Bounded Rationality is a theory that suggests individuals make decisions based on the limited information they have, their cognitive limitations, and the finite amount of time they have to make a decision. It challenges the traditional notion of perfect rationality in economic models, emphasizing that real-world decision-making is often suboptimal due to these constraints.

Bounded Rationality

limited information

Cognitive limitations refer to the inherent constraints in human mental processing, which affect our ability to perceive, remember, and reason. These limitations influence decision-making, problem-solving, and learning, often necessitating strategies or tools to mitigate their impact.

cognitive limitations

finite amount of time

Decision-making is a cognitive process that involves selecting a course of action from multiple alternatives, often under conditions of uncertainty. It is influenced by various factors such as individual biases, available information, and the decision-making environment.

decision-making

perfect rationality

Economic models are simplified representations of economic processes, used to analyze real-world economic scenarios and predict outcomes. They help economists understand complex interactions within an economy by focusing on key variables and relationships while making assumptions to reduce complexity.

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