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Bounded Rationality Conceptualized by Herbert Simon in early 1960’s He won the Nobel prize so he must know something People try to behave rationally within the limits of their information processing capabilities and within the context of their attitudes and emotions they engage in restricted searches for information; have limited information processing capabilities rely on familiar sources of information biases and heuristics construct simplified models of reality; ...and then they make decisions using those models! Simon’s definition... The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world -- or even for a reasonable approximation of such objective rationality. Cognitive Limitations Human decision makers can retain only a few bits of information in short-term memory 7 plus or minus 2 Those who think in concrete rather than abstract terms tend to be somewhat limited in their ability to process information inside versus outside the box Propensity for risk may limit the amount of information needed to arrive at a decision risk takers may require less information than risk avoiders Bounded Rationality Problem Space Simon refers to this as “satisficing” Bounded Rationality We all suffer from it There is no cure So how do we deal with it? We rely on structured problem solving methods to help us minimize or overcome the effects of bounded rationality. Business cases are one of those methods. Business Case Examples Consumer Products International Strengths? Concerns? Should this business case be funded? Biogenetica Strengths? Weaknesses Should this business case be funded? Why Write Business Cases? Disciplined Exercise Make tacit assumptions explicit Provides basis for allocating capital Communication Tool Essential investment in building the relationship asset Defines what the project is (and is not) Project Comple