How does bounded rationality affect decision-making?

Bounded rationality refers to the idea that individuals have limited cognitive abilities and information processing capabilities, which can impact their decision-making process. It suggests that individuals make decisions that are rational within the constraints of their cognitive limitations and the information available to them.

Bounded rationality affects decision-making in several ways. Firstly, individuals may rely on heuristics or mental shortcuts to simplify complex decision problems. These heuristics can lead to biases and errors in judgment, as they may not always result in the most optimal decision.

Secondly, bounded rationality can lead to satisficing behavior, where individuals settle for a satisfactory solution rather than seeking the best possible outcome. This is because the cognitive effort required to find the optimal solution may be too high or the information available may be insufficient.

Additionally, bounded rationality can result in decision-makers being influenced by their emotions, personal biases, and social pressures. These factors can lead to deviations from rational decision-making and impact the overall quality of decisions.

Overall, bounded rationality acknowledges the limitations of human cognition and highlights the ways in which decision-making can be influenced by these limitations, potentially leading to suboptimal outcomes.