CHAPTER 8Market

Nobel Prize recipient Herbert Simon coined the phrase bounded rationality1 to describe a view of human problem-solving ability. Since we have only so much brainpower and a finite amount of time to apply this brainpower, we can’t be expected to solve all difficult problems optimally. Finding the optimal solution often takes more time and resources than would be, well, optimal.

It is more rational for people to adopt rules of thumb to get more out of our limited cognitive resources. The leads to the idea of bounded rationality, where in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

In the world of startups, a bounded market occurs when founders can identify the entire population of users easily. For example, the initial potential Amazon customer population, back when Amazon was starting out with the goal of being “Earth’s Biggest Bookstore,” was bounded by literacy and access to the Internet. This was a large market, but it became unbounded, or one where the user populations are large, when Amazon expanded beyond books. Consider Google search, which is an unbounded market, in contrast to a search engine that only includes securities-related documents such as EDGAR, which is bounded. Instagram is unbounded, while “the Instagram for doctors”2 is bounded.

Market Stage

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