Economics Bounded Rationality Questions Medium
The key assumptions of bounded rationality are as follows:
1. Limited information processing capacity: Bounded rationality assumes that individuals have limited cognitive abilities and cannot process and analyze all available information. Due to this limitation, individuals tend to simplify complex problems and make decisions based on a subset of relevant information.
2. Time constraints: Bounded rationality recognizes that individuals often face time constraints when making decisions. They may not have enough time to gather and analyze all the necessary information, leading to the use of heuristics or rules of thumb to make decisions quickly.
3. Satisficing behavior: Bounded rationality assumes that individuals aim to make decisions that are satisfactory or "good enough" rather than optimal. Instead of searching for the best possible solution, individuals tend to settle for a solution that meets their minimum requirements or goals.
4. Cognitive biases: Bounded rationality acknowledges that individuals are prone to cognitive biases, which can lead to systematic errors in decision-making. These biases include anchoring bias, confirmation bias, and availability bias, among others. These biases can influence how individuals perceive and interpret information, leading to suboptimal decisions.
5. Learning and adaptation: Bounded rationality recognizes that individuals learn from their experiences and adapt their decision-making processes over time. As individuals gain more knowledge and experience, they may improve their decision-making abilities and overcome some of the limitations imposed by bounded rationality.
Overall, bounded rationality suggests that individuals make decisions within the constraints of their cognitive abilities, time limitations, and imperfect information, resulting in decision-making processes that are less than fully rational.