Skip to main content
SpringerLink
Log in

Bounded Rationality

  • Reference work entry
  • First Online:
Book cover Encyclopedia of Law and Economics

  • 135 Accesses

Abstract

Bounded rationality (BR) is the idea that when individuals make decisions, they are “bounded” or limited because of inadequate information, cognitive limitations inherent in the human mind and time constraints. This type of rationality describes broad areas of social and economic action, in which rational utility-maximizers faced with complex situations are required to make less-than-perfect choices (satisficing rather than optimizing). BR is one of the cornerstones of rational choice theory and it informs many scientific fields, spanning from mathematic and economic psychology to political economy and managerial economics. This entry discusses the general aspects of BR, focusing on how cognitive biases affect the decision-making of rational agents faced with the costs of acquiring, absorbing and processing information. It also presents an overview of BR’s current applications in various fields of economic activity.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 819.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 1,099.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  • Aharoni Y, Tihanyi L, Connelly BL (2011) Managerial decision-making in international business: a forty-five-year retrospective. J World Bus 46(2):135–142

    Article  Google Scholar 

  • Akerlof GA (1970) The market for ‘lemons’: quality uncertainty and the market mechanism. Q J Econ 84(3):488–500

    Article  Google Scholar 

  • Baron J (2007) Thinking and deciding, 4th edn. Cambridge University Press, New York

    Google Scholar 

  • Basel JS, Brühl R (2013) Rationality and dual process models of reasoning in managerial cognition and decision making. Eur Manag J 31(6):745–754

    Article  Google Scholar 

  • Foss NJ (2001) Bounded rationality in the economics of organization: present use and future possibilities. J Manag Gov 5(3–4):401–425

    Article  Google Scholar 

  • Garcia-Retamero R, Takezawa M, Galesic M (2010) Simple mechanisms for gathering social information. New Id Psychol 28(1):49–63

    Article  Google Scholar 

  • Gifford S (1999) Limited attention and the optimal incompleteness of contracts. J Law Econ Organ 15(2):468–486

    Article  Google Scholar 

  • Gigerenzer G, Reinhard S (eds) (2001) Bounded rationality: the adaptive toolbox. MIT Press, Cambridge

    Google Scholar 

  • Güth W (2000) Boundedly rational decision emergence – a general perspective and some selective illustrations. J Econ Psychol 21(4):433–458

    Article  Google Scholar 

  • Hart O (1995) Firms, contracts, and financial structure. Clarendon, Oxford

    Book  Google Scholar 

  • Heap SH, Hollis M, Lyons B, Sugden R, Weale A (1992) The theory of choice: a critical guide. Blackwell, Oxford

    Google Scholar 

  • Kahneman D (2003) Maps of bounded rationality: psychology for behavioral economics. Am Econ Rev 93(5):1449–1475

    Article  Google Scholar 

  • Pita J, Jain M, Tambe M, Ordóñez F, Krau S (2010) Robust solutions to Stackelberg games: addressing bounded rationality and limited observations in human cognition. Artif Intell 174(15):1142–1171

    Article  Google Scholar 

  • Rapoport A, Dale PS (1967) The “end” and “start” effects in the iterated Prisoner’s dilemma. J Confl Resolut 11:354–462

    Article  Google Scholar 

  • Reis R (2006) Inattentive consumers. J Monet Econ 53(8):1761–1800

    Article  Google Scholar 

  • Riedl DF, Kaufmann L, Zimmermann C, Perols JL (2013) Reducing uncertainty in supplier selection decisions: antecedents and outcomes of procedural rationality. J Oper Manag 31(1–2):24–36

    Article  Google Scholar 

  • Rosenthal RW (1981) Games of perfect information, predatory pricing, and the chain store paradox. J Econ Theory 25(1):92–100

    Article  Google Scholar 

  • Rosenthal RW (1989) A bounded-rationality approach to the study of noncooperative games. Int J Game Theory 18:273–292

    Article  Google Scholar 

  • Rubinstein A (1998) Modeling bounded rationality. MIT Press, Cambridge, MA

    Google Scholar 

  • Sah RK, Stiglitz JE (1985) Human fallibility and economic organization. Am Econ Rev 75(2):292–296

    Google Scholar 

  • Selten R (1978) The chain store paradox. Theory Decis 9(2):127–159

    Article  Google Scholar 

  • Simon HA (1955) A behavioral model of rational choice. Q J Econ 69(1):99–118

    Article  Google Scholar 

  • Simon HA (1982) Models of bounded rationality: behavioral economics and business organization, vol 2. MIT Press, Cambridge, MA

    Google Scholar 

  • Stahl DO, Haruvy E (2008) Level-n bounded rationality and dominated strategies in normal-form games. J Econ Behav Organ 66(2):226–232

    Article  Google Scholar 

  • Thaler RH, Sunstein CR (2008) Nudge: improving decisions about health, wealth, and happiness. Yale University Press, New Haven

    Google Scholar 

  • Tisdell C (1996) Bounded rationality and economic evolution: a contribution to decision making, economics and management. Edward Elgar, Cheltenham

    Google Scholar 

  • Todd PM (2007) How much information do we need? Eur J Oper Res 177(3):1317–1332

    Article  Google Scholar 

  • Tsaoussi A, Zervogianni E (2010) Judges as satisficers: a law and economics perspective on judicial liability. Eur J Law Econ 29(1):333–357

    Article  Google Scholar 

  • Tversky A, Kahneman D (1981) The framing of decisions and the psychology of choice. Science 211(4481):453–458

    Article  Google Scholar 

  • Tversky A, Kahneman D (1986) Rational choice and the framing of decisions. J Bus 59(4):251–278

    Article  Google Scholar 

  • Williamson OE (1985) The economic institutions of capitalism. Free Press, New York

    Google Scholar 

  • Yao J, Li D (2013) Bounded rationality as a source of loss aversion and optimism: a study of psychological adaptation under incomplete information. J Econ Dyn Control 37(1):18–31

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Law, Aristotle University of Thessaloniki, Thessaloniki, Greece

    Aspasia Tsaoussi

Authors
  1. Aspasia Tsaoussi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Aspasia Tsaoussi .

Editor information

Editors and Affiliations

  1. MRE and University of Montpellier, Montpellier, France

    Alain Marciano

  2. Faculté d’Economie, Université de Montpellier and LAMETA-UMR CNRS, Montpellier, France

    Alain Marciano

  3. DiGSPES, University of Eastern Piedmont, Alessandria, Italy

    Giovanni Battista Ramello

  4. IEL, Torino, Italy

    Giovanni Battista Ramello

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer Science+Business Media, LLC, part of Springer Nature

About this entry

Check for updates. Verify currency and authenticity via CrossMark

Cite this entry

Tsaoussi, A. (2019). Bounded Rationality. In: Marciano, A., Ramello, G.B. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7753-2_106

Download citation

Publish with us

Policies and ethics

Search

Navigation