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Bounded rationality in the ever-changing cooking oil policymaking
Three changes in cooking oil policy could be an empirical case of bounded rationality.
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Cooking oil price hike cartoon (JP/T. Sutanto)
O
ver the last three months, the Trade Ministry has changed its policy instruments three times to stabilize the cooking oil price within a range the government believes will protect domestic consumers from the skyrocketing price of vegetable oils.
The measures have included the draconian policy of imposing a domestic market obligation (DMO) on producers, which amounts to 30 percent of their export volume sold at the DMO price, half the international market price.
The ever-changing policy instruments mirror "bounded rationality" in policymaking. Policymakers are bounded by cognitive limits and choose to adopt a tolerable course of action, rather than seeking the best possible. The instruments are adopted without perfectly knowing the uncertainty or the consequences.
Bounded rationality was coined by Herbert A. Simon in the mid-1950s. Simon was awarded a Nobel Prize in economic science in 1978 for his pioneering research into the decision-making process within economic organizations.
In A Behavioral Model of Rational Choice (1955), Simon challenged the perfect rationality assumption of “economic man” who hypothetically possesses complete information and knows all the courses of action, as well as the outcomes. Simon proposed a different assumption by describing humans as bounded by their own cognitive limits due to the inability to obtain or process all the information needed to make fully rational decisions. Instead, humans seek to use incomplete information to produce a satisfactory result, or one that is "good enough."
In his Nobel memorial lecture, Simon hypothesized that bounded rationality was largely characterized as a residual category – rationality is bounded when it falls short of omniscience. And the failures of omniscience are largely failures of knowing all the alternatives, uncertainty about relevant exogenous events and an inability to calculate consequences.
Bounded rationality decision making is about searching and “satisficing” – a combination of satisfying and sufficing – or achieving a satisfactory outcome. Satisficing means the tendency of decision-makers to select the first alternative that meets the aspiration as to how good an alternative should be. Once a choice meeting the aspiration level is found, the search stops.
