Rationality of human behavior in economics: bounded rationality concept

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Rationality of human behavior in economics: bounded rationality concept

Journal Title: Економічна теорія та право - Year 2018, Vol 3, Issue 34

Abstract

Problem setting. The set of assumptions concerning human behavior is an important starting point in the construction of economic theories and models. In the middle of the previous century, H. Simon proposed the notion of bounded rationality, which takes into account the scarcity of individuals’ cognitive abilities. The specifics and details of this concept’s application for analyzing decision-making in a different context are of great current interest. Recent research and publications analysis. The number of publications dealing with different facets of bounded rationality in modern economic theories surged in last decades. Mainly the interest is concentrated around such spheres as the evolution of the bounded rationality concept, its interpretation in different kinds of models and influence on individuals’ decision-making. Paper objective. The purpose of this article is to trace the specifics of interpretation and applied aspects of bounded rationality concept in modern economics. Paper main body. The concept of bounded rationality was proposed as an alternative to the neoclassical assumption of global rationality, which is poorly applicable for day-today practice. This notion reflects the limitations of cognitive abilities and computational capabilities of human individuals who have to make decisions under uncertainty and time shortage. Afterward, Simon clarified his position and coined the term «procedural rationality,» which describes in detail the process of acquiring satisficing decisions. Notions of bounded rationality and procedural rationality should be treated as complements, in that the latter sums up the essence of Simon’s view about rational human behavior and the former plays a critical role to neoclassical economics. Today, as the idea of bounded rationality became very popular, this term is often used to denote any models which reject global rationality. It seems inappropriate to classify this way the models of optimization under constraints as they use uncertain assumptions and optimization approach as such cannot be realized in many situations because of infinite regression problem. Bounded rationality also is one of three basic characteristics within behavioral economics approach, where it can be caused both by cognitive limits and psychological factors. The theory of ecological rationality developed Simon’s basic idea about two components of bounded rationality: cognitive limitations of humans and the structure of the environment. Exploiting the environmental structure, even under constraints of limited time, limited cognitive abilities and limited computational capabilities individuals can make rational and successful decisions. Such a result becomes possible due to heuristics, which arise in the process of adaptation to the specifics of the environment and provide fast and frugal ways to make decisions in different situations. Conclusions of the research. The concept of bounded rationality allowed to widen the understanding of human behavior rationality and to make it closer to actual daily practice. A complementary notion of procedural rationality emphasized the importance of appropriate procedures to ensure the efficiency of the decision-making process. Today bounded rationality is used in very broad sense living room to different interpretations, sometimes hardly compatible. Combining the concept of bounded rationality with recent progress in cognitive psychology opens the prospects of the new research program under the name of «embodied rationality». Short Abstract for the article Abstract. The preconditions of nascence and evolution features of bounded rationality notion in modern economics are traced. It is shown that this concept is widely used today when constructing essentially different models. The specifics of bounded rationality interpretation in models of optimization under constraints, behavioral economics, and ecological rationality theory are considered.

Authors and Affiliations

О. З. Ватаманюк

Keywords

global (unbounded) rationality; cognitive limitations; bounded rationality; procedural rationality; heuristics; ecological rationality.

EP ID EP437767
DOI 10.31359/2411-5584-2018-34-3-11
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