RATIONALITY OF HUMAN BEHAVIOR IN ECONOMICS: BOUNDED RATIONALITY CONCEPT

Author
, Doctor of Sciences (Economics), Professor, Professor of Economics Department, Lviv, prospekt Svobody, 18

In heading

 Economic theory;

Signed print

 21.09.2018

Issues number

 2018 - № 3 (34)

Page

 11-25

Type of articles

 Scientific article

Code UDK

 330.101:330.83

ISSN print

 2411-5584

Abstract

 Problem setting. The set of assumptions concerning human behavior is an important starting point in the construction of economic theories and models. In the middle of the previous century, H. Simon proposed the notion of bounded rationality, which takes into account the scarcity of individuals’ cognitive abilities. The specifics and details of this concept’s application for analyzing decision-making in a different context are of great current interest.
Recent research and publications analysis. The number of publications dealing with different facets of bounded rationality in modern economic theories surged in last decades. Mainly the interest is concentrated around such spheres as the evolution of the bounded rationality concept, its interpretation in different kinds of models and influence on individuals’ decision-making.
Paper objective. The purpose of this article is to trace the specifics of interpretation and applied aspects of bounded rationality concept in modern economics.
Paper main body. The concept of bounded rationality was proposed as an alternative to the neoclassical assumption of global rationality, which is poorly applicable for day-today practice. This notion reflects the limitations of cognitive abilities and computational capabilities of human individuals who have to make decisions under uncertainty and time shortage. Afterward, Simon clarified his position and coined the term «procedural rationality,» which describes in detail the process of acquiring satisficing decisions. Notions of bounded rationality and procedural rationality should be treated as complements, in that the latter sums up the essence of Simon’s view about rational human behavior and the former plays a critical role to neoclassical economics.
Today, as the idea of bounded rationality became very popular, this term is often used to denote any models which reject global rationality. It seems inappropriate to classify this way the models of optimization under constraints as they use uncertain assumptions and optimization approach as such cannot be realized in many situations because of infinite regression problem. Bounded rationality also is one of three basic characteristics within behavioral economics approach, where it can be caused both by cognitive limits and psychological factors.
The theory of ecological rationality developed Simon’s basic idea about two components of bounded rationality: cognitive limitations of humans and the structure of the environment. Exploiting the environmental structure, even under constraints of limited time, limited cognitive abilities and limited computational capabilities individuals can make rational and successful decisions. Such a result becomes possible due to heuristics, which arise in the process of adaptation to the specifics of the environment and provide fast and frugal ways to make decisions in different situations.
Conclusions of the research. The concept of bounded rationality allowed to widen the understanding of human behavior rationality and to make it closer to actual daily practice. A complementary notion of procedural rationality emphasized the importance of appropriate procedures to ensure the efficiency of the decision-making process. Today bounded rationality is used in very broad sense living room to different interpretations, sometimes hardly compatible. Combining the concept of bounded rationality with recent progress in cognitive psychology opens the prospects of the new research program under the name of «embodied rationality».
Short Abstract for the article
Abstract. The preconditions of nascence and evolution features of bounded rationality notion in modern economics are traced. It is shown that this concept is widely used today when constructing essentially different models. The specifics of bounded rationality interpretation in models of optimization under constraints, behavioral economics, and ecological rationality theory are considered.

Keywords

 global (unbounded) rationality, cognitive limitations, bounded rationality, procedural rationality, heuristics, ecological rationality.

Reviewer

External reviewer

Article in PDF

 3 11-25

Bibliography

 1. Simon, H. A. (1978). Rational Decision-Making in Business Organizations. Nobel Memorial Lecture. Retrieved from https://www.nobelprize.org/nobel_prizes/economicsciences/laureates/1978/simon-lecture.pdf.
2. Simon, H. A. (1993). Ratsionalnost kak protsess i produkt myishleniya [Rationality as Process and as Product of Thought]. THESIS: teoriya i istoriya ekonomicheskih i sotsialnyih institutov i system – THESIS: theory and history of economic and social institutions and systems, 3, 16–38. Retrieved from http://ecsocman.hse.ru/data/629/779/1217/3_1_2simon.pdf [in Russian].
3. Gigerenzer, G., & Selten, R. (2001). Rethinking Rationality. In G. Gigerenzer, & R. Selten (Eds.), Bounded Rationality. The Adaptive Toolbox (pp. 1–12). Cambridge, Massachusetts: The MIT Press.
4. Klaes, M., & Sent, E.‑M. (2005). A Conceptual History of the Emergence of Bounded Rationality. History of Political Economy, 37(1), 27–59.
5. Barros, G. (2010). Herbert A. Simon and the concept of rationality: Boundaries and procedures. Brazilian Journal of Political Economy, 30(3), 455–472.
6. Mastrogiorgio, A., & Petracca, E. (2016). Embodying rationality. Retrieved from https://mpra.ub.uni-muenchen.de/74658/1/MPRA_paper_74658.pdf.
7. Rabin, M. (1998). Psychology and Economics. The Journal of Economic Literature, XXXVI, 11–46.
8. Mullainathan, S., & Thaler, R. H. (2000). Behavioral Economics. NBER Working Paper 7948. Retrieved from http://www.nber.org/papers/w7948.
9. Kahneman, D. (2003). Maps of Bounded Rationality: Psychology for Behavioral Economics. The American Economic Review, 93(5), 1449–1475.
10. Kleiner, G. B. (2003). K metodologii modelirovaniya priniatiya resheniy ekonomicheskimi agentami [To the methodology of modeling decision-making by economic agents]. Ekonomika i matematicheskie metody – Economics and mathematical methods, 39(2), 1–32 [in Russian].
11. Selten, R. (2001). What Is Bounded Rationality? In G. Gigerenzer, & R. Selten (Eds.), Bounded Rationality. The Adaptive Toolbox (pp. 13–36). Cambridge, Massachusetts: The MIT Press.
12. Gigerenzer, G. (2001). The Adaptive Toolbox. In G. Gigerenzer, & R. Selten (Eds.), Bounded Rationality. The Adaptive Toolbox (pp. 37–50). Cambridge, Massachusetts: The MIT Press.
13. Conlisk, J. (1996). Why Bounded Rationality? The Journal of Economic Literature, XXXIV, 669–700.
14. Simon, H. A. (1959). Theories of Decision-Making in Economics and Behavioral Science. The American Economic Review, 49(3), 253–283.
15. Brunner, K. (1993). Predstavlenie o cheloveke i kontseptsiya sotsiuma: dva podhoda k ponimaniyu obschestva [The Perception of Man and the Conception of Society: Two approaches to Understanding Society]. THESIS: teoriya i istoriya ekonomicheskih i sotsialnyih institutov i system – THESIS: theory and history of economic and social institutions and systems, 3, 51–72. Retrieved from https://igiti.hse.ru/
data/005/314/1234/3_2_1Brunn.pdf [in Russian].
16. Stigler, G. J. (1961). The Economics of Information. The Journal of Political Economy, 69(3), 213–225.
17. Pingle, M. (2007). Deliberation Cost as a Foundation for Behavioral Economics. Retrieved from https://pdfs.semanticscholar.org/11a4/70ba6b768e988a39331907fbc6304b92711e.pdf.
18. Pingle, M. (2010). Looking under the hood: Exploring assumptions and finding behavioral economics. Journal of Economic Behavior & Organization, 73, 73–76.

Code DOI

 10.31359/2411-5584-2018-34-3-11

17.09.2018