“Bounded Rationality” and “Dual Process Theory”: Two Pillars of Behavioral Economics

Do you really know how your users make decisions? The theories of bounded rationality and dual-system cognition offer valuable insights into understanding their behavior and designing better product strategies. In this article, I share my initial personal approaches to these theories and how they can help you get the most out of them in your work.

We often think we can do several things at once. Especially at work, we tend to feel like we're experts at multitasking. Remember the last meeting where you thought, “I can answer this email while listening to the presentation...”? And when you finished the email, you realized you couldn't remember anything that had been said.

Something similar happened to me when I was 17. Let me tell you about it...

I really liked math in school. A friend used to talk to me just when I was concentrating on an exercise. I thought I could solve the problem and listen to her at the same time, but I realized that wasn't the case when she got angry because I didn't answer her (I hadn't even heard her question).

That experience left me wondering: why do I stop paying attention to what's going on around me when I'm focused on a task? Is there a theory that explains this?

The answer came a few years later, when I learned about behavioral economics, particularly Herbert Simon's concept of bounded rationality [1].

Herbert Simon and Bounded Rationality

Simon, a social scientist and mathematician, is considered one of the pioneers of behavioral economics. He argued that the social sciences should have the same rigor as “hard core” sciences such as mathematics or biology. This vision led him to research economic models, and in 1947 he published Administrative Behavior [2], where he presented his theory of decision-making.

At that time, the idea of homo economicus prevailed: a being who makes perfectly rational decisions and always seeks to maximize utility.

But Simon discovered that, in practice, our decisions are limited by three factors:

• our capacity for analysis,

• the information available,

• and the time we have to decide.

This gave rise to the concept of bounded rationality, one of the pillars of behavioral economics.

This means that our attention and processing are finite. That is why we often resort to mental shortcuts to choose options that are not “optimal” but good enough.

With this knowledge, I understood why I couldn't deal with my math problem and the conversation with my friend at the same time: I was directing all my cognitive capacity to the more demanding task. If, on the other hand, she had spoken to me while I was calculating 2 x 2, I probably would have been able to answer her, because that calculation requires little mental effort.

The Dual System of Cognition

This raises another question: why can we do some tasks in parallel without any problems, but not others?

The answer lies in another pillar of behavioral economics: the dual system of cognition, popularized by Daniel Kahneman in Thinking, Fast and Slow [3].

According to this theory, our brain functions with two systems:

• System 1: Fast, automatic, impulsive. It is based on previous experiences and associations. It does not require conscious effort or working memory. It is the “intuition” system.

• System 2: Slow, deliberate, analytical. It requires attention, working memory, and cognitive effort. This is the one we use to solve complex problems or make conscious decisions.

Depending on the situation, one or the other is activated. For example, when learning to drive, we use system 2 because we need concentration and conscious practice. But once we have acquired the skill, driving switches to system 1: we do it almost on autopilot, and in the meantime we can listen to music or talk.

How can these theories be applied to projects?

When conducting user research, considering limited rationality and the dual system of cognition helps us understand how users make decisions.

Some key points:

• Analyze user interaction with the product and its context to detect limitations in cognitive capacity, information, and time.

• Identify when decisions are made automatically (system 1) or deliberately (system 2).

• Recognize the psychological barriers that affect behavior, which enriches tools such as the Human-Centered Design empathy map.

Applying these principles of behavioral economics takes research to a deeper level and allows us to design solutions that positively influence the user experience and decisions.

Behavioral Tips

• Understand how your customer makes decisions by applying behavioral economics.

• Consider the three factors of limited rationality: analytical capacity, available information, and time.

• Determine whether decisions are made using System 1 or System 2.

• If it's System 1, leverage heuristics in your solutions.

• If it is system 2, thoroughly investigate motivations, attitudes, and needs.

• Don't forget the context in which the user interacts when designing your product strategy: environmental stimuli directly influence their behavior.

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Silvia Cottone

Behavioral Science Consultant & Worldwide Speaker

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The content of the article was created with Daniela Espitia, Behavioral Designer at BeWay.

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[1] Herbert A. Simon (1955). A Behavioral Model of Rational Choice. The Quarterly Journal of Economics.

[2] Herbert A. Simon (1947). Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization. Oxford Handbooks.

[3] Kahneman, D. (2011). Thinking, fast and slow. Farrar, Straus and Giroux.