BOUNDED RATIONALITY

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.
As decision makers have to make decisions about how and when to decide, Ariel Rubinstein proposed to model bounded rationality by explicitly specifying decision making procedures. This puts the study of decision procedures on the research agenda.
Gerd Gigerenzer argues that most decision theorists who have discussed bounded rationality have not really followed Simon's ideas about it. Rather, they have either considered how people's decisions might be made sub-optimal by the limitations of human rationality, or have constructed elaborate optimising models of how people might cope with their inability to optimise. Gigerenzer instead proposes to examine simple alternatives to a full rationality analysis as a mechanism for decision making, and he and his colleagues have shown that such simple heuristics frequently lead to better decisions than the theoretically optimal procedure.

Contents

References

See also

References

★ Jon Elster (1983). ''Sour Grapes: Studies in the Subversion of Rationality''. Cambridge, UK: Cambridge University Press.

★ Gigerenzer, G. & Selten, R. (2002). ''Bounded Rationality''.Cambridge: The MIT Press; reprint edition. ISBN 0-262-57164-1

★ Kahneman, Daniel (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''. New York: The Free Press.

★ Simon, Herbert (1957). "A Behavioral Model of Rational Choice", in ''Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting''. New York: Wiley.

★ Simon, Herbert (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'' 87: 548-577.

★ Tisdell, Clem (1996). ''Bounded Rationality and Economic Evolution: A Contribution to Decision Making, Economics, and Management''. Cheltenham, UK; Brookfield, Vt.: Edward Elgar.

See also

★ Altruism

★ Behavioral economics

★ Homo economicus

★ Neoclassical economics

★ Psychohistory

★ Rational choice theory

★ Rational ignorance

★ Satisficing

★ Utility Maximization Problem

★ Transaction Cost Economics