Economics Bounded Rationality Questions Medium
Bounded rationality differs from perfect rationality in several ways.
Firstly, bounded rationality recognizes that individuals have limited cognitive abilities and information-processing capacities. In contrast, perfect rationality assumes that individuals have unlimited cognitive abilities and can process all available information to make optimal decisions.
Secondly, bounded rationality acknowledges that decision-making is often influenced by heuristics, or mental shortcuts, due to time constraints and the complexity of real-world problems. These heuristics can lead to biases and deviations from rational decision-making. On the other hand, perfect rationality assumes that individuals always make decisions based on complete and unbiased information.
Thirdly, bounded rationality recognizes that individuals often satisfice rather than optimize. Satisficing refers to the tendency to choose the first option that meets a satisfactory level of acceptability, rather than exhaustively searching for the best possible option. In contrast, perfect rationality assumes that individuals always make decisions that maximize their utility or satisfaction.
Lastly, bounded rationality acknowledges that decision-making is influenced by the social and institutional context in which individuals operate. This means that individuals' decisions are not solely based on their own preferences and beliefs, but also on social norms, cultural values, and institutional constraints. Perfect rationality, on the other hand, assumes that individuals make decisions solely based on their own preferences and beliefs, without any external influences.
Overall, bounded rationality recognizes the limitations and constraints that individuals face in decision-making, while perfect rationality assumes that individuals have unlimited cognitive abilities, access to complete information, and always make optimal decisions.