Bounded Rationality (Economics)

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  • In modeling com plex human behavior to obtain utility maximization, economists normally assume that humans are rational. Being rational presupposes the ability to process substantive information. This assumption enables economists to achieve optimal results (the best out comes given substantive limitations) in order to make inferences about human behavior and utility maximization.

    The theory of bounded rationality maintains that humans do not entirely behave in a rational way to maxi mize utility because the information to make rational decisions is not always adequate or available. Apart from the claim to rationality, the theory holds that humans are equally emotional, and therefore, they make choices that are based on emotions rather than rules of logic.

    Utility, or profit maximization, is further complicated by multiple objectives or alternatives with ...

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