[Page 279]Bounded Rationality

The concept of bounded rationality states that a decision agent is as rational as its limited resources, knowledge, and time 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. This entry shall review the concept of bounded rationality, explain its relationship to traditional economic assumptions concerning rationality and how each of these needs to be modified in light of the reality of bounded rationality, and conclude by discussing some consequent social and ethical issues related to bounded rationality.

Neoclassical economic theory unrealistically suggests how rational consumers should behave. However, bounded rationality describes what imperfect, error-prone humans actually do, allowing for better description, explanation, and ...