Bounded rationality

Updated: Aug 20, 2021

Bounded rationality arises because there is a finite limit to the amount of information the human brain can hold and process. Although teamwork and computers can vastly increase the amount of information that can be collected, and the calculations that can be performed, it is still the case that using the information and understanding the implications of the calculations are subject to severe limits. Bounded rationality casts doubt on the model of the economic consumer considering all possible alternatives and optimizing by choosing the most preferred option. The theory of satisficing assumes that individuals and organizations consider only a relatively small number of alternatives, and frequently stop searching once they find a tolerable course of action, rather than seeking the best possible.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.