Economics Bounded Rationality Questions
Bounded rationality and rational expectations are two concepts that are related but have different implications in economics.
Bounded rationality refers to the idea that individuals have limited cognitive abilities and information processing capabilities when making decisions. It suggests that individuals make decisions based on simplified models and heuristics, rather than fully optimizing their choices. Bounded rationality recognizes that individuals cannot always gather and process all available information, leading to decision-making that may not be fully rational.
On the other hand, rational expectations theory assumes that individuals make predictions about the future based on all available information and use these predictions to make rational decisions. It suggests that individuals have perfect knowledge and can accurately anticipate future events and outcomes.
The relationship between bounded rationality and rational expectations lies in the recognition that individuals' decision-making processes are influenced by their cognitive limitations. Bounded rationality acknowledges that individuals cannot fully optimize their decisions due to limited information and cognitive constraints. In contrast, rational expectations theory assumes that individuals can fully optimize their decisions by incorporating all available information.
Therefore, while bounded rationality recognizes the limitations of individuals' decision-making abilities, rational expectations theory assumes that individuals can overcome these limitations and make fully rational decisions.