Bounded Rationality

Bounded rationality argues that a decision agent is as rational as its limited resources and other conditions will permit. This theory recognizes that, contrary to neoclassical decision theory, decision makers are not purely rational, optimizing individualistic outcomes. Rather, bounded rationality suggests inherent limits on rational thought and decision making.

Neoclassical economic theory unrealistically suggests how rational consumers should behave. However, bounded rationality describes what imperfect human beings actually do, allowing better explanation or prediction of their decisions.

Bounded rationality is a central theme in behavioral economics, which studies how the imperfections of actual decision making influence those decisions. Thus, behavioral economics departs from one or more neoclassical assumptions regarding rational behavior. By considering nonmonetary costs, the limitations of human perception, and altruistic motivations, bounded rationality theory demonstrates ...