Bounded Rationality in the Decision Making Processes

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  • 0:04 Information Overload
  • 0:37 Bounded Rationality
  • 1:39 Consumer Decisions
  • 3:47 Marketing Decisions
  • 4:41 Lesson Summary
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Lesson Transcript
Instructor: Melanie Lawson
In this lesson, you'll learn the definition of bounded rationality and how the theory applies to the consumer decision-making process. You'll also learn how corporations use the theory to adjust their marketing tactics.

Information Overload

Consumers and everyone in general are on information overload. We're constantly subjected to advertisements on television, radio, billboards, cell phones, and all other electronic devices. We're being told what to buy, what's on sale, the latest fashion trends, current stock prices, and much much more. So when it comes time to make a simple purchase either in a department store or at the supermarket, we're probably not going to want to spend time doing a lot of research on the product. Instead, we'll find something that's simply 'good enough.'

Bounded Rationality

Economist Herbert Simon's theory of bounded rationality states that people are not inclined to gather all of the information required to make a decision. This is because we're incapable of getting all the information out there and couldn't even digest the information if we were able to get it in the first place. Therefore, you're more likely to pick something that meets maybe one or two criteria.

Let's think of this theory in an example. Say you're walking down the cereal aisle, looking for a healthy cereal. It'd be impossible to research every brand of cereal and compare nutritional information to find the healthiest one, right? Comparing the ingredients between just two cereals is tiring enough, much less trying to compare hundreds of them. You just don't have the time. Instead, you'd probably associate 'healthy' with an ingredient like whole wheat, find a box that says, '100% Whole Grain' and toss it in your basket. You found something that met the criteria for 'healthy,' in your mind, selected it, and moved along, without knowing whether it actually was the best choice.

Consumer Decisions

Corporations understand the theory of bounded rationality and design their marketing accordingly. Referring back to our cereal example, companies know that many of us try to eat healthy and, therefore, slap '100% Whole Grain' or the amount of fiber or protein per serving right on the front of the box to aid us in our decision-making process. So when you see the label, you're able to quickly make your decision.

Another way corporations tailor their marketing to aid us in our decision-making process is to appeal to trending values. Values are often one of the selection criteria consumers use to make their purchase decision. For example, you might be more environmentally-conscious and you're in search of eco-friendly, sustainable, or environmentally responsible products when you're shopping. Again, you're probably not doing a ton of research in the store find the most eco-friendly product; you're likely searching for something that is eco-friendly enough. Thus, labels such as 'Earth Friendly' or 'Sustainable Product' will be more noticeable on the packaging to you.

Another example of advertising that might be appealing to your values is the label 'Not Tested on Animals,' which you can find on a lot of beauty products. You might not know what you're looking for in a lipstick, but you pick up two like brands and one says it's not tested on animals, so you put it in the basket and move along to the next product.

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