Bounded rationality

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Many models of human behavior in the social sciences assume that humans can be reasonably approximated or described as "rational" entities, especially as conceived by rational choice theory.

Many economics models assume that people are hyperrational, and would never do anything to violate their preferences.

Herbert Simon, in Models of My Life, points out that most people are only partly rational, and are in fact emotional/irrational in the remaining part of their actions. He gives Albert Einstein as an example of bounded rationality. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Williamson, p. 553, quoting Simon). Simon, who some claim coined the term, describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:

• limiting what sorts of utility functions there might be.
• recognizing the costs of gathering and processing information.
• the possibility of having a "vector" or "multi-valued" utility function.

In addition, bounded rationality suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and the inability to process and compute all alternatives. Deliberation costs might be high and there are often other economic activities where similar decision making is required.

Daniel Kahneman proposes bounded rationality as a model to overcome some of the limitations of the rational-agent models in Economic literature.

References

• Elster, Jon (1983). Sour Grapes: Studies in the Subversion of Rationality. Cambridge University Press.
• Gigerenzer, G. & Selten, R. (2002). "Bounded Rationality" Cambridge: The MIT Press; reprint edition. ISBN 0262571641
• Kahneman, D.(2003) Maps of Bounded Rationality: Psychology for Behavioral Economics." The American Economic Review. 93(5). pp. 1449-1475
• March, James G. (1994). "A primer on decision making: how decisions happen", The Free Press, New York.
• Simon, Herbert (1957). "A Behavioral Model of Rational Choice", in Models of Man
• Simon, H.A. (1990) A mechanism for social selection and successful altruism, Science 250 (4988): 1665-1668.
• Williamson, Oliver (1981). "The Economies of Organization: The Transaction Cost Approach". American Journal of Sociology. Vol 87, pp. 548--577

See also

• Altruism
• Behavioral economics
• Homo economicus
• Neoclassical economics
• Psychohistory
• Rational choice theory
• Rational ignorance
• Satisficing
• Utility Maximization Problem

[ v]·[ d]·[ e]	Topics in game theory
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Classes of games	Symmetric game · Perfect information · Dynamic game · Repeated game · Signaling game · Cheap talk · Zero-sum game · Mechanism design
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Related topics	Mathematics · Economics · Behavioral economics · Evolutionary biology · Evolutionary game theory · Population genetics · Behavioral ecology · Adaptive dynamics · List of game theorists

 

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