What is Bounded Rationality?

Definition: Bounded rationality is a concept that portraits the limitations of rational thinking in
decision making processes. It describes the boundaries experienced by individuals facing the
choice to move forward or not with a certain transaction.
OR
Bounded rationality is the idea that we make decisions that are rational, but within the limits of
the information available to us and our mental capabilities.

What Does Bounded Rationality Mean?

This idea was developed by Herbert Simon, an economist and a Nobel Prize winner, who
intended to describe the factors that played a key role in decision-making processes and how the
rationality of these processes was impaired by certain considerations. He identified three
essential limitations experienced by the person making a given choice.
The first one is the availability of information, since the person entering the transaction has to
make an informed decision with all the information he currently possesses. This information is
not always reliable or profound enough to provide a sound rational argument for agreeing or not
to the operation.
Secondly, cognitive limitations come into play, since as human beings we have limited
knowledge and comprehension of facts and this reduces our ability to rationally decided about
certain issues. Subjectivity, in these cases, makes it appearance, where the individual fill the gaps
of his cognitive ability with pure instinct.
Finally, there are time boundaries, since not all decisions have a time frame that is long enough
for the individual to analyze the situation adequately to come up with the most rational solution.
These boundaries limit ourselves as human beings to be fully rational economic entities, as many
authors proposed at some point in history.

Example
Mr. Lockwell decided to buy a new washing machine. He spent the last two hours of his day
researching the best models available, prices and warranties to come up with three options he
considers suitable for what he is currently looking for. He decided to visit a local home
appliance’s store and a salesman approached him to help him choose. As Mr. Lockwell
suspected, the three options he considered the best ones were a little bit more expensive than he
anticipated and the salesman was prompted to offer a different one, cheaper than his other
choices.
He is now facing the decision of which one to buy and the concept of bounded rationality applies
here since Mr. Lockwell now doesn’t have all the information he needs, since he doesn’t know
everything about the cheaper washing machine he is being offered. On the other hand, his limited
knowledge about appliances cause him to be in a disadvantage to make a rational decision about
the purchase, and finally, he has a limited time frame since he has to get back to work in an hour
and he really needs his washing machine to be delivered tomorrow.

What is Rationality
Rationality is the quality or state of being rational – that is, being based on or agreeable
to reason.[1][2] Rationality implies the conformity of one's beliefs with one's reasons to believe,
and of one's actions with one's reasons for action.
"Rationality" has different specialized meanings in philosophy, economics, sociology,
psychology, evolutionary biology, game theory and political science

Rationality According to Islamic market

Erratic and inconsistent behavior is not amenable to scientific analysis leading to generalizations
that could have some predictive value for groups but not for individuals. This is possible only
with consistent behavior resulting from deliberate choice guided by certain norms. All intelligent
persons try to be rational in this sense, their success depending on the availability of relevant
information. It is reasonable, therefore, to assume rational behavior as the basis of economic
analysis of households and firms. But economic rationality assumed by modern economics goes
farther than that. It regards maximization of advantage for the self as the chief attribute of all
economic agents. The consumer maximizes utility or satisfaction and the firm maximizes profits.
The concepts are strongly individualistic and utilitarian. Altruism or one caring for the good of
others in one's choice is ruled out. The time horizon is narrowed down to the near future if not
the present. A care for life in the hereafter is thus excluded, however genuine one's faith in it.
The concept tends to regard non-economic ends irrelevant for choice, in so far as utility,
satisfaction and profits are interpreted in purely economic terms. As maximization of profits
implies minimization of costs, the focus is on direct cost to the individual, ignoring ecological
and socio-cultural costs. Thus the concept of economic rationality enshrines the materialistic
individualistic worldly approach to life in vogue in the hey-day of capitalism. Those were the
days of aversion to religion and morality and revolt against the Church. The Darwinian idea of
survival of the fittest further sanctified exploitation of the weak by the strong in the name of
economic rationality. The idea of superiority of the white race justified imperialism.

The concept of economic rationality is not suitable for the analysis of behavior in Muslim
countries, for two main reasons. It is not realistic. Men and women do care for the good of others
besides caring for their own good. Their choice is influenced by their assessment of its possible
consequences for society, for their neighbors, etc. They do care for the after life. Their choice as
consumers and their decision as producers, employers, traders etc. is influenced by their faith or
lack of faith in the life hereafter. They are also motivated by social, cultural and political
considerations. These tendencies may be strong or weak, depending on the extent of available
information and the strength of the relevant commitment. Yet the tendencies are there. A concept
that ignores these tendencies can hardly do justice to reality. Once the concept of economic
rationality is given the status of a basic assumption it has a tendency to serve as a norm. Men and
women tend to regard it as the proper way to behave. That is the difference between human
sciences and natural sciences, the object in the latter remaining unaffected by any assumption the
scientist makes regarding its behavior. No wonder that altruism, otherworldly considerations and
non-economic motives tend to be regarded as irrational modes of behavior by those who take
economics seriously. When economic theory is applied to practical problems and policy
prescriptions are made, this bias results in the neglect of the vital interests of society and its
individuals. This is the second reason why Western "economic rationality" cannot be admitted
into the conceptual framework of Islamic economics. It would hinder the process of Islamic
transformation by virtue of its normative role. Islamic economists have suggested its replacement
by the concept of "Islamic rationality" implying orientation of action towards maximal
conformity with the Islamic norms.' This concept too is normative in nature, but it would serve
as a better tool of analysis if due allowance is made for weakness of the Islamic commitment in
present day Muslim societies. It is a broader concept than that of economic rationality and a
closer approximation to the actual reality. Its normative role will promote the cause of Islamic
transformation of our societies.