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 ?
A Perspective on judgment and choice: Mapping bounded rationality.
This is where a leader's bounded rationality, based on what they think they know, can result in less-than-optimal decision-making (Simon, 1947).
A key concept within bounded rationality is that of limited information and the importance of rapid, if not immediate, feedback.
This paper contributes to the intuition on price setting under bounded rationality by developing a model in which the share of firms that have up-to-date information on relative prices to establish the optimal price follows evolutionary dynamics (with and without mutation), and not a random dynamics a la Calvo (1983), as in Mankiw and Reis (2002), and the related literature.
MUNICIPAL BUDGETS, THE GREAT RECESSION, AND BOUNDED RATIONALITY
These expressions of bounded rationality show that in many situations, individuals are incapable of rational utility-maximization because of the way the human mind processes information and reacts to particular circumstances.
In other words, norms of cooperation should include rules that help people make better decisions under bounded rationality.
Against the background of the idea of Levitt that MNEs should not customize products and services to cultural differences, but rather should offer standardized products and services because of the highly homogenized global consumer preferences, chapter 9 demonstrates arguments, under which circumstances Levitt's (1983) idea leads to bounded rationality problems by MNE managers, managers' overestimation of the transferability, deployment and exploitation potential of firm-specific advantages and results in defective global strategies.
Bounded rationality implies that there are limits to the ability of stewards to align their interests with those of the organization, as well as limits to the ability of owners to properly evaluate the pro-organizational intentions, abilities, and actions of stewards.
Gruneisen presented his preliminary findings June 10 at the Summer Institute on Bounded Rationality, a weeklong set of seminars and workshops for young scientists, at the Max Planck Institute for Human Development.
It is not entirely fair to simply say humans are totally irrational; the psychological theory of bounded rationality cuts us some slack.
Further, this bounded rationality was proportional to the uncertainties and complexity associated with transactions (Rindfleisch & Heide, 1997).