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DO YOU HAVE BOUNDED RATIONALITY?

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Craig A. Lambert essay “The Marketplace of Perceptions,” and Reinhard Selten’s “What is Bounded Rationality?,” both take a close look at the human psyche while trying to draw conclusions on why we do the things we do in relation to economics. They both investigate mainstream economic theory and how it has a deeply flawed impression of the human decision-making process. Both pieces turn to this ideal “Economic Man” as the fundamental flaw in economic theory and they lean instead to the more realistic “bounded rationality” to explain people’s true nature. Human’s aren’t rational beings and it is largely irrational emotions that drive us to make the decisions we make.

These articles attempt to convince the reader that behavioral economics should replace classical and neoclassical economics. They draw the link that economic agents are based on complete rationality, but there is no consideration for the fact that humans are not rational beings. The articles conclude that humans are not fully rational because people have limited cognitive capabilities.

Ultimately, the articles point to the fact that people have ideas about what they want to accomplish things such as quitting smoking and exercising – but they usually don’t follow through on these ideas, even though their execution would be rational. While people may be fully motivated to perform the task, they have cognitive blocks that are driven largely by strong emotional impulses. This is why mankind is not able to make decisions based on weighing the negatives against the positives.

The “gateway” disciplines the thinkers drawn upon include bounded rationality, which refers to the non-optimizing adaptive behavior of people. While it can’t be exactly defined, bounded rationality doesn’t take emotions into account when decisions are being made. Bounded rationality alone, however, doesn’t explain why humans make the decisions they do.

Reinhard Selten describes in “What is bounded rationality?,” the aspiration adaptation theory, which attempts to provide an idea of the insights related to creating a model of non-optimizing characteristics of the bounded rational economic agents. The theory, however, doesn’t claim that it is validated as providing a description of what causes people to make the decision they do.

Economic thinking has evolved to the point where we are now questioning the former thinking with behavioral economics. A more realistic idea of people in the marketplace can begin to form by taking into consideration human emotion and irrationalities. Instead of pursuing economics with an ideal way to be, we can start to develop a climate where we are more realistic in the ways we approach economics.


In order to evolve, we must first learn to recognize our true nature. In doing so, people could make better decisions, if they are aware of their nature. This objectivity comes from self-awareness that can lead us to learning and to growing. The neoclassical decision-maker simply relates the object to the choice made. However, the decision-maker in behavioral economics describes the object of their interest to themselves and they justify a transaction in a more emotional response. Bounded rationality helps draw the line from neoclassical economics to behavioral economics. This shift could improve the way we make decisions and improve our self-awareness and realistic view of economics.

Major world events such as the recession have improved the case for behavioral economics because the ideology allows us to recognize that we are emotional. With that recognition, we could learn to understand ourselves and know that we are likely being irrational when we made a decision to sell all our shares after the market had dipped by around 40 per cent. At that time, many people believed the market would never recover but, sure enough, it did – and those who recognized the irrational emotions of the general public profited on making stock purchases when the market was down.

By recognizing that people will likely always have emotions, pending any significant mental evolution over the next dozen centuries, mankind can start to move forward with the way in which we approach economics. Doing so will provide for a way to account for our irrationalities and perhaps outsmart temptation.

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By Hanna Robinson

Hanna has won numerous writing awards. She specializes in academic writing, copywriting, business plans and resumes. After graduating from the Comosun College's journalism program, she went on to work at community newspapers throughout Atlantic Canada, before embarking on her freelancing journey.

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