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Bounded rationality

Bounded rationality
Bounded rationality is the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. It was proposed by Herbert A. Simon as an alternative basis for the mathematical modeling of decision making, as used in economics, political science and related disciplines; it complements rationality as optimization, which views decision-making as a fully rational process of finding an optimal choice given the information available.[1] Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as "rational" entities (see for example rational choice theory). Origins[edit]

Cognitive bias Systematic pattern of deviation from norm or rationality in judgment Although it may seem like such misperceptions would be aberrations, biases can help humans find commonalities and shortcuts to assist in the navigation of common situations in life.[5] Some cognitive biases are presumably adaptive. Cognitive biases may lead to more effective actions in a given context.[6] Furthermore, allowing cognitive biases enables faster decisions which can be desirable when timeliness is more valuable than accuracy, as illustrated in heuristics.[7] Other cognitive biases are a "by-product" of human processing limitations,[1] resulting from a lack of appropriate mental mechanisms (bounded rationality), impact of individual's constitution and biological state (see embodied cognition), or simply from a limited capacity for information processing.[8][9] Overview[edit] The "Linda Problem" illustrates the representativeness heuristic (Tversky & Kahneman, 1983[14]). Types[edit] List of biases[edit]

Rational choice theory Rationality is widely used as an assumption of the behavior of individuals in microeconomic models and analyses and appears in almost all economics textbook treatments of human decision-making. It is also central to some of modern political science,[2] sociology,[3] and philosophy. A particular version of rationality is instrumental rationality, which involves seeking the most cost-effective means to achieve a specific goal without reflecting on the worthiness of that goal. Definition and scope[edit] The concept of rationality used in rational choice theory is different from the colloquial and most philosophical use of the word. Early neoclassical economists writing about rational choice, including William Stanley Jevons, assumed that agents make consumption choices so as to maximize their happiness, or utility. Rational choice theorists do not claim that the theory describes the choice process, but rather that it predicts the outcome and pattern of choices. Formal statement[edit]

List of cognitive biases Cognitive biases are tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgment, and are often studied in psychology and behavioral economics. There are also controversies over some of these biases as to whether they count as useless or irrational, or whether they result in useful attitudes or behavior. For example, when getting to know others, people tend to ask leading questions which seem biased towards confirming their assumptions about the person. Although this research overwhelmingly involves human subjects, some findings that demonstrate bias have been found in non-human animals as well. Decision-making, belief, and behavioral biases[edit] Many of these biases affect belief formation, business and economic decisions, and human behavior in general. Social biases[edit] Most of these biases are labeled as attributional biases. Memory errors and biases[edit] Common theoretical causes of some cognitive biases[edit] Notes[edit]

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