What it means
Classical economics assumed that decision-makers know all their options, can calculate every outcome and always choose the best. Simon thought this was unrealistic.
People have limited time, information and mental capacity, so their rationality is bounded, meaning limited by what they can know and compute. From that insight came the idea of satisficing, a word he formed by combining satisfy and suffice.
Instead of searching for the best possible option, a satisficer sets a minimum standard and accepts the first choice that meets it, even though a better one might exist somewhere. This is not laziness; it is a sensible response to the cost of searching, because the time spent hunting for a perfect answer can outweigh its benefits.
His 1947 book on how decisions are made inside organisations applied the idea to companies and public bodies. Companies break decisions into smaller pieces, create rules and procedures and divide tasks among specialists in order to cope with complexity.
Budgets, standard operating procedures and approval limits are all ways of simplifying decisions so that people can make them quickly and consistently. Simon won the Nobel Memorial Prize in Economic Sciences in 1978 for his research on decision-making within organisations.
He also helped found the field of artificial intelligence, building early programmes with Allen Newell that mimicked human problem solving, and the pair received the Turing Award, the highest honour in computing, in 1975. He spent much of his career at Carnegie Mellon University.
His work matters to anyone designing a business process. If people are boundedly rational, then good systems provide clear information, sensible defaults and simple rules instead of expecting perfect analysis from everyone.
It also explains why managers rely on rules of thumb, such as a minimum payback period, to screen investments quickly. The approach has influenced behavioural economics, which studies how real people differ from the idealised decision-maker.
Finance teams see the idea every day in approval limits, standard templates and dashboards that show only the few numbers a manager needs.
In practice
Real-world examples.
Example
A procurement manager needs a new supplier for packaging, and her time is limited because three other projects are due this month. She sets the standard of a quote below $0.40 per unit with delivery in two weeks and chooses the first supplier who meets it, rather than interviewing 30 firms.
Example
A start-up CFO with limited time and data uses a rule that any project must repay its cost within 24 months. The rule is not perfect, but it lets the team reject weak proposals quickly and focus on the promising ones. Over a year, the team reviews 40 proposals instead of 15 and funds the best eight.
Example
A large hospital group designs a checklist for its admissions staff. The checklist reflects the idea that busy people make fewer errors when complex decisions are broken into simple steps. Staff no longer try to weigh every factor at once, and the hospital records a drop in missing paperwork from 12% of admissions to 4% within a quarter.
Case study
Seen in the real world.
Redwater Components is a fictional manufacturer that used to spend six weeks evaluating every purchase above $5,000, which delayed projects and tied up its finance team. A new CFO, influenced by Simon's ideas, analysed 200 past purchases and found that the first acceptable quote was within 4% of the best price in nearly every case.
She introduced a rule for the illustrative company: for purchases up to $50,000, managers could approve the first supplier that met price and quality standards. Approval times fell from six weeks to four days, and project managers stopped treating the finance team as a bottleneck. The company estimated that the small loss from not finding the cheapest option was far smaller than the savings in staff time.
The finance team still audited a sample of purchases each quarter to check that the rule was not being abused. In the illustrative review, 3% of approvals were flagged for follow-up, which the CFO considered an acceptable price for faster decisions and a team free to work on forecasting.
Watch out
Common mistakes.
- Reading satisficing as settling for poor results, when it means applying a clear standard of acceptable and stopping the search when it is met.
- Assuming bounded rationality means people are foolish, when it describes sensible behaviour under limited time and information.
- Believing Simon was only an economist, when he also worked in psychology, political science, computer science and management.
Questions
People also ask.
What is bounded rationality?
It is the idea that decision-makers have limited information, time and brainpower, so they cannot optimise perfectly.
What is satisficing?
It is choosing the first option that meets a minimum standard, instead of searching for the best possible one.
Did Herbert Simon win a Nobel Prize?
Yes, he won the Nobel Memorial Prize in Economic Sciences in 1978.
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