Abstract
This chapter explains bounded rationality, which is rationality bounded by human abilities. For the purpose of studying bounded rationality, the optimization approach of traditional economics has difficulties such as the infinite regress problem. Hence it has been complemented by the descriptive approach in which intuitive judgment such as heuristics is shown to often lead to biases in experiments.
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28 July 2019
The original version of the book was revised: Author’s belated corrections have been incorporated.
Notes
- 1.
It should be noted that, for other purposes such as work, an economic man’s abilities are assumed to be limited, so that there can be unskilled workers and so on.
- 2.
A more complicated model of bounded rationality in which the levels of reasoning of other players follow a probability distribution was proposed by Camerer et al. (2004).
- 3.
Kahneman noted that Simon (1955) had proposed much earlier that decision makers should be viewed as boundedly rational.
- 4.
- 5.
The correct answer at the time of the experiment is not written in the paper, but the correct answer in 2006 was about 28%.
- 6.
They also conducted the same experiment for amateur participants in four conditions.
- 7.
The mathematical model of prospect theory, however, was born from the consideration that System 1 focuses on changes. Prospect theory is a good example of how the optimization approach can be combined with the descriptive approach.
- 8.
The WYSATI bias is closely related to the concept of the worldview we explain in Chap. 9 in the sense that a person tends to believe his worldview is all there is. Tetlock and Gardner’s (2015, Chap. 10) discussion about the dilemma of the leader that she needs to make decisions with confidence and at the same time to be humble to avoid the WYSATI bias is closely related to virtue ethics that we will explain in Chap. 11 below.
References
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Ogaki, M., Tanaka, S.C. (2017). Bounded Rationality. In: Behavioral Economics. Springer Texts in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-6439-5_5
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