Understanding Bounded Rationality

If you’re interested in the (human) limits to rational decision making read this paper.

Abstract (Via Princeton)

Findings from behavioral organization theory, behavioral decision theory, survey research, and experimental economics leave no doubt about the failure of rational choice as a descriptive model of human behavior. But this does not mean that people and their politics are irrational. Bounded rationality asserts that decision makers are intendedly rational; that is, they are goal oriented and adaptive, but because of human cognitive and emotional architecture, they sometimes fail,occasionally in important decisions. Limits on rational adaptation are of two types: procedural limits, which limit how we go about making decisions, and substantive limits, which affect particular choices directly. Rational analysis in institutional contexts can serve as a standard for adaptive, goal-oriented human behavior. In relatively fixed task environments, such as asset markets or elections, we should be able to divide behavior into adaptive, goal-oriented behavior (that is, rational action) and behavior that is a consequence of processing limits, and we should then be able to measure the deviation. The extent of deviation is an empirical issue. These classes are mutually exclusive and exhaustive, and they may be examined empirically in situations in which actorsmake repeated similar choices.

Introduction/Excerpt (Via Bryan D Jones)

Do people make rational decisions in politics and economics? Not if by “rational” we mean that they demonstrate conformity to the classic expected utility model. There is no longer any doubt about the weight of the scientific evidence; the expected-utility model of economic and political decision making is not sustainable empirically.

Click Here To Read A Treatise On Bounded Rationality (As PDF)

About Miguel Barbosa

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13. July 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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