Bounded Rationality

Two Interpretations from Psychology

Authored by: Jörg Rieskamp , Ralph Hertwig , Peter M. Todd

Handbook of Contemporary Behavioral Economics

Print publication date:  July  2006
Online publication date:  January  2015

Print ISBN: 9780765613028
eBook ISBN: 9781315703879
Adobe ISBN: 9781317469162


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Perhaps more than anybody else in economic theory, Herbert A. Simon stressed that individual decision makers have no choice but to make decisions under the constraints of limited cognitive resources (e.g., Simon 1978). On the basis of this indisputable truth about the human cognitive system, he challenged classical economic theory, which in his view projected an omniscient rationality assuming unbounded knowledge, computational capacities, and time. He also targeted Milton Friedman’s (1953) famous defense of classic economic theory, “The Methodology of Positive Economics.” Responding to the criticism that economic theory rests on unrealistic assumptions, Friedman argued:

Complete “realism” is clearly unattainable, and the question whether a theory is realistic “enough” can be settled only by seeing whether it yields predictions that are good enough for the purpose in hand. (Friedman 1953, 41)

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