Editing Bounded rationality (section)

==Behavioral economics==
{{further|Behavioral economics}}
Bounded rationality attempts to address assumption points discussed within [[neoclassical economics]] theory during the 1950s. This theory assumes that the complex problem, the way in which the problem is presented, all alternative choices, and a utility function, are all provided to decision-makers in advance,<ref>{{cite book|title=Economics, Bounded Rationality and the Cognitive Revolution|isbn=978-1-85278-425-6|date=2008|publisher=Edward Elgar Publishing Limited|last1=Simon|first1=Herbert A.|last2=Egidi|first2=Massimo|last3=Viale|first3=Ricardo|last4=Marris|first4=Robin|url=https://books.google.com/books?id=CdI9VRcn1SEC&q=bounded+rationality+economics&pg=PP8}}</ref> where this may not be realistic. This was widely used and accepted for a number of decades, however economists realised some disadvantages exist in utilising this theory. This theory did not consider how problems are initially discovered by decision-makers, which could have an impact on the overall decision. Additionally, personal values, the way in which alternatives are discovered and created, and the environment surrounding the decision-making process are also not considered when using this theory.<ref>{{cite book|title=Economics, Bounded Rationality and the Cognitive Revolution|isbn=978-1-85278-425-6|date=2008|publisher=Edward Elgar Publishing Limited|last1=Simon|first1=Herbert A.|last2=Egidi|first2=Massimo|last3=Viale|first3=Ricardo|last4=Marris|first4=Robin|url=https://books.google.com/books?id=CdI9VRcn1SEC&q=bounded+rationality+economics&pg=PP8}}</ref> Alternatively, bounded rationality focuses on the cognitive ability of the decision-maker and the factors which may inhibit optimal decision-making.<ref>{{cite journal |last1=Selten |first1=R |title=Bounded Rationality |journal=Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die Gesamte Staatswissenschaft |date=1990 |volume=146 |issue=4 |pages=649–658 |jstor=40751353}}</ref> Additionally, placing a focus on organisations rather than focusing on markets as neoclassical economics theory does, bounded rationality is also the basis for many other economics theories (e.g. organisational theory) as it emphasises that the "...performance and success of an organisation is governed primarily by the psychological limitations of its members..." as stated by John D.W. Morecroft (1981).<ref>{{cite book |title=System Dynamics: Portraying Bounded Rationality |publisher=Alfred P. Sloan School of Management |last=Morecroft |first=John. D. W. |id=WP1332- 82A |date=October 14, 1981 |hdl=1721.1/49181 |hdl-access=free}}</ref>

One concept closely related to the idea of bounded rationality is [[Nudge theory|nudging]]. The connection between nudging and bounded rationality lies in the fact that nudges are designed to help people overcome the cognitive limitations and biases that arise from their bounded rationality.<ref>{{Cite journal |last=Lodge |first=Martin |date=January 11, 2016 |title=The rationality paradox of Nudge: rational tools of government in a world of bounded rationality |url=https://onlinelibrary.wiley.com/journal/14679930 |journal=Law and Policy|volume=38 |issue=3 |pages=250–267 |doi=10.1111/lapo.12056 }}</ref> Nudging involves designing [[choice architecture]]s that guide people towards making better decisions without limiting their freedom of choice. The concept was popularized by [[Richard Thaler]] and [[Cass Sunstein]] in their 2008 book "[[Nudge: Improving Decisions about Health, Wealth, and Happiness|Nudge: Improving Decisions About Health, Wealth, and Happiness]]."<ref>{{cite book |last1=Thaler |first1=Richard H. |title=Nudge: Improving Decisions about Health, Wealth, and Happiness |title-link=Nudge (book) |last2=Sunstein |first2=Cass R. |date=April 8, 2008 |publisher=Yale University Press |isbn=978-0-14-311526-7 |oclc=791403664}}</ref><ref>{{cite journal |last1=Thaler |first1=Richard H. |last2=Sunstein |first2=Cass R. |last3=Balz |first3=John P. |date=April 2, 2010 |title=Choice Architecture |journal=Behavioral & Experimental Economics eJournal |doi=10.2139/ssrn.1583509 |s2cid=219382170 |ssrn=1583509}}</ref> As nudging has become more popular in the last decade, governments around the world and nongovernmental organizations like the United Nations have established behavioral insights teams or incorporated nudging into their policy-making processes.

One way nudges are used is with the aim of simplifying complex decisions by presenting information in a clear and easily understandable format, reducing the cognitive burden on individuals. Nudges can also be designed to counteract common heuristics and biases, such as the default bias (people's tendency to stick with the default option). For example, with adequate other policies in place, making posthumous organ donation the default option with an opt-out provision has been shown to increase actual donation rates.<ref>{{Cite journal |last1=Beraldo |first1=Sergio |last2=Karpus |first2=Jurgis |date=2021 |title=Nudging to donate organs: do what you like or like what we do? |journal=Medicine, Health Care and Philosophy |volume=24 |issue=3 |pages=329–340 |doi=10.1007/s11019-021-10007-6 |issn=1386-7423 |pmc=8349348 |pmid=33733389}}</ref> Moreover, in cases where the information needed to make an informed decision is incomplete, nudges can provide the relevant information. For instance, displaying the calorie content of menu items can help people make healthier food choices.<ref>{{Cite journal |last=Thunström |first=Linda |date=2023-01-01 |publication-date=January 2019 |title=Welfare effects of nudges: The emotional tax of calorie menu labeling |journal=Judgment and Decision Making |language=en |volume=14 |issue=1 |pages=11–25 |doi=10.1017/S1930297500002874 |issn=1930-2975|doi-access=free }}</ref> Nudges can also guide people towards satisfactory options when they are unable or unwilling to invest the time and effort to find the optimal choice. For example, providing a limited set of well-designed investment options in a retirement plan can help people make better financial decisions.

In [[economic model]]s based on behavioral economics, implementing bounded rationality implies finding replacements for [[utility maximization]] and [[profit maximization]] as used in conventional [[general equilibrium model]]s. [[Stock-flow consistent model]]s (SFC) and [[agent-based models]] (ABM) often implement that agents follow a sequence of simple rule-of-thumb behavior instead of an optimization procedure.<ref>{{cite book |last1=Godley |first1=Wynne |last2=Lavoie |first2=Marc |title=Monetary Economics. An Integrated Approach to Credit, Money, Income, Production and Wealth |publisher= Palgrave Macmillan |location=New York |date=2012 |isbn = 978-0-230-30184-9}}</ref><ref>{{cite book | first1 = Mauro | last1=Gallegati |first2= Matteo G. |last2= Richiardi |date = 2009 | chapter = Agent based models in economics and complexity |editor-first1 = R. A. |editor-last1= Meyers |title=Encyclopedia of Complexity and Systems Science |publisher = Springer |pages = 200–224 |doi=10.1007/978-0-387-30440-3_14| isbn=978-0-387-75888-6 }}</ref><ref>{{cite book|first1= E. |last1= Ebenhoh |chapter= Agent-Based Modelnig with Boundedly Rational Agents |editor-first1=Jean-Philippe |editor-last1=Rennard|title = Handbook of Research on Nature-Inspired Computing for Economics and Management | date= 2007 |isbn=978-1-59140-984-7 }}</ref> Other dynamic models interpret bounded rationality as “looking for the direction of improvement“<ref>{{cite journal |title=Bounded Rationality Modeling |first1=Bertrand |last1=Munier |first2=Reinhard |last2=Selten |first3=Denis |last3=Bouyssou |first4=Paul |last4=Bourgine |first5=Richard |last5=Day |first6=Nigel |last6=Harvey |first7=Denis |last7=Hilton |first8=Mark J. |last8=Machina |first9 = Phil |last9=Parker |first10=Hon |last10 = Sterman |first11 = J. |last11= Sterman |first12= Elke |last12=Weber |first13= Birger |last13 = Wernerfelt |first14= Robin |last14=Wensley |journal =Marketing Letters |volume=10 |issue=3 |date = 1999 |pages=233–248 |jstor=40216537}}</ref> such that agents use a [[hill climbing|gradient climbing]] approach to increase their utility.<ref>{{cite journal |first1=Suren |last1=Basov | title=Bounded rationality: static versus dynamic approaches |journal=Economic Theory |volume=25 |pages=871–885 |date=2005 |issue=4 |doi=10.1007/s00199-004-0484-6}}</ref><ref>{{cite journal |first1=Oliver |last1=Richters |title= Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints|journal=Journal of Economic Behavior and Organization |volume=188 |date=2021 |pages=846–866 |doi= 10.1016/j.jebo.2021.06.005|arxiv=2106.00483 }}</ref>