Herbert Alexander Simon
In 1978 American social scientist Herbert Simon was awarded the Nobel Prize in economics for his “pioneering research into the decision-making process within economic organizations.” In a stream of articles, Simon, who trained as a political scientist, questioned mainstream economists’ view of economic man as a lightning-quick calculator of costs and benefits. Simon saw people’s rationality as “bounded.” Because getting information about alternatives is costly, and because the consequences of many possible decisions cannot be known anyway, argued Simon, people cannot act the way economists assume they act. Instead of maximizing their utility, they “satisfice”; that is, they do as well as they think is possible. One way they do so is by devising rules of thumb (e.g., save 10 percent of after-tax income every month) that economize on the cost of collecting information and on the cost of thinking.
Simon also questioned economists’ view that firms maximize profits. He proposed instead that because of their members’ bounded rationality and often contradictory goals and perspectives, firms reach decisions that can only be described as satisfactory rather than the best.
Not surprisingly for one who believes that decision making is costly, Simon also worked on problems of artificial intelligence.
After earning his Ph.D. in political science from the University of Chicago, Simon joined the school’s faculty. In 1949 he left for Pittsburgh, where he helped start Carnegie Mellon University’s new Graduate School of Industrial Administration.
About the Author
David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.