BOUNDED RATIONALITY
SUBMITTED BY: SHUVAM GUPTA
[Link] SECTION-B GROUP-“L”
The concept of bounded rationality was introduced by Herbert A Simon
mire than thirty years ago. He proposed to replacer the idea of utility
maximization by the view of economic behavior involving the adaption
of aspiration levels to success and failure.
The interest in experimental economic has grown tremendously in the
last decade. However relatively few experimentalist contribute to the
development of a theory of bounded rational economic behavior.
In the view of the accumulating experimental evidence many
theoretician have become uneasy with exaggerated rationality
assumptions. More use could be made of available le theories of
bounded rational behavior in economic modelling. In the transaction
costs approach much emphasis is put on bounded rationality but only
verbally .
Formal modelling involving bargaining and organization interaction
could be improved by the use of experimentally based theories of
bargaining and coalition formation. The experimental evidence suggest
that bounded rationality is not just some other kind of utility
maximization or something close to it.
THE LIMITS OF RATIONALITY
Cognitive limits are imposed by human capabilities of computation and
cogitation. However these limit are not the only ones for a long time
the author thought of bounded rationality entirely in terms of cognitive
limitations. Around 1973 he discovered chain store paradox. The game
theoretical analysis of the chain store game by backward induction
does not put any strain on the cognitive abilities of human being . he
experienced the motivational limits of his own rationality.
The motivational limit of rationality are due to a separation of cognition
and decision. The problem is known in philosophy under the name of
weakness of the will. A person may know very well what action is best
for him and yet he may fund himself unable to take it.
The paper on chain store paradox proposes a three level theory o
decision making. According to their theory three mental processes that
work on different levels :
1) Routine level
2) The level of imagination
3) The level of reasoning
On the routine level a level is reached very quickly without any
thinking like in a difficult traffic situation which does not leave any
time for conscious deliberation. On the level of imagination the
decision maker tries to visualize how various initial actions may
influence future events. The comparison of the scenarios
constructed in this way is the basis of selection of a decision making.
A prejudice either activates only the routine level or the routine level
and the level of imagination or all these levels.
The decision emergence view emphasis the idea that rationality has
limited control over behavior. There is no reason to suppose that
human behavior is guided by a few abstract principle.
THE CAUSACTIC STRUCTURE OF BOUNDED RATIONLAITY
STRATEGIES
A strategy is not necessarily result of conscious reasoning. A player
guided by routine learning only also follows a strategy. The learning
mechanism of the player follows a strategy. The learning mechanism
of the player generates a decision for every situation
The typical strategy is casuistic in the following sense a system of
case distinction based on simple criteria determine which simple
decision rules are employed.
An obvious alternative is a caustic strategy is a complex formula
which computes the decision as a function of part observation
uniformly for all situations which may arise .
Bounded rationality strategies can be obtained with the help of the
strategy method. In the application of their method a group of
participants first obtained the opportunity to become sufficiently
experienced game. The participants then write strategies for this
game
The strategies are computer programs they are matched with each
other in computer tournaments.
Rule systems like law books or operating manuals which guide
practical decision is real life seem to have a caustic structure even if
their prescription are often imprecise.
BOUNDED RATIONAL STRATEGY CONSTRUCTION
The strategies programmed by participants in strategy method
experiments are consciously constricted. Nevertheless the
participants who write strategies do not do this arbitrarily and it is
possible to recognize typical pattern of reasoning.
The first stage in a bounded rationality analyses of a decision
problem seems to be a superficial analysis. The superficial analysis is
qualities rather than quantitative. The word superficial refers to the
exclusive use of easily accessible information.
A first vague qualitative strategic plan emerges establish cooperation
in the initial phase maintain cooperation in the initial phase maintain
cooperation in the main phase and act non-cooperatively in the end
phase.
CONCLUSION
The author has thought about the problems how the approach
presented there can be helpful in the development of a theory of
bounded rational economic behavior. He did not yet reach a
conclusion.
Only some aspects of bounded rationality have been discussed in
This paper the first session tried to sketch the historical development
of the concept including come of the misdirection approaches to the
problem
Nevertheless it is important to understand the cognitive aspect of
decision process
BOUNDED RATIONALITY BY REINHARD SELTEN