On Bounded Rationality

I was having lunch with a colleague last week when we touched on the topic of bounded rationality. In his research, he explores the theory as it applies to the knowledge management of organisations in times of disasters. Arguing that people only make rational decisions within the boundaries they see/are a part of, knowledge management in organisations should focus on providing specific contexts for people to make decisions.

I think the other aspect of bounded rationality, and the more important one to know with regards to the commons, points out that most people are only partly rational, and are in fact emotional or irrational in most of their actions (a point put forward by Herbert Simon, in Models of My life, 1991).

The problem with most economic theories lies in their vein of rigid optimisation. From my last post, the problem that I have with Hardin’s ‘Tragedy of the Commons’ (1968) is the assumption of rationality. Again, it is interesting that supporters of the ‘tragedy of the commons’ support it with the claim that resources are finite; yet they assume the infinite rationality of human actions.

Conlisk (1996) summarised a number of empirical evidence justifying why bounded rationality works as a feasible theory. For example, studies have found that:

[People] display intransitivity; misunderstand statistical independence; mistake random data for patterned data and vice versa; fail to appreciate law of large number effects; fail to recognize statistical dominance; make errors in updating probabilities on the basis of new information; understate the significance of given sample sizes; fail to understand covariation for even the simplest 2X2 contingency tables; make false inferences about causality; ignore relevant information; use irrelevant information (as in sunk cost fallacies); exaggerate the importance of vivid over pallid evidence; exaggerate the importance of fallible predictors; exaggerate the ex ante probability of a random event which has already occurred; display overconfidence in judgment relative to evidence; exaggerate confirming over disconfirming evidence relative to initial beliefs; give answers that are highly sensitive to logically irrelevant changes in questions; do redundant and ambiguous tests to confirm an hypothesis at the expense of decisive tests to disconfirm; make frequent errors in deductive reasoning tasks such as syllogisms; place higher value on an opportunity if an experimenter rigs it to be the “status quo” opportunity; fail to discount the future consistently; fail to adjust repeated choices to accommodate intertemporal connections; and more.

In such experiments, the mental tasks put to people are often simple, at least relative to many economic decisions; whereas their responses are frequently way off. Most important, reasoning errors are typically systematic.

(Conlisk, 1996)

Let me clarify that this is not to mean that economic theories are not important. They are; but all good economists would also ask that we consider all costs in economic modelling. Some studies in economics have already incorporated the theory in recent years, such as deliberation costs as part of economic modelling.

What bounded rationality theory also raise is the dissatisfaction with the tragedy of the commons as one explanation of resource problems. It seems to suggest that the idea of having common pool resources is not feasible, or is doomed to fail. Yet history and stories have proven otherwise. Peer-to-peer networks, and other self-governing groups have proven themselves to be sustainable, and increased in value over time and space. The assumption of perfect rationality (a key argument of Hardin’s commons-tragedy) suggests that people cannot cooperate other than for their self interests – and therefore cooperative and collaborative will not last. A rather simplistic view I must say, simply because people do not live alone; they do not live without communities. What may appear to be selfish decisions of man are influenced by larger considerations of the communities they live in.

“We know of no people without names, no languages or cultures in which some manner of distinctions between self and other, we and they, are not made… Self-knowledge – always a construction no matter how much it feels like a discovery – is never altogether separable from claims to be known in specific ways by others.” (Calhoun c.f. Castells, 2003)


Castells, M. (2003). The Power of Identity. Malden: Blackwell Publishing.

Conlisk, J. (1996). Why Bounded Rationality? Journal of Economic Literature, 34(June), 669-700.

Simon, H. (1991). Models of My Life. London: Basic Books.

4 Comments On Bounded Rationality

  1. AvatarKevin Carson

    Hardin’s thesis has been considerably misrepresented by neoliberal types. Hardin himself later regretted that he didn’t title the piece “the tragedy of the unregulated commons,” since that would have better reflected the point of view he expressed in the article.

  2. AvatarNatalie Pang

    Ostrom, in ‘Governing the Commons’ brings up this point very strongly. Yet at the same tme, many look upon the Internet as a type of unregulated commons – more questions are raised: is there a ‘tragedy’ in such a scenario? If yes, how? If not, how not? What are the working mechanisms to make those distinctions?

  3. AvatarMichel Bauwens

    Hi Natalie,

    Information Commons do not have the same tragedy, as they are non-rival or even anti-rival, they benefit from more usage. But they can be hijacked or appropriated. For me, the peer governance processes are aimed at preventing such hijacking, while peer property formats are aimed at preventing private appropriation. So, peer projects are definitely regulated, though every project regulates itself. Because most of the regulation is located within the projects itself, the whole may give the, in my opinion, mistaken, impression that it is unregulated. The regulatoin in this case, doesn’t come from private or public rules, but directly proceeds from the autonomous social processes, it is an emergent property of peer projects, as they learn from experience.

  4. AvatarNatalie Pang

    That is quite true. One of the things that is perplexing yet incredible, is the enclosure movement in the commons. The enclosure movement, which originated in the 18th century amongst farmers in England, caused boundaries around intellectual property contained in resources to be formed. What once belonged to many now only belonged to a few. It resembles somewhat like the exclusive club where if one becomes a member (insider), there is plenty to be gained and an array of privileges to be capitalized on – and the distance with the non-member (outsider) widens intentionally. Some argue against the enclosures that have been formed today; but i think at some levels there can be ‘good’ (for lack of a better) enclosures that is inherent in the interaction of networks.

    The beginning of it all, to me, is the fundamental recognition of property forms. The Romans in the ancient times, recognised three forms of property: res privatae, res publicae, and res communes. The most open of all is res communes, while with res publicae a distinction is made between what’s state-owned and what belonged to communities. I find it quite fascinating that back in ancient civilisations (without the internet and today’s communication technologies) there is such a level of pragmatic understanding on working models of property.

Leave A Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.