What are the cognitive biases associated with bounded rationality?

Bounded rationality refers to the idea that individuals make decisions based on limited information and cognitive abilities. As a result, they often rely on heuristics or mental shortcuts that can lead to cognitive biases. Some of the cognitive biases associated with bounded rationality include:

1. Confirmation bias: This bias occurs when individuals seek out information that confirms their existing beliefs or hypotheses, while ignoring or downplaying contradictory evidence. It can lead to a narrow and biased decision-making process.

2. Anchoring bias: This bias occurs when individuals rely too heavily on the first piece of information they encounter (the anchor) when making subsequent judgments or decisions. It can lead to an overemphasis on initial information and an insufficient consideration of other relevant factors.

3. Availability bias: This bias occurs when individuals base their judgments or decisions on readily available information that comes to mind easily. It can lead to an overestimation of the likelihood of events or outcomes that are more easily recalled, while underestimating the likelihood of less memorable events.

4. Overconfidence bias: This bias occurs when individuals have an inflated sense of their own abilities, knowledge, or judgment. It can lead to overestimating the accuracy of their decisions and underestimating potential risks or uncertainties.

5. Sunk cost fallacy: This bias occurs when individuals continue to invest resources (time, money, effort) into a decision or project, even when it is no longer rational to do so, simply because they have already invested in it. It can lead to irrational decision-making and a failure to cut losses when necessary.

6. Framing bias: This bias occurs when individuals are influenced by the way information is presented or framed, rather than the actual content of the information. It can lead to different decisions or judgments based on how the same information is presented, highlighting the importance of how choices are framed.

These cognitive biases highlight the limitations of human rationality and the ways in which individuals deviate from fully rational decision-making. Understanding these biases is crucial in economics as it helps explain why individuals may make suboptimal choices and how these biases can impact market outcomes and economic behavior.