Abstract

There are not one but three programs of bounded rationality, and these could hardly be more unalike. Herbert Simon’s original program studied how people make rational decisions in real-world situations of uncertainty, as opposed to well-defined situations of risk such as lotteries. Simon encouraged economists to study actual decisions under uncertainty rather than constructing as-if models of expected utility maximization. Economists adopted the term bounded rationality but changed it to mean precisely what Simon had opposed, models of optimization under constraints. Proponents of the heuristics-and-biases program also appropriated the term and changed it to mean violations of rational choice theory, which they interpreted as forms of irrationality, again precisely what Simon had opposed. These three programs entail different visions of the nature of human rationality: Simon’s Homo heuristicus has to cope with an uncertain world; the omniscient Homo economicus foresees the future and calculates the optimal action; Homer Simpson (also known as “System 1”) somehow survives despite predicable bouts of irrationality. This chapter shows how Simon’s program of studying Homo heuristicus has been revived and fleshed out in the last 25 years by taking the human condition of fundamental uncertainty and the potential of heuristics seriously.