Study Notes

Bounded Rationality (Behavioural Economics)

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 21 Mar 2021

Bounded rationality suggests that consumers and businesses opt to satisfice rather than maximise. They will use rules of thumb and approximations when active in different markets

Behavioural Economics - Bounded Rationality

Most consumers and businesses do not have sufficient information to make fully-informed judgements when making their decisions. The increasing complexity of products also makes life difficult

Heuristics

In response to bounded rationality, many people fall back on "tried and trusted" heuristics when making their decisions and choices.

Heuristics are best described as mental shortcuts or rules of thumb for decision-making to help people make a quick, satisfactory, but perhaps not perfect, answer to a complex question.

The economist Gerd Gigerenzer argues that heuristics can be an optimal way to respond to occasions where we lack information or time. People learn from experience and develop many different heuristics over time

Optimal behaviour is not the same as maximizing behaviour

© 2002-2022 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.