Adaptive rationality means making the best possible decisions based on your situation, rather than trying to be perfectly logical all the time.

It recognises that people don’t have perfect information, unlimited time, or full control. So instead of finding the “perfect” decision, they use simple rules (shortcuts) and adjust their choices as they learn from experience.

In simple terms, you make decisions, see what works, and then improve over time.

Unlike traditional thinking, which assumes people always act perfectly rationally, this approach accepts that behaviour changes based on environment, feedback, and past outcomes.

A small business owner in Surat started investing in equity mutual funds during a strong bull market because returns were high and people around him were making money.

When markets became volatile and his portfolio value dropped, he realised he was uncomfortable with large ups and downs. Instead of stopping or continuing blindly, he adjusted his approach.

He shifted part of his investments into a balanced advantage fund that automatically adjusts between equity and debt, and moved some money into short-term debt funds for stability.

Over time, he also began to understand market cycles and his own risk tolerance better. His decisions improved because he learned from experience and adapted to changing conditions.

This is adaptive rationality — changing your decisions based on what you learn, rather than sticking to one fixed approach.

• Popularised by Gerd Gigerenzer in the 1990s
• Builds on Herbert Simon’s idea of bounded rationality
• Suggests that simple decision rules can work well depending on the situation
• Emphasises learning, environment, and context in decision-making