Bounded Rationality is essentially the term for rational behavior under some constraints upon an individual’s rationality regarding access to information, lack of capacity or special nature of utility functions. The original proposed approach of Bounded Rationality involved “satisficing”, by a search for additional information until an outcome was reached that satisfied the minimum needed utility for the individual (Selten, 1999). At this stage, the individual would stop searching, even though full rationality (with perfect information) was not reached. Bounded Rationality has since become an important part of economics, especially Behavioral economics, and aims to improve on the classical assumption of rationality in explaining human behavior. A significant body of evidence indicates that rational behavior is not the norm for actual individuals (Conlisk, 1996).
Bounded Rationality is an evolving concept with different viewpoints on the exact nature and impact of the bounds. One idea of axiomatic bounded rationality comes from game theory, as proposed by Laurent Mathevet who lays out 3 axioms detectable in the Stag-Hare game: Individual Security (the search for minimum returns), Collective Intelligence (learning from others actions), and Internal Stability (the rationalization of actions). Such a framework can be used to map the optimization behavior of individuals. Several models with variations on bounded rationality have been proposed, including the X-inefficiency model, boundedly-rational choice (satisficing), and evolutionary economics (Conlisk, 1996).
Lakatos’ methodology towards rationality rests upon his idea of the Research Programme, in which he proposes 4 parts of any theory: a Hard Core (the unchanging root theory), a Protective Belt (the changeable parts of the theory), a Negative Heuristic (the approach that prevents change to the core) and a Positive Heuristic (the approach that promotes change to the belt) (Matheson and Dallman, 1996). This is remarkably similar to the Bounded Rationality approach to modifying classical rationality – Rationality itself is the Hard Core (there is no irrational behavior), the context of rationality becomes the Belt (Information, Time and Resources), which allow the base idea to be preserved while its application is updated to be more reflective of reality.
Lakatos also proposes that any modifications to the belt can be either Progressive or Degenerate. Progressive modifications are those which lead to novel ideas and Degenerate are those which do not add anything new (Matheson and Dallman, 1996). A system or theory can be thought of being in good health so long as there are enough Progressive modifications being made. In this sense, we can think of the Bounded conditions as being a Progressive modification to the core idea of rationality in Economics. By adding novel ways to consider theories of rational behavior, the Bounded approach has allowed rationality to persist as a valid idea with added accuracy as a theory. Bounded Rationality can be thought of as an empirical progression rather than a theoretical one (which in Lakatos’ original view, may not make it progressive) as it is the result of the shortcomings of the original theory observed in the real world (Klaes and Sent, 2002).
The position of Bounded Rationality as a progressive modification is challenged by neoclassical defence of rationality. In this view, rationality is preserved in theory and the distortions seen in reality are due to information asymmetries or externalities rather than a failure of rationality. Key differences between the two are that the individual chooses when to stop searching for more information in a Bounded Rationality world, whereas in an Asymmetry world, the information is simply not available. The two theories have impact upon the value of information and its effects on policy and decision theory.
Works Cited
Laurent Mathevet. "AN AXIOMATIC APPROACH TO BOUNDED RATIONALITY IN REPEATED INTERACTIONS: THEORY AND EXPERIMENTS." Web. 15 Mar. 2016. <http://econ.as.nyu.edu/docs/IO/27530/Mathevet_axioms.pdf>.
Matthias Klaes, and Esther-Mirjam Sent. "A Conceptual History of the Emergence of Bounded Rationality." ESHET Conference (2002). Web. 15 Mar. 2016. <http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.7.7036&rep=rep1&type=pdf>.
John Conlisk. "Why Bounded Rationality?" Journal of Economic Literature 34.2 (1996): 669-700. Web. 15 Mar. 2016.
Reinhard Selten. "What Is Bounded Rationality?" SFB Discussion Paper (1999). Web. 15 Mar. 2016. <http://www.wiwi.uni-bonn.de/sfb303/papers/1999/b/bonnsfb454.pdf>.
Carl Matheson, and Justin Dallman. "Historicist Theories of Scientific Rationality." Stanford Encyclopaedia of Philosophy. 12 Aug. 1996. Web. 15 Mar. 2016. <http://plato.stanford.edu/entries/rationality-historicist/>.
