Economics Game Theory In Behavioral Economics Questions Medium
Bounded rationality is a concept in behavioral game theory that recognizes the limitations of human decision-making abilities. It suggests that individuals do not always make fully rational decisions due to cognitive constraints, limited information, and time constraints.
In the context of game theory, bounded rationality acknowledges that individuals may not always be able to consider all possible strategies and outcomes when making decisions. Instead, they rely on simplified decision-making rules or heuristics to make choices. These heuristics are often based on past experiences, social norms, or simple decision rules that help individuals navigate complex situations.
The effects of bounded rationality on decision-making can be significant. Firstly, individuals may make suboptimal decisions or fail to achieve the best possible outcome due to their limited cognitive abilities. They may overlook certain strategies or fail to consider all relevant information, leading to less than optimal results.
Secondly, bounded rationality can lead to systematic biases in decision-making. These biases can include overconfidence, anchoring, availability bias, and confirmation bias, among others. These biases can distort individuals' perceptions of the game and influence their choices, leading to outcomes that deviate from rational predictions.
Furthermore, bounded rationality can also affect strategic interactions between individuals. When both players have limited cognitive abilities, they may struggle to accurately predict each other's actions and intentions. This can result in a breakdown of rational decision-making and lead to suboptimal outcomes for both parties.
Overall, the concept of bounded rationality in behavioral game theory highlights the importance of understanding the cognitive limitations of decision-makers. By recognizing these limitations and the biases they can introduce, researchers can gain insights into how individuals make decisions in strategic situations and develop more realistic models of human behavior in economic settings.