bounded rationality

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Bounded Rationality

The theory that humans attempt to make rational decisions, but their ability to do so is limited by knowledge, ability to know, inadequate time to consider and other factors. Bounded rationality may explain situations like panic buying, in which investors continue to buy a security long after it ceases to be rational to do so. Investors may believe the price for the security may continue to rise and may not believe they have enough time to find out for certain. Bounded rationality claims people aim for rationality but cannot be reasonable all the time. See also: Behavioral economics.

bounded rationality

limits on the capabilities of people to deal with complexity, process information and pursue rational aims. Bounded rationality prevents parties to a CONTRACT from contemplating or enumerating every contingency that might arise during a TRANSACTION, so preventing them from writing complete contracts.
References in periodicals archive ?
These features of BE present an important challenge to the usefulness of neoclassicism grounded in hyper-rationality axioms.
3 Specifically, it has demonstrated that BE is underpinned by an incongruous methodological configuration, simultaneously promulgating the need for more realistic accounts of behaviour while retaining unrealistic assumptions associated with hyper-rationality. The foundations of this critique may be best understood according to the Lakatosian yardstick of 'verification' (Dow 2013).
Such examples do not point to a new Lakatosian research programme, so much as a marginal modification of the protective belt of auxiliary hypotheses: the neoclassical hard core of hyper-rationality axioms is retained, with constraints on hyper-rational choice elucidated through more complex representations of 'rationality' or otherwise as 'irrationality' (Dow 2013).
On the one hand, BE holds that the empirical lessons of psychological experiments will advance economic analysis when filtered through models allowing for behavioural phenomena diverging from hyper-rationality. On the other hand, such modelling often does not pursue psychological realism, depending on Friedman's (1953) instrumentalist 'as-if' defence to justify increasingly unrealistic formulations of psychological choice as resolving more elaborate constrained optimisation problems than the simpler neoclassical models they intended to transcend (Berg and Gigerenzer 2010).
Because BE has largely sought to modify rather than reject neoclassical models of hyper-rationality based on constrained optimisation, its capacity to utilise insights from cognitive psychology and social experiments is restricted.
While not disregarding this need for alternatives, the political economic significance of behaviouralism's retention of hyper-rationality extends beyond methodological incongruity.
From this perspective, beyond the 'as-if' critique outlined above, retention of hyper-rationality alongside more realistic descriptions of psychological processes has critical performative implications.
In contrast to the representation of the subject in the A-D model, BE relaxes the assumption that actors exercise hyper-rationality in decision-making.
Such reasoning, whereby observed deviations from hyper-rationality are conceptualised as resulting from mistakes, effectively presupposes the neoclassical optimising model of decision-making as correct at one, normative level.
From Kahneman and Tversky (1974) onward, BE has thereby proceeded from presuppositions of hyper-rationality and analysed deviations from this 'rational' yardstick as 'irrational' (Berg and Gigerenzer 2010).
Analogeously, Medin and Bazerman (1999: 543), frame BE as concerned with delineating the 'systematic ways in which people deviate from optimality or rationality', while Diamond (2008: 1859) contends that BE aims to identify 'circumstances where people are making "mistakes"' arising from their deviations from hyper-rationality. Koszegi and Rabin (2008) and Beshears et al.
In challenging the universalist presumptions of hyper-rationality, this articulation of a more complex account of decision-making appears to complement long-standing calls for such an approach within political economy (e.g.