Skip to main content
SpringerLink
Log in

Bounded Rationality

  • Living reference work entry
  • Latest version View entry history
  • First Online:
Encyclopedia of Law and Economics

  • 166 Accesses

Definition

Bounded rationality (BR) is the idea that when individuals make decisions, they are “bounded” or limited because of inadequate information, cognitive limitations inherent in the human mind, and time constraints. This type of rationality fittingly describes broad areas of social and economic action, in which rational utility maximizers faced with complex situations are required to make less-than-perfect choices (satisficing rather than optimizing). The term was coined by the US economist and Nobel laureate Herbert Simon, who proposed it as a more realistic version of the “perfect rationality” assumed by the neoclassical model (Simon 1982). Current understandings of BR are informed by the rich and widely influential work of modern behavioral economists (see esp. Thaler 2015).

General Aspects of Bounded Rationality

BR is one of the cornerstones of rational choice theory (Simon 1955; Tversky and Kahneman 1986; Heap et al. 1992). Although its origins can be traced back to the...

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution

Institutional subscriptions

References

  • Aharoni Y, Tihanyi L, Connelly BL (2011) Managerial decision-making in international business: a forty-five-year retrospective. J World Bus 46(2):135–142

    Article  Google Scholar 

  • Akerlof GA (1970) The market for ‘lemons’: quality uncertainty and the market mechanism. Q J Econ 84(3):488–500

    Article  Google Scholar 

  • Akerlof GA, Shiller RJ (2009) Animal spirits: how human psychology drives the economy and why it matters for global capitalism. Princeton University Press, Princeton

    Google Scholar 

  • Ariely D (2008) Predictably irrational: the hidden forces that shape our decisions. HarperCollins, New York

    Google Scholar 

  • Baron J (2007) Thinking and deciding, 4th edn. Cambridge University Press, New York City

    Google Scholar 

  • Basel JS, Brühl R (2013) Rationality and dual process models of reasoning in managerial cognition and decision making. Eur Manag J 31(6):745–754

    Article  Google Scholar 

  • Foss NJ (2001) Bounded rationality in the economics of organization: present use and future possibilities. J Manag Gov 5(3–4):401–425

    Article  Google Scholar 

  • Gabaix X (2018) Behavioral inattention. CEPR discussion paper No. DP13268. Available at SSRN: https://ssrn.com/abstract=3270947. Accessed 8 June 2020

  • Garcia-Retamero R, Takezawa M, Galesic M (2010) Simple mechanisms for gathering social information. New Ideas Psychol 28(1):49–63

    Article  Google Scholar 

  • Gifford S (1999) Limited attention and the optimal incompleteness of contracts. J Law Econ Org 15(2):468–486

    Article  Google Scholar 

  • Gigerenzer G, Reinhard S (eds) (2001) Bounded rationality: the adaptive toolbox. MIT Press, Cambridge

    Google Scholar 

  • Güth W (2000) Boundedly rational decision emergence – a general perspective and some selective illustrations. J Econ Psychol 21(4):433–458

    Article  Google Scholar 

  • Hart O (1995) Firms, contracts, and financial structure. Clarendon Press, Oxford

    Book  Google Scholar 

  • Heap SH, Hollis M, Lyons B, Sugden R, Weale A (1992) The theory of choice: a critical guide. Blackwell, Oxford

    Google Scholar 

  • Kahneman D (2003) Maps of bounded rationality: psychology for behavioral economics. Am Econ Rev 93(5):1449–1475

    Article  Google Scholar 

  • Karlsson N, Loewenstein G, Seppi D (2009) The ostrich effect: selective attention to information. J Risk Uncertain 38:95–115

    Google Scholar 

  • Olaffson A, Pagel M (2017) The ostrich in us: selective attention to financial accounts, income, spending, and liquidity. NBER working paper no. 23945. Available at https://www.nber.org/papers/w23945. Accessed 14 June 2020

  • Pita J, Jain M, Tambe M, Ordóñez F, Krau S (2010) Robust solutions to Stackelberg games: addressing bounded rationality and limited observations in human cognition. Artif Intell 174(15):1142–1171

    Article  Google Scholar 

  • Rapoport A, Dale PS (1967) The “end” and “start” effects in the iterated Prisoner’s dilemma. J Confl Resolut 11:354–462

    Article  Google Scholar 

  • Reis R (2006) Inattentive consumers. J Monet Econ 53(8):1761–1800

    Article  Google Scholar 

  • Riedl DF, Kaufmann L, Zimmermann C, Perols JL (2013) Reducing uncertainty in supplier selection decisions: antecedents and outcomes of procedural rationality. J Oper Manag 31(1–2):24–36

    Article  Google Scholar 

  • Rosenthal RW (1981) Games of perfect information, predatory pricing, and the chain store paradox. J Econ Theory 25(1):92–100

    Article  Google Scholar 

  • Rosenthal RW (1989) A bounded-rationality approach to the study of non-cooperative games. International Journal of Game Theory 18:273–292

    Google Scholar 

  • Rubinstein A (1998) Modeling bounded rationality. The MIT Press, Cambridge, MA

    Book  Google Scholar 

  • Sah RK, Stiglitz JE (1985) Human fallibility and economic organization. Am Econ Rev 75(2):292–296

    Google Scholar 

  • Samson A (2017) The behavioral economics guide 2017 (with an introduction by Cass Sunstein). Retrieved from https://www.behavioraleconomics.com. Accessed 8 June 2020

  • Selten R (1978) The chain store paradox. Theor Decis 9(2):127–159

    Article  Google Scholar 

  • Simon HA (1955) A behavioral model of rational choice. Q J Econ 69(1):99–118

    Article  Google Scholar 

  • Simon HA (1982) Models of bounded rationality: economic analysis and public policy, vol 1. The MIT Press, Cambridge, MA

    Google Scholar 

  • Stahl DO, Haruvy E (2008) Level-n bounded rationality and dominated strategies in normal-form games. J Econ Behav Organ 66(2):226–232

    Article  Google Scholar 

  • Thaler RH (2015) Misbehaving: the making of behavioral economics. W.W. Norton & Company, New York

    Google Scholar 

  • Thaler RH, Sunstein CR (2008) Nudge: improving decisions about health, wealth, and happiness. Yale University Press, New Haven

    Google Scholar 

  • Tisdell C (1996) Bounded rationality and economic evolution: a contribution to decision making, economics and management. Edward Elgar Publishing, Cheltenham, UK

    Google Scholar 

  • Todd PM (2007) How much information do we need? Eur J Oper Res 177(3):1317–1332

    Article  Google Scholar 

  • Tsaoussi A, Zervogianni E (2010) Judges as satisficers: a law and economics perspective on judicial liability. Eur J Law Econ 29(1):333–357

    Article  Google Scholar 

  • Tversky A, Kahneman D (1981) The framing of decisions and the psychology of choice. Science 211(4481):453–458

    Article  Google Scholar 

  • Tversky A, Kahneman D (1986) Rational choice and the framing of decisions. J Bus 59(4):251–278

    Article  Google Scholar 

  • Williamson OE (1985) The economic institutions of capitalism. Free Press, New York

    Google Scholar 

  • Yao J, Li D (2013) Bounded rationality as a source of loss aversion and optimism: a study of psychological adaptation under incomplete information. J Econ Dyn Control 37(1):18–31

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Law, Aristotle University of Thessaloniki, Thessaloniki, Greece

    Aspasia Tsaoussi

Authors
  1. Aspasia Tsaoussi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Aspasia Tsaoussi .

Editor information

Editors and Affiliations

  1. Montpellier, France

    Alain Marciano

  2. Dept DiGSPES, Univ del Piemonte Orientale Dept DiGSPES, Alessandria, Italy

    Giovanni Battista Ramello

Rights and permissions

Reprints and permissions

Copyright information

© 2021 Springer Science+Business Media, LLC, part of Springer Nature

About this entry

Check for updates. Verify currency and authenticity via CrossMark

Cite this entry

Tsaoussi, A. (2021). Bounded Rationality. In: Marciano, A., Ramello, G.B. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_106-2

Download citation

  • DOI: https://doi.org/10.1007/978-1-4614-7883-6_106-2

  • Received:

  • Accepted:

  • Published:

  • Publisher Name: Springer, New York, NY

  • Print ISBN: 978-1-4614-7883-6

  • Online ISBN: 978-1-4614-7883-6

  • eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences

Publish with us

Policies and ethics

Chapter history

  1. Latest

    Bounded Rationality
    Published:
    08 June 2021

    DOI: https://doi.org/10.1007/978-1-4614-7883-6_106-2

  2. Original

    Bounded Rationality
    Published:
    08 October 2014

    DOI: https://doi.org/10.1007/978-1-4614-7883-6_106-1

Search

Navigation