What is the role of social norms in bounded rationality?

The role of social norms in bounded rationality is significant as they influence individuals' decision-making processes and limit their rationality. Bounded rationality refers to the idea that individuals have cognitive limitations and cannot always make fully rational decisions due to time constraints, limited information, and cognitive biases.

Social norms are shared expectations and rules within a society that guide individuals' behavior and shape their preferences. These norms act as a framework for decision-making and influence individuals' choices by providing them with a set of acceptable behaviors and values. They serve as a reference point for individuals to evaluate their decisions and actions.

In the context of bounded rationality, social norms can act as cognitive shortcuts or heuristics that simplify decision-making. Instead of considering all available information and analyzing every possible outcome, individuals rely on social norms to guide their choices. This reliance on social norms helps individuals make decisions more efficiently and effectively, given their cognitive limitations.

Moreover, social norms also influence individuals' preferences and values, which further shape their decision-making. People tend to conform to social norms to gain social acceptance and avoid social sanctions. As a result, individuals may prioritize social norms over their own preferences or rationality, leading to decisions that may not be fully rational but are in line with societal expectations.

However, it is important to note that social norms can also limit individuals' rationality. They can create biases and restrict the range of options individuals consider, leading to suboptimal decisions. Individuals may conform to social norms even when they are not aligned with their own preferences or rationality, resulting in a loss of welfare or missed opportunities.

In conclusion, social norms play a crucial role in bounded rationality by providing individuals with a framework for decision-making and influencing their choices. While they can simplify decision-making and promote social cohesion, they can also limit individuals' rationality and lead to suboptimal outcomes. Understanding the interplay between social norms and bounded rationality is essential for comprehending human decision-making in economic contexts.