Definition: Humans are rational, but within limits.
Insight: Humans need to have mental shortcuts, because we do not have the capacity to make machine-like computations.
Insight: People reason differently depending on context.
Insight: Bounded Rationality occurs because we need to reach conclusions and decisions with incomplete information, or limited time.
Reference: Gigerenzer & Goldstein (1996) defined bounded rationality as the observation that people are rational but with limitations.
Insight: As agents of bounded rationality emotions shape decision making.
Insight: Machines also have bounded rationality according to design limitations.
Reference: Herbert Simon: rationality of decisions is limited by information availability, time, and cognitive processing power.
Insight: Humans cannot measure and analyse like computers, therefore, due to our biological limits and evolutionary pressures we make mental shortcuts and distortions.
Insight: Mental shortcuts are the result of our knowledge of the world being fundamentally incomplete.
Reference: Herbert Simon: formulated the concept of bounded rationality
Insight: Economists use "error" terms in equations as a result of the acknowledgement of bounded rationality.
Reference: Herbert Simon: defined bounded rationality - people lack the cognitive ability to solve complex problems.
IV. Summary of Key Insights & Principles
Decision Making
Humans have limitations to the amount of information we can process.
Bounded Rationality can result in the use of heuristics (mental shortcuts) and biases (deviations from rationality) in decision making.
Bounded rationality can result in 'satisficing': choosing the first option that meets minimum criteria rather than finding the best solution.
