Explain the concept of bounded rationality and its implications in decision-making under uncertainty.

Explain the concept of bounded rationality and its implications in decision-making under uncertainty.

Bounded rationality refers to the idea that individuals have limited cognitive abilities and information-processing capabilities when making decisions. It suggests that individuals do not always make fully rational decisions due to these limitations.

In decision-making under uncertainty, bounded rationality implies that individuals may not have access to all the relevant information or may not be able to process it effectively. As a result, they rely on heuristics, rules of thumb, or simplified decision-making strategies to make choices. These heuristics can lead to biases and errors in judgment.

Additionally, bounded rationality suggests that individuals may not always optimize their decisions but instead settle for satisfactory or "good enough" outcomes. This is because the cognitive effort required to find the optimal solution may be too high or the information needed may be too costly to obtain.

Overall, bounded rationality highlights the limitations of human decision-making and emphasizes the importance of understanding how individuals make choices under uncertainty, taking into account their cognitive constraints and the heuristics they employ.