Economics Bounded Rationality Questions
The key assumptions of bounded rationality are:
1. Limited information processing capacity: Individuals have limited cognitive abilities and cannot process and analyze all available information. They must rely on heuristics and simplifications to make decisions.
2. Time constraints: Decision-makers have limited time to gather and process information, leading to the use of shortcuts and satisficing strategies rather than exhaustive analysis.
3. Cognitive biases: Individuals are prone to cognitive biases, such as overconfidence, anchoring, and confirmation bias, which can influence their decision-making process.
4. Satisficing behavior: Instead of maximizing utility or profit, individuals often settle for satisfactory or "good enough" outcomes due to the constraints of limited information and time.
5. Adaptive behavior: Decision-makers learn from experience and adjust their decision-making strategies over time, aiming to improve their outcomes within the bounds of their rationality.
Overall, bounded rationality recognizes that individuals make decisions based on their limited cognitive abilities, time constraints, and imperfect information, leading to satisficing behavior rather than optimizing choices.