Bounded rationality

Rational behavior, in economics, means that individuals maximize some target function under the constraints they face (e.g., their utility function) in pursuit of their self-interest. This is reflected in the theory of (subjective) expected utility (Savage, 1954).

The term bounded rationality is used to designate rational choice that takes into account the cognitive limitations of both knowledge and cognitive capacity. Bounded rationality is a central theme in behavioral economics. It is concerned with the ways in which the actual decision-making process influences decisions. Theories of bounded rationality relax one or more assumptions of standard expected utility theory.

See also: equilibrium, expected utility, models of microeconomic decisions, behavioral economics, rational behavior

Literature: Savage (1954), Simon (1987b)

Entry by: Joachim Winter

June 17, 1999
Direct questions and comments to: Glossary master