What is the role of information in bounded rationality?

In the concept of bounded rationality, information plays a crucial role in decision-making. Bounded rationality suggests that individuals have limited cognitive abilities and resources, which restrict their ability to process and analyze all available information before making decisions. Therefore, individuals rely on a subset of information that is easily accessible or readily available to them.

The role of information in bounded rationality can be understood in two aspects: information acquisition and information processing.

Firstly, information acquisition refers to the process of gathering relevant data and knowledge to make informed decisions. Bounded rationality acknowledges that individuals cannot gather and process all available information due to time constraints and cognitive limitations. Instead, individuals tend to acquire information that is easily accessible or readily available, such as personal experiences, social interactions, or information from trusted sources. This selective acquisition of information helps individuals make decisions within their cognitive limits.

Secondly, information processing refers to the cognitive process of analyzing and interpreting the acquired information to make decisions. Bounded rationality recognizes that individuals cannot fully analyze and evaluate all available information due to cognitive limitations. Instead, individuals rely on heuristics, which are mental shortcuts or simplified decision rules, to process information quickly and efficiently. These heuristics help individuals simplify complex decision problems and make reasonably rational choices within their cognitive bounds.

Overall, the role of information in bounded rationality is to provide individuals with a subset of relevant information that they can acquire and process within their cognitive limitations. By relying on accessible information and using heuristics, individuals can make reasonably rational decisions despite their bounded rationality. However, it is important to note that bounded rationality can lead to biases and suboptimal decisions if individuals rely on incomplete or biased information.