Abstract

The concept of bounded rationality—and the work of Herbert Simon, Daniel Kahneman, Richard Thaler, and many others in behavioral economics––has provided a much-needed counterweight to rational expectations theory in economics. This chapter revisits the contrast between rational expectations and bounded rationality, specifically as they relate to the psychology of perception and the nature and origins of value. It uses the proverbial $500 bill as a way to informally discuss perception, obviousness, and value. The chapter highlights some perceptual concerns with existing arguments about the idea of obviousness and bias (by Kahneman, Thaler, Sunstein and colleagues), as well as heuristics (by Gigerenzer and colleagues), linking this to empirical findings in cognitive psychology and behavioral economics. The chapter points toward some theoretical alternatives by building on insights from biology and the psychology of perception. Specifically, two key issues related to perception and rationality are discussed: (1) perception and the organism-environment relationship; and (2) seeking or “looking for” rationality. An appraisal of the economic implications of the argument concludes the chapter, by discussing perception, belief heterogeneity and the origins of value in markets.