Bounded rationality - Definition and Overview

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 other 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.

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

See also:

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

References:

• Simon, Herbert (1957). "A Behavioral Model of Rational Choice", in Models of Man
• Williamson, Oliver (1981). "The Economies of Organization: The Transaction Cost Approach". American Journal of Sociology. Vol 87, pp. 548--577
• Simon, H.A. (1990) A mechanism for social selection and successful altruism, Science 250 (4988): 1665-1668.
• March, James G. (1994). "A primer on decision making: how decisions happen", The Free Press, New York.
• Kahneman, D. (2003) Maps of Bounded Rationality: Psychology for Behavioral Economics." The American Economic Review. 93(5). pp. 1449-1475