What is the role of heuristics in decision-making under bounded rationality?

Heuristics play a crucial role in decision-making under bounded rationality. Bounded rationality refers to the idea that individuals have limited cognitive abilities and information processing capabilities, leading them to make decisions that are not fully rational but rather based on simplified mental shortcuts or heuristics.

Heuristics are cognitive strategies or rules of thumb that individuals use to simplify complex decision-making processes. They help individuals make quicker decisions by reducing the amount of information they need to process and the cognitive effort required.

In the context of bounded rationality, heuristics allow individuals to make reasonably good decisions despite their limited cognitive resources. These decision-making shortcuts are often based on past experiences, social norms, or simple decision rules.

However, heuristics can also lead to biases and errors in decision-making. These biases, known as cognitive biases, can result in systematic deviations from rational decision-making. Examples of common heuristics include the availability heuristic (relying on readily available information), the representativeness heuristic (making judgments based on similarity to a prototype), and the anchoring and adjustment heuristic (relying heavily on initial information).

Overall, heuristics are essential in decision-making under bounded rationality as they allow individuals to navigate complex situations with limited cognitive resources. However, it is important to be aware of the potential biases and limitations associated with heuristics to make more informed decisions.