Bounded rationality

Many models of human behavior in the social sciences assume that humans can be reasonably approximated or described as "rational" entities, especially as conceived by rational choice theory.

Many economics models assume that people are hyperrational, and would never do anything to violate their preferences.

Herbert Simon, in Models of My Life, points out that most people are only partly rational, and are in fact emotional/irrational in the remaining part of their actions. He gives Albert Einstein as an example of bounded rationality. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Williamson, p. 553, quoting Simon). Simon, who some claim coined the term, describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:


 * limiting what sorts of utility functions there might be.
 * recognizing the costs of gathering and processing information.
 * the possibility of having a "vector" or "multi-valued" utility function.

In addition, bounded rationality suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization in light of the complexity of the situation, the inability to process and compute all alternatives due to deliberation costs and presence of other economic activities where similar decision making is required.

Daniel Kahneman proposes bounded rationality as a model to overcome some of the limitations of the rational-agent models in Economic literature.