Bounded rationality Totally Explained

Everything about Bounded Rationality totally explained

Some models of human behavior in the social sciences assume that humans can be reasonably approximated or described as "rational" entities (see for example rational choice theory). Many economics models assume that people are hyperrational, and would never do anything to violate their preferences. The concept of bounded rationality revises this assumption to account for the fact that perfectly rational decisions are often not feasible in practice due to the finite computational resources available for making them. The term is thought to have been coined by Herbert Simon. In Models of My Life, Herbert Simon points out that most people are only partly rational, and are in fact emotional/irrational in the remaining part of their actions. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Williamson, p. 553, quoting Simon). Simon describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:

limiting what sorts of utility functions there might be.
recognizing the costs of gathering and processing information.
the possibility of having a "vector" or "multi-valued" utility function.

Simon suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other economic activities where similar decision making is required. Daniel Kahneman proposes bounded rationality as a model to overcome some of the limitations of the rational-agent models in economic literature.
As decision makers have to make decisions about how and when to decide, Ariel Rubinstein proposed to model bounded rationality

by explicitly specifying decision making procedures. This puts the study of decision procedures on the research agenda. Gerd Gigerenzer argues that most decision theorists who have discussed bounded rationality have not really followed Simon's ideas about it. Rather, they've either considered how people's decisions might be made sub-optimal by the limitations of human rationality, or have constructed elaborate optimising models of how people might cope with their inability to optimise. Gigerenzer instead proposes to examine simple alternatives to a full rationality analysis as a mechanism for decision making, and he and his colleagues have shown that such simple heuristics frequently lead to better decisions than the theoretically optimal procedure.
From a computational point of view, decision procedures can be encoded in algorithms and heuristics. Edward Tsang argues that the effective rationality of an agent is determined by its computational intelligence. Everything else being equal, an agent that has better algorithms and heuristics could make "more rational" (more optimal) decisions than one that has poorer heuristics and algorithms.
A school of economic thought that traditionally assumes that economic agents have bounded rationality is the Austrian school.

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