MODULE - I

BASIC PRINCIPLES OF ECONOMICS

AND METHODOLOGIES IN
MANAGERIAL ECONOMICS
SESSION – III | HOMO ECONOMICUS: THE BOUNDED RATIONALITY

Dr. S. K. Rai | Sr. Associate Professor, SOB

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HOMO ECONOMICUS: THE

BOUNDED RATIONALITY

ECONOMIC BEING

3 SESSION
To be Covered WHAT IS RATIONALITY?​

SATISFYING OR
SATISFICING

BOUNDED RATIONALITY​

Presentation for UPES Faculty & Students

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HOMO ECONOMICUS: THE

BOUNDED RATIONALITY ​

Herbert A. Simon​
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HOMO ECONOMICUS:
“ECONOMIC BEING”​

The term homo economicus, or ‘economic man’, denotes a view of individuals in the social
sciences, particularly economics, as self-interested agents who seek optimal, utility-
maximizing outcomes.

Who is this individual?

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CHARACTERISTICS OF THIS
INDIVIDUAL ECONOMIC MAN

This individual possesses certain basic characteristics like:​

 Non-Satiation​

 Clarity of Preferences​

 Selfish Motive, and ​

 Possession of Information​

Note: All these assumptions are qualified and not absolute in nature.​
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Task 1:​

What is Non-Satiation?​
What is Clarity of Preferences?​
What is Selfish Motive?​
What is Possession of Information?​

Task 2: ​

Let’s bring a case where you apply all these characteristics and then check about
the outcome of such a situation.​
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Clarity of
Selfish Motive
Preferences

Non-Satiation Possession of
Information

The superset of these characteristics constitutes what economists love to call

“Rationality”​
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WHAT IS RATIONALITY?​
Rational People Think at the Margin: ​
Economists normally assume that people are rational.​​

Definition: The economic rationality principle is based on the postulate that people behave in
rational ways and consider options and decisions within logical structures of thought, as opposed to
involving emotional, moral, or psychological elements.​

Do you think an individual (suppose a manager) can act as a complete rational being?​
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Satisficing is a term coined by economist Herbert Simon to describe a decision-making process in

which an individual or organization settles for a satisfactory solution rather than striving for the
optimal solution.​

Simply, Satisficing is a decision-making strategy that aims for a satisfactory or adequate result,
rather than the optimal solution.​
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ARE YOU SATISFYING OR

SATISFICING YOURSELF?​
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BOUNDED
RATIONALITY​
Economist Herbert A. Simon, who won the Nobel Prize for his
work in behavioural science came up with the idea of ‘Bounded
Rationality’ as an alternative to counter the commonly held belief
that being economical was equivalent to being rational. ​

According to Simon, there are cognitive or thought limits as well

as environmental factors that have an impact on the decision-
making process.​

An example of bounded rationality is when people face complex problems. For example, consider the problem of
choosing the optimal investment strategy. There is much information to consider, and making the best decisions can be
challenging. As a result, people often need more complex decision-making strategies, leading to suboptimal decisions.​
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ECONOMIC WHAT IS
BEING RATIONALITY?​

SESSION - 3
HOMO ECONOMICUS:
THE BOUNDED
RATIONALITY SATISFYING
BOUNDED
OR
RATIONALITY​
SATISFICING

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Presentation for UPES Faculty & Students