Bounded Rationality

This is the theory that there is only so much information that humans can be aware of. Therefore, when making decisions, we base them on a limited choice. They are rational given the limited choice and awareness of alternatives, but they rarely maximise total utility because people don’t want to take the time to fully consider all options.

  • A theory of bounded rationality suggests individuals can make decisions based on heuristics – these are simple efficient rules of thumb.
  • Some argue bounded rationality places a check on economic theory which assumes firms and consumers are perfectly rational.
  • However, supporters of rational choice theory, assume that if many thousands of people are making decisions from bounded rationality, then the economic average will lead to rational behaviour, even if not everyone makes ‘perfect decisions.’
  • The advent of technology like the internet and computers have helped give consumers more informed choice.

Implications of bounded rationality

  • Choice architecture. Since we take short-cuts in making decisions, the way goods are framed and presented can have a big effect on choices we make. Therefore, the choice architecture of goods and services can nudge us into changing our buying preferences.
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