The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Rationality, Bounded

  • Herbert A. Simon
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_472

Abstract

‘Bounded rationality’ refers to rational choice that takes into account the cognitive limitations of the decision-maker – limitations of both knowledge and computational capacity. It is a central theme in the behavioural approach to economics. Theories of bounded rationality can be generated by relaxing one or more of the assumptions of subjective utility theory underlying neoclassical economics. They insist that the model of human rationality must be derived from detailed and systematic empirical study of human decision-making behaviour in laboratory and real-world situations. For example, a satisficing strategy may be postulated instead of the maximization of a utility function.

Keywords

Behavioural approach to economics Bounded rationality Choice Cognitive limits Expected utility Money illusion Neoclassical economics Optimal search Probability Rational expectations Satisficing Simon, H. A. Subjective utility theory Substantive vs. procedural rationality Uncertainty 

JEL Classifications

B4 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Herbert A. Simon
    • 1
  1. 1.