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Herbert Simon explained why individuals make imperfect decisions. But institutional failure requires a different theory. When decision demand exceeds processing capacity, the problem isn't cognitive limits—it's structural collapse.
Individuals can't process unlimited information. They use shortcuts, heuristics, and "good enough" decisions. This is cognitive limitation.
Key insight: People still make decisions—just imperfect ones.
Institutions can't process unlimited decisions requiring judgment. Under overload, they substitute rules for thinking. This is structural limitation.
Key insight: Institutions stop making decisions entirely—something else substitutes.
| Dimension | Bounded Rationality | Rate-Limited Systems |
|---|---|---|
| Level of analysis | Individual cognitive limits | Institutional processing constraints |
| Core constraint | Humans can't process all information | Institutions can't process all decisions |
| Solution proposed | Satisficing—good enough over optimal | Substitution—rules replace judgment |
| When it fails | Individual makes suboptimal choice | Institution loses decision capacity entirely |
| Can be fixed by | Better information, training, decision aids | Structural redesign, load reduction, capacity increase |
| Collapse pattern | Gradual degradation of decision quality | Threshold-based sudden loss of authority |
Bounded rationality explains why a person makes suboptimal decisions. Rate-limiting explains why an institution stops making decisions at all.
One constrains decision quality; the other constrains decision quantity.
Simon's solution was 'good enough' decisions. Rate-limiting's consequence is eliminating judgment entirely.
Treating institutional failure as if it were individual cognitive failure leads to wrong solutions:
Training doesn't fix structural overload
Better-trained employees still can't process more decisions than the institution allows.
Decision aids don't increase throughput
Helping individuals decide better doesn't help institutions decide more.
Blaming "bad judgment" misses the cause
When rules substitute for judgment, there's no judgment to improve—the problem is the substitution itself.
Bounded rationality, coined by Herbert Simon, describes how individuals make decisions within the limits of available information, cognitive capacity, and time. Rather than optimizing, people 'satisfice'—choosing the first option that meets their minimum requirements. It's a theory of individual decision-making under cognitive constraints.
Rate-limited systems are institutions that have finite processing capacity for decisions requiring judgment. When decision demand exceeds this capacity, the institution doesn't just make worse decisions—it substitutes rules, procedures, or external parties for internal judgment. It's a theory of institutional decision-making under structural constraints.
Because solutions differ entirely. Bounded rationality suggests better training, information systems, and decision aids for individuals. Rate-limiting suggests structural redesign—reducing decision load, increasing processing bandwidth, or insulating authority from demand spikes. Treating institutional failure as individual cognitive failure leads to wrong interventions.
Yes, and they compound. An institution staffed by boundedly rational individuals faces both limits: each person satisfices on their decisions, AND the institution as a whole can only process so many decisions. But these are different constraints requiring different solutions.