Bounded rationality

Kahneman and others have shown that the decision makers are often irrational and that for many decisions, the classic decision-utility model (in which decisions are taken that maximize utility) is not used. Jones says: “(Decision makers) want to make rational decisions, but they cannot always do so. The implication for politics is that rational responses to the environment characterize decision-making generally, but at points—often important points—rationality fails, and as a consequence there is a mismatch between the decision-making environment and the choices of the decision maker. We refer to this mismatch as “bounded rationality showing through” (Simon 1996). … . In structured situations, at least, we may conceive of any decision as having two components: environmental demands (seen by the individual as incentives, positive or negative) and bounds on adaptability in the given decision-making situation. Ideally, an analysis based on rational choice should be able to specify what the environmental incentives are and to predict decisions based on those incentives. What cannot be explained is either random error (even the most rational of us may make an occasional mistake, but these are not systematic) or bounded rationality showing through. Standard statistical techniques give us the tools to distinguish systematic from random factors, so in principle it should be possible to distinguish the rational, adaptive portion of a decision from bounds on rationality.”