On Bounded Rationality

In policy studies, rationality is often discussed in the context of the public. The question is whether the wider population can be considered as rational actors. Some scholars say this “rational choice” theory does indeed hold on a nationwide level. In this market based perspective of the public, individuals will always act in their best interest. For example, if there is a government grant available to small businesses in a certain region, under rational choice theory, all of those small businesses will theoretically apply for the grant on their own. Grants can thus be designed purely based on numbers, such as amount of money provided and number of slots available. Other scholars say that rational choice cannot be assumed within the public. They suggest that on aggregate, people’s values and beliefs play just as large of a role as perceived rational benefit. For example, a small business owner who is suspicious of government entities, perhaps due to previous problems with the IRS, may be unwilling to apply for government grants, even if they would benefit greatly from said grants. Here, the idea of rationality within the public lies at the center of one of the large debates in public policy, positivism vs post-positivism. Can we treat policy as a science, or do we have to surrender that individual values and beliefs prevent any sort of quantifiable policy solution. 

However, the people being affected by policy are only part of the story. In policy studies, rationality is also critical to understanding the actions of policy makers. The job of policy makers is characterized by the collection and understanding of information. Policy makers must collect information, both through data and personal/stakeholder accounts. Then, after understanding the meaning of this data, they must make decisions based on this information. Herein lies an issue: it's almost impossible for policy makers to know enough information to make the perfect decision. Issues often affect millions of people, each with their own life stories that will respond differently to a specific policy action. Yet, the polls and stakeholder accounts that policy makers have access to are often only a fraction of the total population. So, how can policy makers take decisive action when they cannot be sure of what they are doing? This is where bounded rationality comes into play. 

Bounded rationality is different from the traditional assumption of rational choice theory in one key aspect: it takes into account the limits of people’s knowledge and resources. First introduced by Herbert Simon, bounded rationality explains that it is unreasonable to assume that policy makers will always make the utility maximizing decision. This is because making the absolute utility maximizing decision would require the omnipotent knowledge of a god, something that policy makers trapped in the bureaucracy often do not have. So, unable to make perfectly fact based decisions, bounded rationality suggests that policy makers make choices based on feeling. Whether it is creating new educational programs in a low employment neighborhood or opening more soup kitchens during a financial crisis, policy makers will often lean on their “gut-feeling” rather than data. 

Through this, bounded rationality is significant because it provides a more realistic model of how policy makers make choices. It views policy makers more like humans and less like robots. Afterall, when an infinite amount of information gets paired with tight timeframes, the analyst cannot expect the policy maker to make the perfect rational decision. Bounded rationality provides the alternative, a perspective where the process of choosing policy is just as normative as the effects of policies themselves. Through bounded rationality, the policy process is not just dependent on the content of the policy, but also upon WHO the policy maker making the decisions is. Since policy making is almost always a cooperative effort, where heuristics intertwine between multiple individuals, things get even more complicated! This doesn’t mean that we should completely discard data based policy making, certainly not. But, it does raise questions about how we can incorporate heuristics measuring and other aspects of bounded rationality into policy analysis. 

Deborah Stone and Nuances of Public Policy

In her book Policy Paradox: The Art of Political Decision Making, Deborah Stone unpacks what it means to approach difficult policy problems. The book is largely a refutation of the positivist movement policy science, which Stone describes as solutions to policy problems through “rationalist” projects. To proponents that say data alone can be used to solve problems, Stone states that data can only solidify or weaken the specified impacts of a policy. It does nothing to decide if those impacts are beneficial, or even wanted. To illustrate this problem, Stone create the term “policy paradoxes.” These are policy situations where impacts can be both positive or negative, depending on the perspective of the stakeholder. As an example, Stone uses the policy of rubble removal following Hurricane Katrina. This was a policy paradox because the rubble removal was beneficial for many businesses, who needed to clear the streets quickly before reopening. However, it was also harmful for families, who didn’t want their possessions buried in the rubble to disappear forever. Stone’s point is that in situations like these, data cannot help us. Data can tell us how quickly the rubble removal can occur, but it does nothing to decide whose perspective carries the most moral and social importance. 

In this, Stone’s book does a good job of explaining the nuances of public policy. It shows how public policy can be value based, with stakeholder stories serving as data points in and of themselves. However, a problem is that the book doesn’t offer much in terms of a solution. The sentiment is: things are more complicated than we thought, and yes, that means we no longer have a secure solution for these issues. This brings up a larger question in policy studies as a whole. The more people learn about both complex issues and human nature, it almost feels like we are moving away from success. Previous solutions aren’t as good as we thought, and with some issues, there seems to be no solution at all.

Against this cynicism, an idea is that we don’t need perfect solutions at all. Perhaps if perfect solutions are impossible, considering the existence of policy paradoxes, policy analysis is still justified in the creation of marginal improvements. Whatever it is, Stone’s book is more of an analysis of current reality, rather than an explanation of potential future solutions. 

Disparities in Small Business Ownership

Small businesses lie at the core of this country. In fact, they make up 99.9% of all firms in this country. However, like with land, housing, and all other factors of wealth, ownership is what matters. Consequently, though the major disparities in the demographics of small business owners, we can begin to see who benefits from the current system and who is hurt.

Current disparities in small business ownership are significant, both across racial and gender lines. For instance, according to Pew Research in 2024, 85% of small businesses were majority white owned. This compares to only 3% Black owned and 7% Hispanic owned businesses. Across genders, 61% of small businesses were majority owned by men while only 22% were majority owned by women.

These numbers are jarring, and they represent a problem in and of themselves. However, at the same time, the causes of these disparities are systemic in nature. From inequalities in business loan denial to historical redlining, these differences in business ownership are the consequence of decades of structural racism. Similarly, when women face more difficulty accessing capital along with the challenge of caregiving, the gender gap in business ownership isn't surprising.

Understanding that these disparities are systemic in nature is critical because it pushes us to look for systemic solutions, which exist in the form of policy. Through minority and women targeted grants, policy can help close the gaps in financing access that these groups often face. The creation of affinity support groups can help businesses get off the ground, and provide knowledge along the way. Moreover, additions to entrepreneurial education in minority communities can help open doors to students who would've never known the possibility of small business ownership.