Economics Bounded Rationality Questions
Bounded rationality in economics refers to the idea that individuals have limited cognitive abilities and information processing capabilities, leading them to make decisions that are not always fully rational or optimal. This concept recognizes that individuals often rely on heuristics or simplified decision-making strategies to cope with complex situations.
In finance, bounded rationality is also relevant as it acknowledges that investors and market participants may not always have access to complete and accurate information, and their decision-making is influenced by cognitive biases and limitations. This can result in market inefficiencies, such as mispricing of assets or irrational investment behavior.
Overall, bounded rationality in finance recognizes the constraints on human decision-making and highlights the importance of understanding and accounting for these limitations when analyzing financial markets and making investment decisions.