead to better decision-making frameworks and strategies. By acknowledging these limitations, one can develop more realistic models of how decisions are made in practice, catering to the reality that individuals often rely on heuristics and simplified models to navigate complex scenarios.