Bounded Rationality

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Bounded Rationality

Bounded Rationality

In practice, managers are limited by time, by the information they have and by their own skills, habits and reflexes.
• Strategic managers do not evaluate all the possible options open to them in a given situation but choose from a small number of possibilities.
Strategy making necessitates compromises with interested groups through political bargaining. This is called partisan mutual adjustment.
• The manager does not optimise (ie get the best possible solution).Bounded Rationality
Instead, the manager satisfies. The manager carries on searching until he or she finds an option which appears tolerably satisfactory, and adopts it, even though it may be less than perfect. This approach Herbert Simon characterised as bounded rationality.

Definition of Bounded Rationality

Incrementalism involves small scale extensions of past practices.
• It avoids major errors.
• It is more likely to be acceptable because consultation and compromise accommodation are built into the process.
Disadvantages of Incrementalism
• Incrementalism does not work where radical new approaches are needed, and it has a built-in conservative bias. Forward planning does have a role.
• Incrementalism ignores the influence of corporate culture, which filters out unacceptable choices.
• It might only apply to a stable environment.

Logical Incrementalism


Logical incrementalism: managers have a vague notion as to where the organisation should go, but strategies should be tested in small steps, simply because there is too much uncertainty about actual outcomes.
The strategy is best described as a learning process. Logical incrementalism has the best of both worlds.
• The broad outlines of a strategy are developed by an in-depth review
• There is still practical scope for day-to-day incremental decision making.